Boards of Directors of Canadian businesses must be fully informed and up to date on the rapidly changing legal and regulatory landscape relating to Environmental, Social and Governance (ESG) issues. Whether it be climate change, social justice or activist shareholders, or a multitude of other ESG risks and opportunities, the entire ESG landscape is dynamic. This increases pressure on directors to be agile in fulfilling their fiduciary duties.
One of the most critical "S" issues – forced labour in supply chains - serves an example of the dynamic ESG landscape.
Rapidly evolving enforcement at the American border is impacting Canadian businesses exporting to the US. At the same time, supply chain transparency reporting legislation has been passed by Canada's Senate and has made significant progress in the House of Commons. For Boards of Directors of Canadian businesses, addressing the risks of forced labour in their supply chains is no longer an "if" question, it is now a "when" question. And the clock is ticking...
To meet this challenging environment, Boards need to be fully prepared and equipped to oversee both how their businesses are managing the risks of forced labour in their operations and supply chains, and how their businesses are incorporating these risks and opportunities into their corporate strategy. Otherwise, reputational, financial, regulatory and legal risks will be unmanaged and unmitigated.
Topping the list of dynamic changes in the "S" of ESG legal landscape in Canada and the US are the following:
Canada's ban on the importation of forced labour-made goods
Canadian Boards of Directors should already be aware that on July 1, 2020, as part of its implementation of the United States-Mexico Canada Agreement, Canada amended its Customs Tariff Act to prohibit the importation of goods mined, manufactured or produced wholly or in part by forced labour.
Since then, Canada has not delivered one successful enforcement of the prohibition.
By comparison, between Oct. 1, 2021 and Jan. 31, 2022, the US Customs and Border Protection Agency (CBP) detained 1,120 shipments of cargo with a value of USD$227,000,000 pursuant to withhold release orders (WROs) issued by CBP.
It is incumbent on Canadian Boards of Directors to exercise oversight of the appropriate and effective management of the risk that the business is not complying with Canada's Customs Tariff Act due to the use of forced labour in its supply chains.
Uyghur Forced Labour Prevention Act
In the US, on June 21, 2022, the US took another important step forward in the fight against forced labour. The Uyghur Forced Labour Prevention Act (UFLPA) came into force. Under the UFLPA, the US CBP began to apply a rebuttable presumption that goods, wares, articles or merchandise mined, produced or manufactured wholly or in part in the Xinjiang Uyghur Autonomous Region of China (XUAR) or by entities identified by the US Government ULFPA Entities List, are deemed to have been made with forced labour and are prohibited from importation into the US To rebut this presumption, the importer must, among other things, by clear and convincing evidence, prove that the goods, wares, articles or merchandise were not mined, produced or manufactured wholly or in part with forced labor. The US already has a blanket ban on the importation of forced labor-made goods that would continue to apply to goods from other parts of China and around the globe.
While Canada's enforcement of its prohibition on the import of forced labour-made goods appears to have been less than modest, given the enhanced enforcement by CBP at the Canada-US border, Canadian businesses should be well down the road on this issue and ensuring that actions have been taken to map the businesses' supply chains and to develop and implement procurement policies, supply contracts and due diligence procedures to address and mitigate the risks of forced labour in the businesses' supply chains. Given the enhanced and robust enforcement by the CBP and Department of Homeland Security (DHS) at the US border, the risk to Canadian businesses of the diversion of forced labour-made products to the Canadian market is real. Moreover, the USMCA does not provide a safe harbour for Canadian businesses with respect to forced labour-made goods exported from Canada to the US.
Bill S-211 Canada's Fighting Against Forced Labour and Child Labour in Supply Chains Act
Canadian businesses also need to be prepared for a new law making its way through the House of Commons that would require companies to file and publish annual reports detailing what they are doing to prevent and reduce the risk that forced labour or child labour is used in their supply chains.
Canadian directors should be aware that Bill S-211 requires that the annual report must be approved by the entity's board of directors.
Having passed in the Senate, Bill S-211 has now been unanimously approved at Second Reading in the House of Commons. The next step forward will be taken by the House of Commons Standing Committee on Foreign Affairs and International Development, which has been tasked with studying the Bill. The Federal Minister of Labour has already commented that he will be recommending amendments to strengthen the Bill. The unanimous approval of Bill S-211 at Second Reading in the House of Commons is another clear signal from Parliament of the need to take action on the issue of forced labour and child labour in supply chains.
Canadian boards should not be passive or reactive in managing these risks.
Is your business ready?
More in this series
For further information, watch Stephen's latest webinar on Forced Labour and Child Labour in Supply Chains or read the first 14 parts of our Guide to addressing modern slavery in your business and supply chain for Canadian directors:
How we can help
To find out more about how Gowling WLG can help your business with:
- Supplier codes of conduct
- Directors duties and board education/training
- Updating supply contracts
- Supply chain mapping and due diligence
- Stakeholder Identification and Engagement
- ESG reporting
For further information, contact the author Stephen Pike at email@example.com.