European Union (EU) rules on forced labor are tightening, with a new product ban and mandatory due diligence regime that looks set to transform expectations on how companies manage human rights-related risks in their supply chains.
The EU Forced Labor Regulation, which entered into force on December 13, 2024, and will apply from December 14, 2027, combined with the Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD), is expected to direct businesses towards more transparent, data‑driven supply chain management and sustainability integration.
Forced labor is a serious global risk. It’s not just a human rights violation but also a source of legal, operational, and reputational risk that can disrupt supply chains, cause product lines to fail, and endanger stakeholder trust. For investors and lenders, exposure to forced labor can demonstrate weak governance and poor risk controls and this has potential implications for credit quality.
The new measures from the EU build on its existing broader sustainable finance, disclosure, and product safety frameworks. By moving from voluntary standards to more binding obligations — and even product bans — the EU is demonstrating that credible human rights due diligence is a key requirement to do business in the market.
The regulation places a general prohibition on placing, making available, or exporting products made with forced labor on or from the EU market, including online sales. These rules apply regardless of where in the world the forced labor occurs. The rules also cover all products — from raw materials to finished goods — across both EU and non‑EU companies active in the European single market.
There are already some key milestones related to the forced labor regulation fixed in legislation.
The EU Forced Labor Regulation is explicitly risk‑based. Authorities are expected to prioritize scrutiny of products, regions, and sectors that have higher indicators of forced labor risk, and to consider factors such as company size, supply chain complexity, and the scale of suspected abuses.
If an investigation confirms that forced labor has been used at any stage of production, authorities can stipulate that those products are withdrawn, destroyed, recycled, or otherwise disposed of. They have the power to refuse re‑entry until the forced labor link is obviously and clearly erased.
The Corporate Sustainability Due Diligence Directive (CSDDD), entered into force on July 25, 2024, and imposed ongoing human rights and environmental due diligence obligations on large EU and non‑EU companies. Member states are required to bring the directive into national law by July 2027, with phased introductions from July 2028 to 2030 depending on company size and turnover. The scope includes forced labor risks across a company’s entire own operations, including subsidiaries and supply chain—underscoring the importance of preparing for this change and understanding forced labor risk across complex global value chains.
Interaction with the CSRD:
The Corporate Sustainability Reporting Directive (CSRD), in force since January 5, 2023, introduces sustainability disclosure requirements for companies operating in or engaging with the EU market. Among its mandated disclosures, companies are required to report on forced labor risks in adherence to EU’s sustainability reporting standards. Much like the CSDDD, CSRD reporting obligations follow a phased timeline, with reporting requirements rolling out between 2024 and 2029, depending on company size, annual turnover, and asset thresholds. Importantly, non-EU companies with significant activity in the EU are also in scope, highlighting the importance of consistent corporate sustainability obligations across global value chains.
Global reach:
Together, these EU regulations have extraterritorial reach, meaning companies outside the EU, such as those in the Middle East, Turkey, Japan, or Australia, may fall within scope if they export to, operate in, or supply EU businesses. Compliance for impacted organizations may require standardizing sustainability reporting, due diligence, and forced labor risk management approaches.
But what does this mean for businesses in practice?
Organizations should consider how robust due diligence, traceability, and data capabilities are in relation to forced labor risks, so they are prepared to fully demonstrate their supply chains are not linked to forced labor. This could include mapping supply chains and identifying high‑risk raw materials or entities using the EU database and other sources of risk-relevant data.
It also means integrating continuous monitoring into supply chain, procurement, and risk management processes. Those organizations who fail to prepare could face potential product withdrawals and disruptions to their stock supply and fulfilment, not to mention heightened scrutiny from investors and consumers.
With the CSRD reporting requirements already in place for large EU companies, full application of the Forced Labor Regulation coming in December 2027, and CSDDD obligations coming soon after, it may be helpful for companies with complex and widely dispersed supply chains to start considering their next steps. Businesses operating in or trading with the EU may need to act now to build resilience ahead of these deadlines.
Priority actions could include:
It may also be prudent to invest in data, technology, and specialist solutions that help assess forced labor risk leading to greater transparency across supply chains, as well as automated monitoring of changing risks.
Moody’s can support businesses in addressing forced labor risk by providing a structured, data‑driven assessment framework that helps them identify, interpret, and mitigate exposure across complex supply chains.
Built in collaboration with the Rights Lab at the University of Nottingham, the Forced Labor Risk Assessment leverages proprietary datasets, advanced analytics, and internationally recognized standards to generate an overall risk score underpinned by business, industry, and country-level indicators. This multi‑factor model supports teams to drill into granular metrics, uncover hidden risks within fragmented ownership structures, and apply the insights during onboarding or ongoing monitoring.
By transforming a challenging regulatory and ethical issue into actionable intelligence, Moody’s helps organizations strengthen due diligence, supports compliance activity, and take more targeted steps to reduce forced labor risks across their third party networks.
For more information about Moody’s forced labor risk assessment or to discuss any other area of third-party risk management, please get in touch with the team any time. We would love to hear from you.
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