In the wake of the pandemic, the fragility and complexity of global supply chains has prompted a strategic reevaluation in the tech hardware industry. This shift is not only about logistics. Environmental, labor or safety issues are proving as impactful as material shortages or defects, especially as ESG regulations on supply chains increase.
Five key sustainability factors are due to shape tech companies’ hardware supply chain strategies in the year ahead.
1. Disclosure pressure: The introduction of new mandatory sustainability disclosure requirements will increase customer and investor pressure on tech companies to monitor and manage ESG performance in their supply chains.
The EU Corporate Sustainability Reporting Directive (CSRD), adopted in November 2022, will require companies currently under the scope of the EU’s Non-Financial Reporting Directive to disclose 2024 financial year data on the impact of their operations and supply chains on a range of issues, including resource use, biodiversity, climate change, pollution, workers, affected communities and the end consumer.
In the US, California legislation Senate Bills 253 and 261 will require companies operating in the state with revenues of greater than $1 billion to report their scope 1, 2, and 3 greenhouse gas (GHG) emissions, and companies with revenues greater than $500 million to report their climate-related financial risks, starting in 2026.
With ESG disclosure requirements increasing in number and scope, technology companies will need to measure the impact of their activities accurately, report results transparently and determine how best to shape their operations to meet ever-increasing ESG expectations.
2. Due diligence requirements: Tech companies are also coming under pressure to strengthen their due diligence practices. The EU’s proposed Corporate Sustainability Due Diligence Directive (CSDDD), which is on course to be approved in early 2024, requires large companies to implement rigorous environmental and human rights due diligence across their supply chains. It also requires businesses to adopt a plan ensuring that their business model and strategy are compatible with the Paris agreement on climate change.
Full transparency is needed to meet the strict reporting requirements of the CSDDD. Non-compliance could lead to substantial fines and penalties, sanctions or import bans, restrictions on products or even legal action against the company, potentially disrupting supply chains and impacting the company's ability to operate effectively.
It will be crucial for tech companies to understand that adhering to due diligence regulations is not just a legal obligation, but a key factor in maintaining their long-term success and credibility in the global market.
3. Circularity regulation: Circularity is becoming a key focus in the tech hardware industry, driven by increasingly ambitious government recycling and reuse targets and legislation internationally.
In the US, the state of California’s right to repair legislation (SB 244), was signed into law in October 2023 following similar rules in New York and Minnesota. This requires companies to make the necessary tools, components, parts, software, and documentation available for seven years after production of devices priced at US $100 and above, to enable consumers to undertake their own repairs.
The European Commission adopted a right to repair proposal in March 2023, which the EU Parliament endorsed in November. The legislation (expected June 2024) bans contractual, hardware or software techniques obstructing repair, as well as approving obligations on fair pricing and accessibility of some spare parts.
Right-to-repair legislation extends the life of a device, causing ripple effects throughout the supply chain as manufacturers select different materials and manufacturing methods to meet the regulatory requirements. It will require most technology manufacturers to add to their maintenance, repair, and operations (MRO) stock and supply chain.
4. PFAS compliance: New environmental compliance measures affecting tech company supply chains include escalating restrictions on toxic chemicals in products, such as Per- and polyfluoroalkyl substances (PFAS). In February 2023, the European Chemicals Agency published a proposal to ban PFAS. While the proposed ban is still under review and comment, the effect of any resulting legislation is expected to be far-reaching. Although targeted at the EU market, companies worldwide will see the impact on their supply chains and customer expectations.
Amendments to the US Toxic Release Inventory (TRI) reporting program and the Toxic Substances Control Act (TSCA), effective October 2023, now require facilities to report PFAS manufacturing and usage in their operations and imports, as well as production volumes, disposal, exposures, and hazards. These amendments make de minimis exemptions unavailable for supplier notification requirements, requiring thousands of organizations to report PFAS information that was previously not required or exempt.
Tech companies can prepare for the PFAS restrictions by assessing their product and supply chain portfolios to understand where PFAS is present, define the business impact, and work with suppliers to plan for PFAS substitutions. Data collection, management and validation throughout the supply chain will be critical for compliance.
5. Critical minerals sourcing: As the energy transition gathers pace and demand for critical minerals increases, to build renewable energy and battery storage, securing supply is becoming increasingly complex, with companies needing to swiftly mitigate disruptions from geopolitics, ESG risks and fast-changing market conditions.
Stakeholder scrutiny around critical minerals sourcing is growing, causing far-reaching impacts in the supply chain and driving major corporations to undertake significant changes in their sourcing strategies.
For example, reports of child labor and associated health risks in African cobalt mines have driven tech companies reliant on cobalt for lithium-ion batteries, such as Apple, to engage in initiatives to combat child labor, invest in technological solutions to trace and verify the ethical sourcing of cobalt and set targets to use recycled minerals.
With sustainability demands only likely to intensify, it will be crucial for technology companies to recognize the scale and scope of the supply chain challenges that sit before them. Developing a proactive approach to supplier ESG compliance will be essential to minimize disruptions and drive business performance across the technology value chain.
Creating a sustainable supply chain network is a complex and challenging endeavor, especially in the dynamic and fast-paced technology sector. It requires a meticulous and strategic approach, balancing environmental concerns with economic and social responsibilities. In this context, embedding ESG into the fabric of supply chain operations and transforming challenges into opportunities for innovation and leadership becomes a critical task.
This journey involves rethinking and realigning existing processes and fostering a culture of continuous improvement and stakeholder engagement. By doing so, companies can build supply chains that are efficient, resilient, responsible and sustainable, setting new standards for the technology industry.
Author contacts
Ed Struzik – Partner, Supply Chain, Ed.Struzik@erm.com
Justin Goldston – Partner, Supply Chain, Justin.Goldston@erm.com
Lee Read – Partner, Engineer, Lee.Read@erm.com
