Companies are increasingly recognising that climate risk poses “strategic and operational risk” that could severely impact business operations. On 3 August 2023, United Nations Global Compact released Just Transition in Supply Chains: A Business Brief (the “Brief”).  At the heart of the Brief is a call for businesses to embed the concept of ‘just transition’ into supply chain risk management, taking into account both the environmental and social impacts of their supply chains. There is real concern that as companies increase their climate mitigation and adaptation activities, such actions may have unintended consequences that negatively affect workers, small businesses and local communities that drive global supply chains. On the other hand, integrating climate and social risks into a business’ core business and risk management could be “mutually reinforcing” and could “deliver valuable co-benefits”.

Highlights from the Brief

The Brief took into account insights from various businesses (participants of Think Lab on Just Transition) and the International Labour Organisation’s Guidelines for a just transition towards environmentally sustainable economies and societies for all (the “ILO Just Transition Guidelines”) in making five recommendations on improving the sustainability and resilience of supply chains.

In summary:

  • Improve awareness of risks of social disruption and climate change in supply chains

Businesses should consider their climate risks within the context of environmental and social impacts, and should minimise and redress any negative impacts to workers and communities.

  • Improve transparency in supply chains

Businesses should conduct materiality assessments and engage with their suppliers to improve understanding in their exposure to climate and social risks across the supply chain, and any negative externalities that they have on the environment and society.

  • Integrate risk management through just transition principles

Businesses should manage their supply chains’ environmental and social impacts in an integrated manner. Transition planning and climate risk management would be strengthened by applying the just transition guiding principles, engaging in dialogue with various stakeholders, supporting workers’ skills development, respecting rights at the workplace, and undertaking human rights and environmental due diligence.

  • Creating market demand from the public sector

Businesses can work with employers’ and employees’ organisations, to encourage governments or other local authorities to create polices and incentives that reward sustainable and socially responsible business conduct, for example, by reforming public procurement systems.

  • Supporting capacity building and access to finance for small and medium enterprises (“SMEs”)

Larger, better resourced businesses should complement governmental efforts to support SMEs in embedding labour and human rights into climate mitigation and adaption measures.  Larger businesses could assist SMEs with financing and knowledge building on addressing climate and social challenges.

The Brief also stresses the importance of multilateral frameworks (e.g. UN Guiding Principles on Business and Human Rights, OECD Guidelines for Multinational Enterprises etc) and the role of governments in supporting a just transition that would strengthen resilience and sustainability in supply chains.  While there is no “one-size-fits-all” solution, the Brief notes governments are pivotal in encouraging dialogue and raising awareness among relevant stakeholders.  Mandatory due diligence and enforcement, in particular, could lead to systemic change and “level the playing field” for businesses.

Concluding remarks

We have seen increasing focus on supply chain risk management in various jurisdictions in recent years.  Examples of mandatory due diligence legislation and guidance include the draft EU Corporate Sustainability Due Diligence Directive (which we reported here), the German Supply Chain Due Diligence Act that came into force in 2022 (reported here), and the Japanese Government’s Guidelines on Respect for Human Rights in Responsible Supply Chains (reported here). Further, in 2021, the American Bar Association published a report on model clauses to protect workers in international supply chain (reported here). Businesses should consider reviewing their global supply chains to identify any potential negative environmental or social impacts that may be impeding a just transition, taking guidance from the concepts and recommendations discussed in the Brief and the ILO Just Transition Guidelines as a starting point. This would also be helpful for businesses adjusting to existing, or preparing for upcoming, mandatory human rights and environmental due diligence legislation.