Recognizing the existence of violations and breaches of labor rights or labor-related human rights, such as forced labor, injuries caused by inadequate safety measures, working conditions that violate human dignity or endanger health, as well as the most severe violations such as workplace deaths, international organizations—including the United Nations (UN), International Labour Organization (ILO), and Organisation for Economic Co-operation and Development (OECD)—have, over the years, prepared a series of recommendations to improve the protection of labor rights.
The fundamental drawback of these recommendations is their non-binding nature, which is why a unified global system for the protection of labor rights has not been established. Instead, countries have varying levels of development of these systems.
EU countries generally have high standards for employee protection that European companies must respect in their operations. Since European companies cooperate with companies in other countries worldwide, questions have arisen regarding the responsibility European companies may bear for potential labor rights violations of employees within those companies they do business with. For this reason, various EU regulations have been enacted, which not only establish obligations and responsibilities to respect the human rights of their own employees but also extend these obligations throughout the supply chains of European companies.
EU ESG Regulation and Focus on Human Rights
The EU ESG framework encompasses a series of binding regulations and directives, as well as numerous strategies and guidelines that indicate the direction in which specific areas or sectors will develop. It includes rules, standards, and recommendations related to environmental protection, social responsibility, and responsible governance. This text focuses on the “S” aspect of the EU ESG framework—that is, company responsibility toward employees within their supply chains.
Among the regulations aiming to ensure the protection of labor rights within supply chains are the Corporate Sustainability Reporting Directive (CSRD) and the related Commission Regulation on Sustainability Reporting Standards (European Sustainability Reporting Standards – ESRS), the Corporate Sustainability Due Diligence Directive (CSDDD), the Forced Labour Regulation (FLR), and, significant for our market, the German Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG).
Throughout the text, the terms “supply chain” and “value chain” will be used since both appear in the analyzed regulations. While the supply chain refers to the system of activities, processes, and actors throughout all phases before the product reaches the end user, the value chain, in addition to the company’s supply chain, includes the company’s own activities and business relationships. The obligations under CSRD and CSDDD concern the human rights of employees along the company’s value chain. The obligations of the LkSG relate to the company’s activities and its direct and indirect suppliers, while FLR obligations pertain to the company’s supply chain.
The Corporate Sustainability Reporting Directive (CSRD) establishes rules for companies to report on sustainability covering all three ESG components and specifies the standards by which companies must report (ESRS). The directive introduced, for the first time, the concept of double materiality in non-financial reporting, meaning companies are required to report on topics they assess as significant both in terms of the company’s impact on the environment, society, and governance, and the impact that changes in these areas may have on the company’s business.
Within the ESRS standards, ESRS S2 relates to the workforce within the company’s value chain. This standard includes five disclosure requirements companies must report if they consider the workforce topic material:
Policies related to workers along the value chain
Processes for involving workers along the value chain in the context of the company’s impact on them
Processes for remediating negative impacts and channels through which workers can file complaints
Actions taken for material impacts on workers along the value chain, risk management approaches, and opportunities related to workers, as well as effectiveness of these actions
Targeted values regarding managing material negative impacts, enhancing positive impacts, and managing material risks and opportunities
The Corporate Sustainability Due Diligence Directive (CSDDD) requires companies to exercise due diligence in respecting human rights and environmental protection across their value chains. This means companies must do everything in their power to prevent human rights violations within the activities of their business partners, whether operating within or outside the EU.
Similarly, the German Supply Chain Due Diligence Act (LkSG) obliges companies operating in Germany to adhere to social responsibility and environmental standards throughout their supply chain. Violations may result in penalties, including exclusion from public procurement for up to three years. In cases of very serious breaches, termination of business relationships between partner companies is possible.
The Forced Labour Regulation (FLR) prohibits placing, making available, or exporting products made with forced labor on the EU market, contributing to the global fight against forced labor. It requires member states to designate competent authorities responsible for enforcing these obligations. Any individual can report suspicions of forced labor related to products on the EU market. Authorities, together with the Commission, will investigate and, if necessary, ban products from the market or order their withdrawal. This regulation does not impose additional obligations on companies but prohibits placing products on the EU market if any part of their supply chain involved forced labor.
This legislation provides a broad framework for protecting human rights along companies’ supply chains by requiring companies to establish systems for regular human rights risk assessments and reporting such processes, as well as prohibiting products linked to forced labor from entering the EU market. This establishes responsibility for companies regarding their employees throughout their supply chains.
Impact on Companies in Serbia
Companies in Serbia are not direct subjects of EU ESG regulations as companies in the EU are. However, they are obliged to disclose necessary information to their EU partners, such as the status of respect for the rights of their employees and employees in their supply chains.
To maintain their European partners, if those partners consider the workforce issue along the value chain to be material, Serbian companies will need to report on topics within the ESRS S2 standard (CSRD obligation), designate responsible bodies or persons for identifying human rights risks, introduce internal processes to check for human rights risks within their operations and value chains, keep documentation, and report regularly on these matters (CSDDD and LkSG obligations). Finally, they can expect inquiries about forced labor within their operations and supply chains if they are part of the supply chain for companies whose products are marketed or exported from the EU (FLR obligation).
Research shows that sectors particularly sensitive to these regulations include agriculture, clothing and footwear manufacturing, mining, and construction, due to historically high numbers of labor rights violations. In Serbia, besides these sectors, special attention should also be paid to industries with the highest export to the EU, such as electricity production, oil extraction, wholesale and retail trade, cable telecommunications, passenger air transport, pharmaceutical production and trade, as well as production of soft drinks, mineral, and other bottled waters. Companies in these sectors should expect inquiries from their European partners regarding the protection of labor rights within their operations and supply chains and should therefore devote appropriate attention to these processes.
If you need more information or support in these processes, please contact our consulting team at advisory@kpmg.rs.
Author: Lana Hadži Niković, Senior Associate, Advisory
