It’s been five years since California signed a groundbreaking piece of legislation that set a legal precedent around the world. the California Transparency in Supply Chains Act, better known as SB 657, requires manufacturers and retailers with more than $100 million in gross annual receipts to disclose their efforts to ensure that their supply chains are free of human trafficking and forced labor.
At the time, the law was the first of its kind. Since then, California’s leadership to eradicate human trafficking in supply chains has made way for a wave of reform efforts in Congress, the United Kingdom, and the European Union.
When SB 657 first came into effect in 2012, there was a need for guidance and a way to track corporate compliance. KnowTheChain was originally created in 2013 to document compliance with and encourage greater understanding of the new law.
As labor abuse revelations continue to grow, so has the pressure on companies to report and prevent such labor abuses. There is a global demand from consumers, governments, and investors alike for more transparency and accountability in corporate supply chains.
In order to meet this growing desire for transparency and accountability, it’s in the best interest of companies to address the forced labor abuse happening within their supply chains. Abusive labor practices in a company’s supply chain can jeopardize business performance, shareholder confidence, and consumer loyalty, making this issue more than a legal or ethical consideration - it’s a business risk not worth taking.
In today’s global economy consisting of complex supply chains with overseas suppliers, it can be difficult to discover labor abuses deep within a supply chain. Companies without effective and adaptive management and risk mitigation practices may unknowingly be connected to forced labor, trafficking or other labor abuse practices through their direct and indirect suppliers.
After studying the impacts of SB 657 over the past two years, KnowTheChain has published an Insights Brief that closely reviews the successes and shortcomings of the law since its enactment. Based on a sample of 500 companies that KnowTheChain identified as being affected by SB 657, we highlighted three key lessons, as well as recommendations to improve future laws:
- Improve transparency. Seems like a given for a transparency law, right? Not exactly. KnowTheChain was only able to identify 19 percent of the companies required to comply with SB 657. Although the law requires companies to publically disclose their efforts to eradicate labor abuses from their supplier networks, it does not require that the names of the companies subject to the law be made public. As a result, neither consumers nor investors know which businesses must comply with the law. A public list of companies subject to transparency laws should be made available.
- Provide clear and timely guidance to businesses. 47 percent of the companies identified by KnowTheChain did not disclose sufficient information as specified by the law. Why? In part, because of delayed guidance on how to comply. In order to avoid confusion on how a company should comply, future transparency laws should require enforcement agencies to release clear and timely guidance prior to the law taking effect.
- Require annual updates and an even playing field. In California, whether or not your company is impacted by the law is based on your state tax classification, not by your assumed labor abuse risks. This criteria inevitably creates an uneven playing field for competitors who have identical supply chains but different tax classifications. The law also requires a disclosure statement only once instead of annual reporting, which better reflects the changing dynamics of supply chains.
With SB 657 recently marking its fifth anniversary, KnowTheChain is expanding its focus by applying our research, analysis, and online resources to help companies and investors understand a growing list of legal obligations designed to identify the risk for worker exploitation in supply chains. KnowTheChain is committed to working alongside businesses and investors, providing support and feedback to ensure sustainable and ethical supply chain management.
Transparency laws and regulations such as SB 657 should provide guidance and best practices, not restrict companies by creating more red tape. Issues as complex and deep-rooted as human trafficking and forced labor demand cooperation across sectors and borders. So, whether it’s regulatory-, human rights- or business-related, we all have a stake in supply chain transparency.