As the push to combat greenwashing intensifies, the level of data consumed to prove compliance will explode in scale. Australian regulators need innovative approaches to compliance at scale, including ‘algorithmic due diligence.’ The United Nations is working on a new Digital Product Passport standard that will make ESG claims portable between countries and software systems, but regulators will need to catch up quickly to take advantage of the change.

In brief

  • Regulators are driving demanding verifiable supply chain transparency to deliver valuable incentives that drive climate transformation
  • Globally, ESG regulation is on the increase and will impact exports and investment opportunities for Australian companies
  • Regulators are facing increasing pressure to cover more ground with fewer resources
  • Digital Product Passports (DPPs) are an emerging global data standard for transporting ESG claims in supply chains that can be applied universally
  • Regulators can dramatically streamline compliance operations with Digital Product Passports and algorithmic due diligence

Pressure is mounting to combat greenwashing

In an era of growing environmental and social consciousness, consumers, investors, corporate buyers, and regulators are increasingly demanding products that are environmentally and socially responsible.

International compliance regimes are complex and overlapping, difficult and time consuming to meet, reducing the competitiveness of products with poor ESG performance. For regulators, unchecked greenwashing significantly undermines their ability to use incentive schemes to drive sector-level ESG transformation, a trend that trend will put regulators under increasing pressure over the next decade.

Leading the global charge against greenwashing is the EU’s new Corporate Sustainability Due Diligence legislation that will see fines as large at 4% of a corporation’s total global turnover for failing to “identify, and where necessary prevent, end or mitigate the negative impact of their activities, including that of their business partners, on human rights and the environment.” This is a potential threat for Australian industry, with only the best performing and most transparent firms granted access to the EU, regardless of the route the supply chain takes.

“The EU’s new Corporate Sustainability Due Diligence legislation will see fines as large at 4% of a corporation’s total global turnover”

Australian regulators must now do more with less

Australian regulators not only protect our domestic environment, but help exporters meet the accelerating complexity of international regulations and they are facing more challenges – administer more regulation, at higher levels of certainty, at ever growing scale, but with fewer resources each year.

Greenwashing is now reaching an industrial scale and threatening to undermine trust in ESG claims. In the US, 68% of executives now admit their companies are involved in greenwashing, accelerating government action. We may see a global sustainability arms race where nations continually increase the carbon thresholds on imports as a form of protectionism. Carbon tariffs are on the horizon from the EU and the USA, and recent signals from the Australian Treasurer may see Australia take similar measures to keep high-emission products out and protect us from ‘carbon dumping.’ This pressure will force regulators to adapt quickly to new needs that protect our environment and industries.

Many of our exporters are now facing the challenge of preparing claims to meet regulation of their products as they pass through long and complex supply chains and multiple international borders, a challenge that Australian regulators can support.

How do regulators meet the challenge?

Large-scale change and building new systems are not required for Australian regulators to meet this challenge. They now have two simple approaches they can exploit:

  • Algorithmic due diligence is an answer for regulators to addressing the scale problem, but it means companies must provide higher quality data and use international standards and the challenge for regulators is agreeing on standards and retrofitting systems and processes to adopt them. Many regulators have seen this as a decade-long process, but thankfully, modern technologies and data standards are set to make regulatory compliance across multiple markets significantly easier over the next few years if they act now. Many government agencies are rising to the challenge of sector-level data standards leadership, particularly around low-emissions energy products, health data interoperability and livestock emissions, a role welcomed by industry to create a level playing field and accelerate interoperability.
  • Digital Product Passports can provide regulators with the data they need, using international data standards and protocols. By using machine-readable, verifiable supply chain data, regulators can radically streamline and automate compliance auditing, allowing for rapid growth in coverage using existing resources. Some digital product passport and verifiable credentials schemes are already being proposed by a range of Australian regulators, but a lack of standard data models and protocols may have hampered their development. Adopting the new UNCEFACT standard early will reduce fragmentation and accelerate adoption. Regulators who issue credentials, certificates and licences can also benefit by creating digital versions as ‘verifiable credentials’ that producers can attach to product passports, and creating simple mechanisms for other regulators or customers to verify their legitimacy.

“We like to say that sunlight is the best auditor, and adopting digital supply chain transparency schemes gives no shade to those stretching the truth or bending the rules.”

Digital Product Passports: a simple solution to a complex trade problem

B2B Digital Product Passports answer an emerging and critical ESG problem – how do we collect evidence and claims and share them between actors in a supply chain or between nations?

DPPs are a simple and promising open-source solution to the growing demand for ESG-compliant products. They are being promoted by GS1 and the United Nations Centre for Trade Facilitation and Electronic Business (UNCEFACT) as a global standard for product conformance. DPPs are simple digital records that track the lifecycle of a product, providing detailed information about its origin, production methods, and environmental and social impact. Compliance and conformance claims attached to DPPs can be issued by regulators, allowing producers to demonstrate their commitment to ESG principles through their entire supply chain and provide buyers and regulators with the transparency they demand. In the next few years, DPPs are set to be a ubiquitous standard that producers, materials accounting and production management platforms can all easily integrate as a seamless way of transferring product information.

Digital Product Passports are currently being adopted in the EU for a range of products, starting with batteries and textiles, but they are expected to expand in scope and settle on the UNCEFACT standard.

Video of Steve Capell covering the protocol

First movers will be rewarded

UNCEFACT is releasing a draft of Recommendation 49 for public consultation in January 2024 and in the wake of the new globally commitments at this month’s COP28, they expect significant numbers of nations and companies to formally pledge to adopt the standard. Further information on how to make the sustainability pledge will be available in February 2024.

If Australian regulators can lead the way and support Digital Product Passports for domestic regulation, then Australian exporters with gain a first-mover advantage in global markets, while driving positive environmental change in supplier nations.

GoSource are available to talk about Digital Product Passports and how they might be relevant to your regulatory topic - contact us to have a chat.

About the Author

Steve Capell is recognised as a global thought leader in digital trust and digital trade and a co-founder of GoSource, an ICT service provider specialising in digital transformation for government and enterprise customers. Steve has been a key contributor to the United Nations Centre for Trade Facilitation and Electronic Business (UNCEFACT) to develop guidelines and standards to accelerate the global transformation of digital trade using verifiable credentials. He is currently the project leader for UNCEFACT Recommendation 49 on Digital Product Passports.