Key Point: Energy developers, banks, investors, corporate offtakers and anyone else involved in the solar industry (and perhaps the energy industry more broadly) should ensure that they have a good understanding of the supply chain, so that they can identify and mitigate possible issues with regard to forced labour.
How Well Do You Know Your Supply Chain?
Companies in the renewable energy sector across the world are coming under increasing pressure to ensure that forced labour is not present in their supply chain.
In this article, we focus in particular on the solar industry supply chain, which has recently come into focus due to the alleged use of forced labour in the manufacture of polysilicon (used in modern solar PV panels). We also provide some helpful tips on how to identify and address forced labour issues in your supply chain.
A number of solar industry bodies have condemned the use of force labour and have issued industry guidance on the topic. In particular, the Solar Energy Industries Association (SEAI) in the US has launched a supply chain ‘traceability tool’ and Solar Energy UK is pushing for a supply-chain transparency protocol to deal with forced labour concerns.
We would recommend that solar industry participants use these tools and protocols where possible.
At an EU level, the European Commission recently published guidance aimed at helping companies to combat forced labour in their supply chains (see here). While this guidance is not specific to the solar industry, it will be of use any solar industry participants that are looking to due diligence their supply chain.
The European Commission guidance provides advice on how to recognise forced labour, how to update and implement appropriate policies and systems to combat forced labour, how to identify risk factors for forced labour and other actions that companies can take to address forced labour.
Listed companies, banks and insurance companies will already be familiar with these types of obligations through the EU Non-Financial Reporting Directive, which requires them to report on information with regard to human rights and social issues. Similarly, companies that are active in the United Kingdom will be familiar with the requirements of the Modern Slavery Act 2015.
However, for other companies this type of due diligence will be new territory and we expect that these companies will find the European Commission guidance to be particularly useful.
What Happens Next?
(1) Trade Restrictions, Contracts and Industry Procedures
In the short term, we expect that further trade restrictions and bespoke contractual obligations will be used to manage forced labour supply chain issues (and indeed we have advised on these obligations in a number of recent renewable energy transactions).
In the medium to long term, legislation and agreed industry procedures (combined with appropriate contractual obligations) are likely to become the key tools for managing forced labour issues.
(2) Increased Supply Chain Scrutiny
Renewable energy developers should expect to be asked detailed questions around their supply chain and to provide comfort to investors, financers and counterparties (including corporate PPA buyers) that forced labour issues do not exist in their supply chain. Given the time that it can take to identify possible issues, it would be prudent for developers to act sooner rather than later on this issue.
Developers should consider whether their contracts might be updated to better protect them from possible forced labour issues (for example, by requiring information to establish supply chain transparency or by ‘pushing’ a force labour prohibition down the supply chain).
Investors, financers and counterparties (eg, corporate PPA buyers) should in turn consider what contractual protection they can receive from developers, so that they do not end up exposed to negative publicity in their dealings with developers.
Many companies are currently under no general legal obligation to identify and address forced labour issues in their supply chain. However, that is likely to change in the not-too-distant future. The EU is busy preparing a proposed ‘Sustainable Corporate Governance’ directive which, when in force, may require company directors to actively consider issues such as supply chain forced labour and could introduce a mandatory due diligence requirement for companies in respect of issues such as forced labour. We recommend that companies begin investigating their supply chain as soon as possible to identify and mitigate potential issues.
(3) Wind, Battery Storage and Other Supply Chain Issues
Allegations of forced labour have primarily affected the solar industry to date. However, it is likely that other energy industries will come under increased scrutiny – for example, the wind industry and the battery storage industry. Developers in these industries would be well advised to anticipate future scrutiny of their supply chain and should proactively manage this issue.
Similarly, forced labour is just one of many issues which can affect the renewable energy supply chain. Other issues (eg, supply chain carbon intensity, conflict minerals, etc) may come into sharper focus in the coming months and years and, again, it would be prudent for developers to anticipate these types of issues.
If you would like to discuss any aspect of this article and how it may affect your business, please contact Garret Farrelly, Owen Collins or Niamh Kearney.