How proactive due diligence can help Canadian companies adapt to increasing ESG regulations

Businesses and government institutions in Canada may soon be subject to enhanced annual ESG reporting requirements on supply chain transparency. 

Bill S-211 "An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff" is likely to pass in Canada’s House of Commons in the near future. Bill S-211, which already passed the Canadian Senate on April 28, 2022, was adopted by the House of Commons’ Standing Committee on Foreign Affairs and International Development on November 28, 2022 and is expected to become law. Should the Act pass, Canada will follow the UK, Australia, California and the European Union in implementing supply chain and human rights transparency laws. This comes at a time when companies are facing increasing global regulatory scrutiny in relation to their supply chains, along with more attention from stakeholder and commensurate reputational risk.

Who does Bill S-211 apply to, and what does it require?

The legislation will apply to entities that (a) are listed on a Canadian stock exchange; or (b) have a place of business in Canada or do business in Canada and met at least two of the following criteria in Canada in at least one of its two most recent financial years:

If passed, the Act will come into effect January 1, 2024, with subject entities required to publish an annual report by May 31 each year. The Act specifies that entities and government institutions must outline what steps “have been taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity.” The Act also establishes that reporting requirements include “policies and due diligence processes in relation to forced labour and child labour.” Failure to comply with the regulations or knowingly making false statements will result in a fine of up to CAD 250,000. Directors and officers of any entity who “authorized or participated in the offence” will be held personally liable for offences under the Act.

How can due diligence mitigate ESG-related risks?

The Act underlines the global trend toward improving supply chain transparency in the broader context of increasing regulation on ESG matters. The implementation of supply chain transparency legislation underscores the importance of rigorous and proactive due diligence. Compliance with the requirements of the act should be considered a starting point when managing reputational, financial and legal risk.

At Control Risks, we have deep experience researching, identifying and analyzing ESG-related red flags for our clients, both within the operations or the supply chain of their own organization or that of an investment target. We pair comprehensive public records research and open-source intelligence with human intelligence gathering, site visits and other bespoke services so our clients can have as comprehensive a view as possible regarding their ESG-related risks.

So, what’s next?

The current bill does not go as far as to penalize having forced labour in a supply chain and also stops short of a requirement to avoid having forced labour in a supply chain at all. Many Canadian companies already carry out due diligence on their supply chains but S-211 will bring Canada more in line with other jurisdictions in terms of statutory reporting obligations. The bill should also prompt companies to review due diligence processes as they relate to supply chains and evaluating ESG metrics and reporting more broadly.

Failure to address these supply chain risks, particularly in higher risk industries such as extractives and consumer goods, can translate to significant damage to an organization’s public reputation as well as its revenue streams. Undertaking sophisticated, thorough and proactive supply chain due diligence can expose any underlying issues and further mitigate potential reputational, legal and financial risk. To maintain a more transparent and ethical supply chain, taking extra steps to go beyond the mandatory self-reporting requirements introduced by Bill S-211 can reduce the reputational risks companies and government institutions may face. Control Risks can help companies and government institutions move beyond the requirements of Bill S-211 and reduce reputational risks by maintaining transparent and ethnical supply chains. Contact a Control Risks expert and find out more about Control Risks’ ESG due diligence services and capabilities here.