Lawmakers in California and South Korea announced two new sweeping supply chain due diligence regulations this month, signifying the quickly closing regulatory gap between Asia and the West.
Lawmakers in California and South Korea announced two new sweeping supply chain due diligence regulations this month, signifying the quickly closing regulatory gap between Asia and the West. South Korea’s bill, if approved, could influence other countries in Asia, a historically high-risk region for ESG violations, to step up and impose similar legislation.
California lawmakers approved a new climate regulation that will require large companies to report on their direct and indirect greenhouse gas (GHG) emissions, the first climate regulation in the US of this scope. Meanwhile, South Korea broke ground in Asia by announcing a proposed bill that would require companies to prevent and address adverse human rights and environmental impacts related to business operations.
Government officials are beginning to understand the protection of human rights must be prioritised and the management of these violations falls under the responsibility of each nation. As these laws will increase the regulatory burden on businesses across the globe, organisations must undergo significant adjustments to ensure compliance is covered for their end-to-end operations.
Regulations across the Pacific
In California, the SB 253 Bill, or Climate Corporate Data Accountability Act, focuses on emissions management from Scope 1 to Scope 3. The bill still needs final approval before going into effect, but the legislation is unique in that it is one of the country’s first to mandate indirect emissions reporting, which are notoriously difficult to track.
This law would apply to more than 5,300 companies and has already been backed by major companies such as Apple, Microsoft, Patagonia, and IKEA USA.
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SENATE BILL 253: CLIMATE CORPORATE DATA ACCOUNTABILITY ACT
Who does it apply to?
US-based partnerships, corporations, limited liability companies, and other entities with operations in California and annual gross revenue of more than $1B USD (around 5,300 companies.)
What does it say?
The Act requires companies to report their direct and indirect GHG emissions (Scopes 1, 2, and 3), criteria pollutants, and toxic air contaminants. Companies must have third-party assurance and reporting will be made available to the public on a governmental digital platform. The bill specifies the reporting must be “easily understandable and accessible.”
What is the penalty for non-compliance?
Non-compliance penalties will apply for non-filing, late filing, or other failure to meet the requirements of the bill. Penalties are not specified but may be up to $500,000 USD.
When will it go into effect?
If the bill passes, businesses will have to disclose their 2025 GHG emissions data starting in 2026, with Scope 3 reporting beginning in 2027.
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South Korea’s proposed bill reflects similar legislation recently imposed in the EU and will require companies to not only identify human rights and environmental risks but also display their measures to actively prevent and mitigate them. If approved, South Korea’s bill will be the first of its kind to be imposed in Asia, which thus far has only seen due diligence requirements in a voluntary form.
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PROPOSED ACT ON HUMAN RIGHTS AND ENVIRONMENTAL PROTECTION FOR SUSTAINABLE MANAGEMENT OF COMPANIES
Who does it apply to?
The regulation would apply to South Korean companies with 500 or more employees, or with revenue equal to or greater than 200 billion KRW in the previous financial year.
What does it say?
Companies must establish and operate a human rights and environmental due diligence implementation system, report it to the board of directors, implement measures against human rights and environmental risks identified. Companies must also report publicly their findings and measures taken.
What is the penalty for non-compliance?
Those found in violation of the law may be subject to corrective orders, fines of up to 50,000,000, or may be required to reimburse victims impacted by the entity’s human rights or environmental violations.
When will it go into effect?
The proposal is still in the beginning approval stages, and an effective date has not yet been announced.
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More legislation in Asia is vital to lower human rights impacts worldwide
Asia’s role in the global supply chain is multifaceted, serving as a manufacturing hub, a growing consumer market, and a critical logistics and transportation nexus. Its impact on global supply chains is likely to continue growing as the region’s economies and infrastructure continue to develop.
Asian countries like China, India, Vietnam, and Taiwan, serve as manufacturing powerhouses for a wide range of industries, including electronics, automotive, textiles, and pharmaceuticals. Many global companies have outsourced their production and assembly operations to Asia due to cost-efficiency and skilled labour.
However, despite its importance as a sourcing hub, Asia has previously shown some of the highest levels of ESG risk exposure, in critical areas like forced labour, child labour, and humane treatment.
Figure shows the supply chain ESG risk scores for China, India, and Vietnam derived from LRQA risk data. These scores are available through our due diligence assurance platform EiQ and leverage audit data with trusted civil society data to produce inherent risk scores of sourcing regions.
South Korea’s new law could be key to changing the dynamic of supply chain regulations in Asia, where they previously have only been offered as recommendations.
Business adjustments are more urgent than ever
At least 10 countries across the world have implemented or proposed more stringent due diligence regulations in the past two years. From the US, to EU, to New Zealand, Mexico, Canada – each new law brings with it various penalties which can have a significant impact on business operations.
We continue to preach the importance of understanding proper due diligence and how to build the most resilient responsible sourcing program. To simplify these concepts, we have several resources available for building your understanding of responsible sourcing and how to comply with regulatory requirements.
- Understand the regulations
- Create more nuance in your program
- Focus on segmenting and mapping your supply chain risk
We anticipate the increase in mandates will only continue and evolve to become more stringent and we urge businesses to stay ahead of this new compliance era.