Supply Chain Regulations: Tailwinds for Entrepreneurs

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Ciara Gumsheimer & Philipp Werner
May 24, 2024

👋 Welcome

Welcome to the 2nd edition of the Supply Chain Tech Newsletter and thanks to everyone who subscribed recently! Through this newsletter, our goal is to build an ecosystem of founders, operators, investors, and industry experts who share the same vision.

In this week’s edition, we dive deeper into the world of supply chain regulation. The wave of regulation passed in the past few years that is slowly coming into effect has led to the creation of many startups leveraging these regulatory tailwinds. It also makes us consider how best to leverage regulation when building in highly regulated markets. Read on to find out more…

From Compliance to Competitive Advantage: Leveraging Supply Chain Regulations for Growth

Global supply chains are being reshaped by a series of stringent regulations aimed at promoting sustainability, ethical practices, and corporate accountability. As investors, we believe it’s crucial to stay on top of these regulatory shifts in order to identify opportunities early, and guide our portfolio companies to leverage and prepare for these changes effectively. Today, we plan to explore the key regulations that have emerged in Europe and more globally, whom they will affect, and when they will come into effect, as well as look at some of the startups we have seen emerge as a direct result of these regulations. Finally, we’ll take a look at some considerations we have on leveraging regulatory changes in a startup. 

It comes as no surprise to most people that the urgency of addressing climate change and promoting environmental sustainability has led governments to impose stricter regulations on supply chains. However, increasing awareness and concern over human rights abuses and forced labour have also contributed to the pressures on governments to enforce stricter guidelines around corporate accountability. Scandals and transparency reports revealing unethical practices in supply chains have also catalysed public demand for more sustainable practices, resulting in increased media attention and activism around the world.

Additionally, the Covid-19 pandemic significantly disrupted global supply chains, exposing vulnerabilities and inefficiencies that had previously gone unnoticed. This disruption underscored the need for more resilient and transparent supply chains to better manage risks and ensure continuity. Thus, the global push towards implementing comprehensive supply chain regulations has resulted to both protect consumers and workers but also to safeguard economic stability and sustainability in the face of future crises.

So, what are some of the key regulations that founders are leveraging?

Corporate Sustainability Due Diligence Directive (CSDDD), European Union (2024)

Passed by the European Commission in 2022, the CSDDD, also known as the EU Supply Chain Act was adopted by the European Parliament on April 24, 2024. The directive will initially apply to EU companies with more than 5000 employees and €1.5Bn net global turnover, and non-EU companies with more than €1.5Bn net turnover generated in the EU, starting in 2027. It will gradually be phased in to smaller companies (>1000 employees) over the following years. 

This directive requires companies to integrate sustainability into their governance frameworks, ensuring they identify, prevent, and mitigate adverse human rights and environmental impacts within their supply chains. Companies will need to make significant changes, such as revising their corporate governance structures, implementing stringent supply chain monitoring systems, and increasing transparency. The overall impact will be a push towards more sustainable business practices, increased accountability, and more detailed public reporting. The CSDDD will be enforced through a combination of regulatory oversight and civil liability. 

Corporate Sustainability Reporting Directive (CSRD) (2024)

Passed by the European Union Council in late 2022 and effective from January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) significantly expands sustainability reporting obligations for companies operating within the EU. The Directive will initially apply to organisations listed in an EU market with 500 or more employees, with the first reporting cycle being due in 2025, and will be phased in to smaller companies and foreign companies with EU undertakings until 2028. By then, the directive is estimated to apply to 50k companies globally.

This directive requires comprehensive disclosures on a wide range of ESG matters, including climate change, human rights, and anti-corruption measures, to be integrated into annual financial reports according to the European Sustainability Reporting Standards (ESRS) and independently audited for accuracy. The CSRD necessitates the implementation of rigorous ESG data collection processes and robust governance structures for effective risk management and opportunity identification. Companies must enhance both internal and external reporting systems to ensure transparency and accountability across their supply chains. 

German Supply Chain Due Diligence Act (LKSG) (2023)

Passed in 2021 and effective from January 1, 2023, this act obliges large German companies to conduct thorough due diligence on human rights and environmental standards within their entire supply chains. It initially applied to German-based companies and German-registered branches of foreign companies with more than 3000 employees, and since January 2024 applies to companies with more than 1000 employees. The law covers critical areas such as child labour, forced labour, and environmental protection. This regulation's impact is significant as it requires new governance structures for risk assessment and mitigation, including the development of detailed risk management systems and regular audits. Companies will need to adopt more stringent supplier contracts, enhance supplier training programs, and potentially shift to more sustainable and ethical suppliers, enhancing their overall compliance infrastructure.

U.S. Uyghur Forced Labor Prevention Act (UFLPA) (2022)

Announced in 2021 and fully enforced from June 21, 2022, this act prohibits the importation of goods made with forced labour in China’s Xinjiang region to the US. While the UFLPA doesn’t directly impose compliance requirements, the US Customs and Border Patrol can now detain and inspect any imports from the region or associated regions. To date, 9% of affected shipments have been denied import, and only 40% have been released. The remaining shipments’ status is still pending, and storage costs of all detained shipments are billed to the associated US importer. Industries most affected by this regulation are Electronics, Clothing & Textile, and Industrial and Manufacturing materials.

The regulation places a strong emphasis on supply chain transparency and verification, requiring companies to conduct rigorous supply chain audits and due diligence to ensure compliance. Impacts include the necessity to overhaul supplier verification processes and possibly restructuring supply chains to exclude non-compliant suppliers. Firms will need to establish robust documentation and reporting mechanisms, invest in third-party audits, and potentially seek new, verified suppliers, which may lead to increased costs and operational shifts.

French Anti-Waste Circular Economy Act (AGEC) (2020)

The Anti-Waste and Circular Economy Law (AGEC), passed in 2020, came into effect on January 1st, 2023, and is continually taking effect through various stages up to 2025, requiring companies to transition towards a circular economy. This includes mandates for recycling, reducing plastic use, and extending product life cycles. The law applies to goods sold in French territory, and affects companies that market or import products in France, those with annual turnover over 10M EUR and at least 10k units of products on the French market, by 2025. They will be required to provide product sheets (e.g. DPP) that include information about the product’s sustainability and circularity. Companies must re-evaluate their product designs and supply chain processes to align with these sustainability goals. Impacts include increased R&D investments and potential shifts in supply chain partnerships to meet new recycling and waste reduction standards.

… and many more, implemented by individual countries or yet to be implemented in the near future, including the European Union Deforestation Regulation (EUDR), the European Union Carbon Border Adjustment Mechanism (CBAM), the European Union Ecodesign for Sustainable Products Regulation (ESPR), the European Union Battery Directive (EUBD), the European Union End-of-Life Vehicles Directive (ELV), the UK Modern Slavery Act, the Dutch Child Labour Due Diligence Law, the Norwegian Transparency Act, or Canada’s Supply Chains Act (Bill S-211).

Regulation as a market tailwind

We believe that building on top of regulatory tailwinds can be a great strategy, but it is not without risks. Here are three key considerations:

Timing

Timing is crucial when leveraging regulatory tailwinds, so startups should monitor regulatory timelines closely and position themselves accordingly if they are building in a regulated industry. Regulatory changes often don't apply universally but are phased in gradually. Knowing that regulation will be imposed can prompt many companies to seek solutions well in advance. Those startups with strong products already in place will be poised to capture market demand as it shifts around regulatory announcements. However, finding the sweet spot between anticipating regulatory changes and moving early enough to be ready—yet not so early that there’s no market or investment demand—is challenging. Additionally, regulatory implementation timelines frequently change, get delayed, or are sometimes rescinded, adding another layer of risk to consider. The best example for this are the recent delays in the CSDDD.

Sales & Marketing

It’s easy to assume that if customers need your product for compliance, it will sell itself. However, customers forced to buy a product simply because they have no other choice are usually very price-sensitive and exhibit low loyalty. Thus, a purely compliance-driven sale might appear easy initially but can make upselling and building long-term customer relationships challenging. The key is to focus on the value your product adds beyond regulatory compliance. Use regulatory compliance as a critical benefit, but also emphasise additional features and benefits to create a more compelling value proposition.

Regulatory Dependence

Regulations change frequently. Relying exclusively on one specific regulatory change taking effect or remaining in place is a risky business strategy. It is crucial to remain adaptable and maintain a degree of product and customer diversification. This might mean accommodating multiple regulations and being flexible in adapting to new ones (e.g. for compliance tools), selling across various industries to reduce dependence on a single regulatory framework, or offering your product to customers who are not only subject to compliance requirements but also find value beyond compliance benefits.

What startups are leveraging these regulatory tailwinds?

We are seeing many startups being built around the need and requirement for more sustainable and ethical supply chains. There has been a wave of companies building for ESG compliance and carbon accounting, which are now becoming very relevant for supply chain monitoring. Some of these include Plan A, Atlas metrics, Worldfavor, Normative, apiday, and Tanso building horizontal solutions, and Vaayu, Root Global, or shipzero with a more vertical industry focus in retail, food, and transport, respectively. Adjacently, we are seeing companies work on supply chain decarbonisation, by mapping the resource flows along various value chains, such as Neutreeno or Terralytiq, and companies focussing on product level data to digitise product lifecycle assessments including Makersite, greenly, Carbonbright, Carbonfact, and GreenStory.

With data quality being a key concern for many of the above companies, more recently, there has been an emergence of companies focussing on supply chain visibility, by offering granular, first-hand data on global supply chains for risk management and regulatory compliance. Some players here include Prewave, osapiens, Treefera, Correntics, and Earthcare. Since not all supply chain data can be externally verified via satellites or other publicly available data sources, there has been a surge in tools facilitating supply chain traceability both industry agnostic, such as TrusTrace, and with an industry focus like Retraced, FairlyMade, and Trace for Good (Fashion), Seedtrace (Food), or Infyos (Batteries).

Finally, decarbonising supply chains at the source over time requires better sourcing strategies. Many companies in the Procurement space are making use of this, such as Scoutbee, providing supplier intelligence, or Tacto, building in supplier management. We’ll dive deeper into the exciting things happening in Procurement in a future edition 😉

💡 Interesting Reads

  • Companies Are Seeking Real-World Supply-Chain Gains in New AI Tools | Wall Street Journal

  • Amazon's warehouse robot army keeps getting bigger and bigger | Business Insider

  • Instacart, Uber Join Forces to Add Uber Eats to Instacart App | Wall Street Journal

  • Asia-Europe ocean trades a nightmare scenario – 'unless you're a carrier' | The Loadstar

  • Daimler’s driverless semi trucks will hit the road in 2027 | The Verge

  • Mattel to shut supplier plant in China this year | Supply Chain Dive

  • 'Corrupt ship inspectors demand our food and cargo' | BBC

  • Why the World Has Gone Cuckoo for Copper | Wall Street Journal

💸 Funding Rounds

  • Harbor Lab raises $16M for efficient maritime communication | Tech EU

  • Who needs free shipping? Delivery startup Ingrid banks $23M to provide a viable alternative | TechCrunch

  • Pelikan Mobility raises €4M seed funding for commercial fleet electrification | Tech EU

  • UK’s iCustoms scores €2M to help businesses automate customs processes more efficiently using AI | Silicon Canals

  • Lisbon-based Cargofive raises €2.5 million to continue accelerating digital transformation in freight forwarding | EU-Startups

  • Nice Rice secures six-figure investment to build sustainable rice category | The Grocer

  • Daze raises a pre-seed round to solve online returns | Daze

  • UK’s online jewellery marketplace Nivoda raises €27.9M | Silicon Canals

👷 Jobs in the Industry

Interested in working in Supply Chain Tech? Here are some startup-ups and scale-ups hiring across a variety of roles:

✍️ Want to contribute?

As we grow the Supply Chain Tech newsletter, we are keen to get as many people involved as possible! If you’re interested in supply chain topics, and want to help us spread the word on this exciting space, please do get in touch. We’re always looking for guest authors and collaborators.

Supply Chain Tech Newsletter Team

Philipp Werner is an operator-turned investor and Partner at Project A. He specialises in investing in global supply chain technology and serves on the board of directors of related companies like Relay, Metycle, and Enapi. Philipp also launched the Project A Studio, partnering with founders at the pre-idea stage, and previously worked hands-on with 25+ VC-backed startups including Sennder, Trade Republic and Spryker. 

Ciara Gumsheimer is an Associate at Project A covering global supply chain technology and climate technology, with a particular interest in vertical and sustainable supply chains. Prior to joining Project A, Ciara worked at a FinTech startup in Berlin, after completing degrees at the University of Cambridge, UC Berkeley, and EDHEC Business School.

Project A Ventures is one of the leading early-stage tech investors in Europe with offices in Berlin and London and we are early backers of the logistics unicorn Sennder. We have invested in  some other notable companies in Global Supply Chains, such as Pactum, Metycle, and Relay. In addition to $1bn assets under management, we provide our portfolio companies with exclusive operational support by our team of 100+ in-house experts including all areas from Tech and Product Development to Talent Acquisition and Marketing. Other notable portfolio companies include companies such as Trade Republic, KRY, Spryker, Voi, Catawiki, and WorldRemit.