Due Diligence boom: implications and opportunities for Latin American businesses

[Este blog também está disponível em português aqui.]

2023 has been a significant year to hold companies responsible for activity across their supply chains, often down to the raw materials, by increasing due diligence regulations worldwide. The United States, Canada, Mexico, the European Union, and Germany have recently adopted or proposed new rules requiring enhanced due diligence in supply chains, targeting human rights and environmental issues. Similar measures and proposals in the United Kingdom, France, Australia, the Netherlands, Norway, and others suggest many jurisdictions will soon follow suit (see our Supply Chain Due Diligence Legislation Map).

These laws around the world impose compliance challenges on an unprecedented scale for multinational companies with business activities in high-risk countries, including Latin America. There is an urgent necessity that companies that operate and outsource in Latin America prepare with the appropriate anticipation to meet the due diligence requirements when supply chain due diligence becomes mandatory across the global north.

Some of these regulations apply to businesses based on where they are registered, while others apply to goods moving across borders, regardless of the manufacturer’s location. Similarly, some laws apply to any good in the supply chain, regardless of whether the interest ever enters the jurisdiction, while others are only triggered by import [1]. The risks of non-compliance vary widely, from no enforcement to penalties such as fines, civil actions, and the detainment of goods.

For example, U.S. law prohibits the importation of goods mined, produced, or manufactured, wholly or in part, in any foreign country by forced labor, including convict, indentured, and forced child labor. Enforcement of this prohibition is on the rise, including Withhold Release Orders (WRO) and shipment detentions under the Uyghur Forced Labor Prevention Act (UFLPA). For instance, in 2022, raw sugar and sugar-based products from the Dominican Republic, fresh tomatoes, furniture, clothes hampers, and palm leaf bags from Mexico were prohibited from entering the U.S. by Customs and Border Protection due to reasonable evidence that child and forced labor was used in the production of these goods [2].

Latin America faces the largest exposure to ESG risks

We anticipate the growing number of new regulations will continue to spread worldwide and as a result, businesses must prepare. Latin America is one of the main origins of supply chains for industrialized nations, but it is also a hotspot with countries at high-risk levels of child labor, forced labor, corruption, impacts on communities and indigenous peoples, climate change, and deforestation. Some Latin American countries’ poor performance in protecting human rights defenders also enhances the potential for businesses to contribute to adverse human rights violations [3].

As a result, European and North American companies with extensive supply chains in Latin America face the risk of non-compliance or violating due diligence laws as it would require more oversight over their complex supply chains. Latin American companies that supply the global north market face the risk of losing competitiveness, investment, and market participation if not aligned with the regulation requirements. The US businesses nearshoring in Latin America also face non-compliance risks by not having careful management and mitigation of the ESG risks.

The region is a major producer of agricultural commodities and is rich in natural resources. Still, exposure to the risk of forced and child labor includes much of the American South. Our EiQ data shows extreme risk levels related to unfair salaries, air emissions, freedom of association, and unauthorized subcontracting.

The greatest exposure to supply chain risks lies with the region’s top exporters, encompassing products like coffee, cocoa, meat, gemstones, fuels, metals, and minerals such as iron ore, gold, zinc, silver, lead, and tin. More recently, an increase in demand for minerals – such as lithium, nickel, and copper – to feed the energy transition has further increased interest in the region.

Supply Chain ESG Risk Ratings
(download the report from here)

According to a survey of banking associations in Mexico, Brazil, and Colombia, some of the economic sectors facing high ESG risks include agriculture and forestry, oil and gas, utilities, metals and mining, construction (including infrastructure) along with manufacturing. Important manufacturing activities in the region include the automotive industry and the textile industry in Mexico, Central America, and Brazil [4].

Pressing consequences on Latin America market

Major exporters of several commodities in Latin America are under scrutiny; there will be focus placed on nearshoring and supply chains originating from emerging markets with Brazil, Mexico, and Colombia notably affected.

The supply chain due diligence laws impact companies that are part of the value chains of corporations based in or regulated by countries where due diligence is already (or soon will be) mandatory, as well as their subsidiaries that operate in the region, and Latin American companies that want to enter the EU and other markets with regulations.

Likewise, companies in the region that compete in international markets to attract capital to Latin America will increasingly face more investor requirements and questions related to the implementation of a due diligence framework aligned with international standards, regardless of whether their operations are not developed in countries where regulations have been approved.

Potential consequences on companies in LATAM:

• Small and Medium Enterprises in Latin America may face higher costs and a competitive disadvantage regarding their global competitors.
• Export costs may increase as companies must provide evidence of their compliance regarding respect for human rights.
• May affect national exports: A survey conducted by IW in February 2022 revealed that 18% of the German companies polled are planning to source their upstream products from countries that pay sufficient attention to compliance with human rights and environmental protection standards. Around 12% said they would withdraw from suppliers in developing and emerging countries.
• Local suppliers may struggle to meet the requirements of these laws – particularly in the agriculture sectors – potentially impacting their participation in global supply chains, which could lead to reduced investments and job losses.

Latin America: the time to prepare is now!

Now is the right time for companies in Latin America to familiarize themselves with supply chain due diligence obligations, as they may be suppliers to other companies that are subject to the law developments and will require their suppliers to respect human rights in their supply chain and show responsibility for the environment.

Based on our expertise, the OECD (Organization for Economic Cooperation and Development) and UNGP guidelines, we recommend making sure the company has:

1. A policy statement by the company’s senior management that describes the procedure for fulfilling the due diligence and describes the human rights and environmental expectations the company places on its employees and suppliers.
2. A responsible sourcing program.
3. A risk analysis and risk management system.
4. Preventive and remedial measures.
5. An operational grievance mechanism and procedure.
6. A transparency policy and reports.

LRQA encourages a data-driven approach to supply chain due diligence as human rights and environmental risk come into focus. This can be solved by using technology. LRQA provides the technologies and comprehensive technical consultancy to know your supply chain and ensure they are more transparent, traceable, and controllable.

LRQA is here to help

As your assurance partner, we’ll be relentless in helping you respond to this new era of risk. Our decades of sector expertise in assuring assets and management systems, ensuring product integrity, delivering cyber resilience, and building responsible supply chain programs will help you to anticipate, mitigate and manage risk wherever you operate, freeing you to focus on growth.

Our consulting team supports different multinational and local companies to assess, design and strengthen Supply Chain Due Diligence Frameworks that are tailored to the company, industry, sustainability context and resources. Programs typically include:

• Assessment ESG risk, actual and potential impacts on human rights across your supply chain in general, or on specific issues (e.g., child or forced labor, deforestation, and biodiversity)
• Integration of findings and delivery of risk mitigation plans and corporate Due Diligence frameworks
• Ensure you and your teams perform at the highest level and can meet challenges and industry expectations effectively
• Track risks and impact management and remediation over time
• Communicate and report how impacts are being addressed

LRQA can also perform a gap analysis to help you understand your level of maturity and plan a course of action to strengthen your corporate Due Diligence framework.

If you want to know more about how we can help you manage your Social and Environmental Due Diligence process, do not hesitate to contact us.

[1] Supply Chain Compliance with Human Rights and Environmental Obligations (White & Case, 2023).

[2] Withhold Release Orders and Findings List (U.S. Customs and Border Protection, 2023).

[3] Responsible Business Conduct in the Financial Sector in Latin America and the Caribbean (OECD, 2022)

[4] Progress in Social and Environmental Due Diligence: What Does It Mean for Latin America? (ELEVATE, 2022)