What do regulatory efforts to ban sustainability requests mean for downstream companies?

China, Australia and the EU are all moving to protect suppliers from demands for information, but how much does it really matter? 

Australia, Europe and China have all made moves lately to stop firms from demanding sustainability information from their suppliers. 

Most recently, the Australian government unveiled plans to set “clearer boundaries on supplier information requests, to reduce costs and complexity, particularly for small businesses”.

The announcement was made as part of a commitment to pare back regulation in the country, including on sustainability and climate reporting.

For Courtney Holm, a supply-chain due diligence and traceability advisor, such efforts to protect smaller companies are generally a positive thing. 

“Survey fatigue isn’t a grumble, it’s a commercial reality,” she says, estimating that it costs a company more than £1,000 to respond to each request for information.

“For a small supplier selling into multiple downstream buyers, that overhead is enough to erode profit margins, or worse, sink the business.”

Holm argues that demanding information from these companies can also be a distraction, because material sustainability risks lie with the big companies further up the food chain. 

“We can already see who the bad actors are and where the hotspots lie,” she tells Real Economy Progress. 

Australia’s announcement came hot on the heels of new regulation from China, which seeks in part to prevent overseas companies from making excessive or biased requests for sustainability information from Chinese companies (read more about those rules in this article).  

In Europe, policymakers confirmed earlier this month that they’ll move forward with protections under the EU Corporate Sustainability Reporting Directive for companies with fewer than 1,000 employees.  

Clients can ask such entities to provide information up to the level specified in the EU’s voluntary sustainability reporting standard, but there will be restrictions on making requests beyond that.    

The announcement has caused alarm among some larger firms that worry it will make it impossible for them to retain existing expectations for suppliers to provide certain information, or introduce new ones to align with their broader commitments. 

“It’s mostly smoke and mirrors, though,” says Filip Gregor, a senior lawyer with for-purpose law firm Frank Bold, which has just published a briefing on the European Commission’s proposals. 

Gregor claims the rule doesn’t really prohibit companies from requesting information. 

“It just stops them from legally requiring it via binding contracts,” he tells Real Economy Progress.  

It doesn’t put limits on including sustainability terms in procurement agreements either, Gregor says, and it isn’t applicable to due diligence or risk management processes.

In particular, information that bigger companies need to be able to comply with their obligations under the EU’s Corporate Sustainability Due Diligence Directive aren’t subject to the so-called ‘value chain cap’ – although the requests must be made strictly in accordance with what that law requires. 

“All that being said,” Gregor continues, “the confusion [the value chain cap] brings will have a very negative impact on market practices”. 

“There will be lots of uncertainty and anxiety.”

For Peter Suasso de Lima de Prado, the slew of new rules aren’t a reason for companies to overhaul their current approach to securing sustainability-related information. 

“If you’re running a business, you need to keep doing that in the way you see fit,” says the former head of sustainability at Tata Steel in the Netherlands, who now runs a consultancy called Bluespar. 

Risk-based questions should still be legally justifiable, Suasso de Lima de Prado argues.  

“And let’s be honest, if I ask my supplier a straight-forward question and they hide behind the law, that’s a pretty strong red flag.”