How Will Sustainability Transform Supply Chain Data?
Friday, April 8, 2022
by: Co-Authored by Andrew Stephens and Lily Baron*

Section: Featured Articles

Co-Authored by Andrew Stephens and Lily Baron*
*Andrew Stephens is a Senior Policy Advisor at the USDA Foreign Agricultural Service. Lily Baron is a Law Clerk at the U.S. Department of Commerce and a third-year law student at American University Washington College of Law
The views and opinions of authors expressed herein do not necessarily state or reflect those of the United States Government or any agency thereof.
Sources available from the authors

New sustainability regulatory initiatives are establishing requirements for supply chains to collect additional data on a range of sustainability metrics including deforestation, labor conditions, carbon intensity, and recycled content. As one observer noted, “this proliferation of objectives is making value chain management enormously complex.”
The European Union (EU) may soon require geolocation identification of certain agricultural commodities to prevent deforestation. The EU is also proposing the creation of “digital product passports” for electric car batteries to prove conformity with sustainability requirements. These provisions, and others like them, are contained in myriad emerging sustainability initiatives expected to transform supply chain data—though implementing these new requirements may impose significant challenges to traders. 
Many of these initiatives—which will require traders to trace their products through the product life cycle—appear to be aspirational. After all, what is a digital passport for an electric car battery? Will we really use Radio-Frequency Identification embedded in consumer goods to sort them in recycling centers? How do you trace cotton from the farm to the t-shirt? What data elements are needed to trace lettuce or beef from the field to the restaurant? How can you ensure a plastic bottle contains recycled content? These questions are just some of the many that arise when taking a closer look at the implications of these new initiatives.
While many technical challenges remain to implementing complex traceability requirements for varied global supply chains, these regulatory measures are gaining momentum. One pertinent example of an initiative with supply chain data requirement implications is the United Kingdom’s (UK) Environment Act 2021, which contains provisions on the import and use of certain forest commodities (FRCs), or products derived from FRCs, in commercial activities in the UK. Notably, the Act’s consultation period closed on March 11, 2022, finalizing a step toward the adoption of secondary regulations and the publication of further guidance on its implementation. 
Another example is the EU’s proposal for a Deforestation-Free Products (DFP) Regulation, which seeks to ensure that certain commodities that are purchased, used, or consumed on the EU market are “deforestation-free.” The proposed list of commodities subject to these requirements includes soy, beef, palm oil, wood, cocoa, and coffee. Similarly, the EC’s Battery Regulation, proposed in 2020, will require due diligence to ensure key inputs such as cobalt do not have adverse social or environmental impacts.
The UK’s provisions on FRCs and the EU’s DFP Regulation and Battery Regulation all require regulated entities to obtain detailed information about the origins of the covered commodities, though the DFP Regulation’s information-gathering requirement is arguably the most comprehensive of the three. In addition to collecting information on the country of production of the commodities, to comply with the DFP Regulation entities must collect data on the geolocation coordinates of all plots of land on which the commodities were produced, supplier details, and adequate and verifiable information that the commodities have been produced in conformance with local law and are deforestation-free.
Additionally, the Battery Regulation will require by January 2026 that “each industrial battery and electric vehicle battery with a capacity higher than 2 kWh shall have an individual ‘battery passport’ linked to information about the characteristics of each battery type and model, providing valuable data to recyclers and second-life companies.”
The EU’s forthcoming Sustainable Products Initiative (SPI) will revise the current Ecodesign Directive with the aim towards making “the broadest possible range of products” placed on the EU market more sustainable. The SPI proposes “establishing EU rules for setting requirements on mandatory sustainability labelling and/or disclosure of information to market actors along value chains in the form of a digital product passport.”
The traceability requirements in these various regulations are generally a departure from traditional third-party certification schemes, which ensure products are sourced from sustainable supply chains based upon a chain of custody in which the primary mechanism is a written assurance that a product is in conformity with certain standards. Although there are various approaches, a chain-of-custody system generally includes measures that define responsibility for the care of materials and products as they exchange hands from one organization to the next within the relevant supply chain with the purpose of ensuring that the specified characteristics are indeed the same as those delivered in the final product. Chain-of-custody systems are therefore another model that could be utilized to demonstrate sustainability, but are distinct from the data-intensive mandatory traceability requirements under certain new initiatives like those addressed above.
Notably, blockchain technology is currently one of the leading methods companies use to demonstrate product-origins to consumers. By enabling all actors in a brand’s supply chain to record information about their activities in a single, chronological, and immutable way, companies are able to trace information about their products from the raw material stage all the way to final usage. Some experts predict that companies that invest in increased traceability and measurements of data along supply chains through blockchain will gain a competitive edge in the ever-increasing consumer demand and regulatory requirements.
In a perfect world, these new data requirements would be addressed by a harmonized system of data supported by inter-functional software and hardware. In the real world, the solutions that are emerging appear to be sector specific and diverse. One reason for this degree of novelty is that value chains are diverse and variable across industries. Consequently, some industry bodies have begun developing their own initiatives. For example, Together for Sustainability, a chemical-industry body, began developing rules for generating and sharing emissions data among its 34 members. However, industry-specific initiatives like this one remain siloed from parallel initiatives, which can lead to problems for companies spread across multiple sectors that in turn must meet various or conflicting criteria.
Differences in how companies make their calculations can also raise problems considering lack of uniformity can create wide disparity in numbers. For example, a supplier could have a relatively small carbon footprint but only because its analysis excluded certain activities, for example transport, that its rivals included in their calculations. Adding a further layer of difficulty is that many of the relevant terms included in these initiatives, such as “value chain,” “upstream,” and “downstream” are difficult to define as they are used for different meanings in different contexts in literature and by stakeholders from different industry sectors.
Additionally, the tracing and information requirements established by provisions like those under the UK Environmental Act 2021 and the EU’s proposed sustainability regulations will be particularly challenging for companies that have minimal visibility into the lower tiers of their supply chains. Knowledge gained from other traceability efforts suggests that this and many other challenges remain, particularly for the most stringent form of traceability known as “identity preserved” in which a specific article is traced back to the source of production. For example, the U.S. Food and Drug Administration (FDA) has worked to develop traceability systems for high-risk foods for more than a decade. A major pilot project funded by the FDA in 2020 resulted in six firms successfully tracing lettuce from the supermarket back to the farm, but only because the firms utilized data that was outside of the original data template for the project. This experience suggests there is a lot of learning still to be done, especially when it comes to tracing input materials through processed products, which would undoubtedly be even more challenging.
In addition to this current batch of sustainability initiatives, if the EU establishes a Carbon Border Adjustment Measure (CBAM), importers of carbon intensive products such as steel, cement, and fertilizer would be required prove the energy intensity of their products, which would likely necessitate tracing upstream (Scope 3) carbon emissions from their input suppliers, creating an entirely new set of supply chain data requirements. The authors of the Impact Assessment Report prepared by European Commission Staff for the CBAM proposal in July 2021 noted that there may not be a one-size-fits-all solution for ensuring that imports are properly reporting their associated carbon emissions:
Value chains are very different in the sectors covered by the EU [Emissions Trading System] and exposed to a risk of carbon leakage. The differences concern both the typical depth as well as the horizontal width of value chains. Therefore, it can be assumed that not all options of CBAM designs will be equally suitable for the different sectors.
Looking forward, one can expect that some regulations will continue to rely on traditional third-party certification schemes, while others will incorporate new technological solutions for traceability from the initial production of key inputs all the way to the consumer.
Having assurances that a product contains recycled inputs will be a key aspect for many of these new regulations—the CBAM Impact Assessment Report notes that if an importer declares their steel to be produced from recycled scrap, the resulting emissions and the financial obligations of the importer under the CBAM will be significantly less. Likewise, Canada recently sought public comments on how to verify that imported plastic contains recycled content. In some situations, products containing recycled inputs can be identified through laboratory analysis, while in other cases, lab tests may not be dispositive.
This revolution in supply chain data could also present important opportunities for customs and other cross border regulatory agencies to utilize these new data flows to enhance their risk profiles for imported products and facilitate trade. Recently published trade facilitation texts negotiated by USTR anticipate major changes in supply chain digitization. For example, Article 6 of the updated Protocol to the Agreement on Trade and Economic Cooperation (ATEC) between the United States and Brazil requires that “Each Party shall regularly update, as appropriate, risk profiles in its risk management systems, taking into account emerging trends and trade dynamics….”
An uptake in traceability initiatives and wider use of technologies will contribute to ensuring sustainability compliance moving forward, especially as these initiatives gain popularity and expand in scope. Already, some legal practitioners have surmised that the UK’s DFP Regulation will be broadened to cover other commodities in addition to forest products, such as food products and eventually mining and extractive commodities too. “At an EU level, the DFP Regulation explicitly suggests that the law is intended to be complementary to other human rights/environmental due diligence requirements and anticipates some harmonization in aspects of EU due diligence regimes including reporting requirements.”
Moving forward, it will be pertinent for traders to find opportunities to provide input on the proposed technical implementation of initiatives like the ones discussed in this article, to ensure that they are feasible and do not unduly burden trade. Although public comment periods are closed for some of the measures discussed above, such as the UK’s FRCs Regulation, there will almost certainly be more opportunities in the future for traders to share their experience.