Tackling trade-related water risks

How importing countries can address water stress from global commodity production

Research paper Updated 15 May 2024 ISBN: 978 1 78413 596 6 DOI: 10.55317/9781784135966

Silvia Weko

Former Visiting Fellow, Environment and Society Centre

Glada Lahn

Senior Research Fellow, Environment and Society Centre

A combination of climate change impacts and the production of water-intensive commodities, such as food, textiles and minerals, is exacerbating global water insecurity. Around 50 per cent of the water used to produce goods imported into the Global North comes from countries with significant water scarcity, mostly in the Global South.

As the situation worsens, there are few applicable legislative or regulatory options that can improve water sustainability at production sites. Through the use of case studies, this paper explores available approaches to boost sustainable and fair use of water at sites of production, including company disclosures, due diligence and market access standards.

Importer countries are in a strong position to insist on better water standards due to the unequal power dynamics between sellers and buyers. However, improving water standards at production sites will require trust, finance and capacity-building to enable producers to adhere to changes in policy.

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03 Importer-country initiatives and challenges

Importer countries can mandate supply chain transparency and due diligence, put conditions on market access and set sustainability criteria in trade agreements.

Mandating disclosure and due diligence in supply chains

At the UN Water Conference in March 2023, the Global Commission of the Economics of Water released a report with seven points for action. Point four emphasized disclosure of water footprints as critical and ‘key to steering capital and consumer preferences in favour of sustainable practices’, and the report recommended that governments make these mandatory.57 At present, corporate entities may be obliged to report on the environmental risks and impacts of their business in different ways or not at all. The scope, detail and metrics for disclosures depends on the legislation of the countries in which companies are headquartered or operate. However, sustainability reporting requirements are moving towards global standardization (see Box 3).58

Voluntary disclosure and due diligence standards created by businesses for their own supply chains have a mixed record. While they can lead to positive change, in some cases they may result in greenwashing: ‘the practice of overstating the environmentally or socially conscious attributes of an enterprise’s offering while understating the negative attributes, to the enterprise’s benefit.’59

As many companies already track and disclose water use and water risks to their business, mandated corporate water disclosure would not be a burden for these firms. For example, CDP – an international not-for-profit organization focusing on disclosure – conducted an analysis of 3,370 business disclosures in 2021, finding that, ‘98% of all respondents can disclose whether or not they are exposed to substantive water-related risks. 95% can disclose the number of facilities exposed.’60 For companies of a certain size, the EU now mandates reporting on not only the financial risks to the company, but also the company’s impacts on the availability, quality or access to water in a given location (see the next section on EU legislation). Likewise, there are international bodies working on developing a baseline for climate disclosures (see Box 3).61

Legislation to implement reporting requirements from companies would be more successful if G20 countries moved together to mandate what CDP calls ‘full water disclosure’: corporate disclosures that enable a comprehensive view of the risks, opportunities and responses to water insecurity.

Legislation to implement reporting requirements from companies would be more successful if G20 countries moved together to mandate what CDP calls ‘full water disclosure’: corporate disclosures that enable a comprehensive view of the risks, opportunities and responses to water insecurity. There is an opportunity to progress this through the G20 Sustainable Finance Roadmap, which recognizes the authority of the Taskforce on Nature-related Financial Disclosures (TNFD) and seeks,  ‘[i]nternational coordination on approaches to identify, verify and align investments to sustainability goals’.62

Box 3. Evolving global standards for environmental and water risk disclosure

To date, there is an evolving collection of frameworks, recommendations and standards that encourages business reporting on water risks – chiefly from the CDP, the TNFD and the International Sustainability Standards Board (ISSB), which sits under the International Financial Reporting Standards (IFRS) Foundation. The IFRS develops and oversees globally accepted accounting standards. These entities are closely aligned – the ISSB and CDP are knowledge partners to the Taskforce on Climate-related Financial Disclosures (TCFD) – and CDP intends to align its reporting standards with the TCFD as of 2024.63 While these standards and frameworks differ in purpose and content, there is convergence on the agenda to develop a unified global baseline for reporting including climate, water, nature, and broader environmental risks and impacts, which will move from voluntary to mandatory application.64

The IFRS Foundation launched the ISSB at COP26 in Glasgow in 2021. The ISSB is tasked with developing standards for a global baseline of sustainability and climate disclosures that will enable companies to report to investors and financiers on an internationally comparable basis. The ISSB has introduced two Sustainability Disclosure Standards (SDS): IFRS S1 on general sustainability and IFRS S2 on climate-related disclosures, which were published in June 2023 and came into effect in January 2024. Application of these standards could reduce duplication of water disclosure efforts across jurisdictions. IFRS S1, for instance, requires an entity to disclose information about all ‘sustainability-related risks and opportunities’ that could reasonably be expected to affect the entity’s commercial prospects:

For example, if an entity’s business model depends on a natural resource – such as water –  the entity could both affect and be affected by the quality, availability and affordability of that resource. Specifically, degradation or depletion of that resource – including resulting from the entity’s own activities and from other factors – could create a risk of disruption to the entity’s operations and affect the entity’s business model or strategy and could ultimately negatively affect the entity’s financial performance and financial position. In contrast, regeneration and preservation of that resource – including resulting from the entity’s own activities and from other factors – could positively affect the entity.65

It later states:

The entity might need to disaggregate information about sustainability-related risks and opportunities, for example, by geographical location or in consideration of the geopolitical environment. For example, to ensure that material information is not obscured, an entity might need to disaggregate information about its use of water to distinguish between water drawn from abundant sources and water drawn from water-stressed areas.66

These two sustainability disclosure standards can currently be applied independently of the main body of IFRS accounting standards (mandatory for company reporting in 140 jurisdictions), but the aim is that they will gradually be included as requirements in the same jurisdictions. At COP28, over 400 entities ‘committed to advancing the adoption or use of the International Sustainability Standards Board’s climate-related reporting at a global level’.67 Governments stating that they plan to adopt or align domestic accounting frameworks with the ISSB’s SDS include Australia, Brazil, Canada, the EU (through the European Sustainability Reporting Standards – ESRS), Nigeria, Singapore and South Korea.68

In certain value chains, where buyers are far more powerful than suppliers and set conditions of trade, buyers may also pass compliance costs for standards (voluntary or mandated) onto their suppliers. For agricultural goods like wine and coffee, the market power of dominant buyers allows them to set prices for coffee beans or grapes, and to require supplier compliance with environmental standards. When suppliers must meet environmental standards without being able to sell their goods for a higher price, they may cut costs in other areas such as labour.69 It is therefore important to ensure that standards encompass both environmental and social issues.

EU legislation

In the context of the European Green Deal, EU legislation will play an increasingly important role in the trend towards global standards for environmental and sustainability reporting. Several directives could serve as models – and offer useful lessons – for other jurisdictions aiming to strengthen their disclosure and due diligence frameworks on water.

Expanding disclosure

The EU’s 2014 Non-financial Reporting Directive (NFRD) boosted supply chain governance by requiring major companies to report on their environmental impacts. However, the policy had some shortcomings including a lack of unified or detailed reporting standards, and a limited scope in terms of which companies were subject to these measures. To remedy these issues, the EU introduced the Corporate Sustainability Reporting Directive (CSRD) in 2022 to replace the NFRD. In addition to the CSRD, the EU then proposed the Corporate Sustainability Due Diligence Directive (CSDDD), which is awaiting EU parliamentary approval, expected in April 2024. From a broader perspective, these regulations can be seen as advancing global standards for sustainability reporting, and they could serve as models for other jurisdictions that aim to strengthen their supply chain governance measures.

The CSRD requires all large EU companies and their subsidiaries, as well as companies listed on regulated markets, to disclose and ensure third-party sustainability auditing. This should detail how sustainability issues impact company operations and financial performance, and the impact the company has on people and the environment.70 While the NFRD was aimed at covering 11,700 companies, the EU plans for the CSRD to be adopted by at least 50,000 companies. The CSDDD is intended to compliment the CSRD and, when it comes into force, should boost compliance with the CSRD among large companies by imposing duties and penalties for due diligence violations as well as enabling victims to claim compensation for damages.

Table 1. EU supply chain governance measures

	CSRD (adopted Nov 2022, reporting begins in 2025)	CSDDD (revised version expected to pass in Apr 2024)
Firms impacted	All EU-listed companies including subsidiaries with over 250 employees, or over €40 million in annual revenue, or over €20 million in total assets.	Companies with more than 1,000 employees and a net worldwide turnover over €450 million – including their operations, subsidiaries and value chains. To be phased in from 2027 to 2029 and first applied to larger companies.
Implementation and enforcement	Third-party accredited audit required.	Phased in between 2027 and 2029. Member states impose fines and compliance orders, and enable victim compensation for damages.
Reporting requirements	Discloses and ensure auditing of information related to business model, strategy and supply chains as laid out in the European Sustainability Reporting Standards (ESRS).	Companies: Identify, prevent and account for negative human rights and environmental impacts (defined as any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption); adopt a climate transition plan compatible with the 1.5°C climate target. Directors: Set up and oversee due diligence implementation; consider consequences of decisions in ‘best interests’ of company.

CSRD (adopted Nov 2022, reporting begins in 2025)

CSDDD (revised version expected to pass in Apr 2024)

Firms impacted

All EU-listed companies including subsidiaries with over 250 employees, or over €40 million in annual revenue, or over €20 million in total assets.

Companies with more than 1,000 employees and a net worldwide turnover over €450 million – including their operations, subsidiaries and value chains. To be phased in from 2027 to 2029 and first applied to larger companies.

Implementation and enforcement

Third-party accredited audit required.

Phased in between 2027 and 2029. Member states impose fines and compliance orders, and enable victim compensation for damages.

Reporting requirements

Discloses and ensure auditing of information related to business model, strategy and supply chains as laid out in the European Sustainability Reporting Standards (ESRS).

Companies: Identify, prevent and account for negative human rights and environmental impacts (defined as any measurable environmental degradation, such as harmful soil change, water or air pollution, harmful emissions or excessive water consumption); adopt a climate transition plan compatible with the 1.5°C climate target.

Directors: Set up and oversee due diligence implementation; consider consequences of decisions in ‘best interests’ of company.

The extent of reporting required – the ESRS

The European Sustainability Reporting Standards (ESRS) set the disclosure requirements for the CSRD. The initial draft of these standards proposed by the European Financial Reporting Advisory Group had the potential to reduce Europe’s water footprint, as it included mandatory reporting on water and marine resources, pollution, and biodiversity and ecosystems, among others.71 However, the final standards adopted by the European Commission in July 2023 were weakened in member state negotiations, potentially limiting the CSRD’s ability to encourage more sustainable water footprints in trade.72 Companies must still assess and disclose financial and impact materiality, but it is now voluntary to explain why certain areas are deemed material or not, including water and marine resource reporting.73 As noted by a public statement from a coalition of financial actors, ‘it would be up to corporates, supported by their consultants and advisers, to determine what is, and isn’t, material to report’.74 Furthermore, disclosures on biodiversity75 and the welfare and protection of agency or contracted workers are voluntary.76

Limitations to enforcement and compensation – the CSDDD

Introduction of the CSDDD would be a groundbreaking piece of legislation in terms of enforcement, but experts have pointed out limitations for water.77 First, cases must relate to the breaking of existing environmental or human rights conventions. Due to the lack of binding international agreements on water, it may be difficult to use the CSDDD in water-related legal challenges. Second, the CSDDD can be seen as the EU encroaching into corporate law, which is usually a member state competence, leading to legal questions and opposition.78 Third, some civil society actors have criticized the CSDDD for being too narrow and covering too few companies, as well as having ‘mostly given up on its original plans for directors’ obligations and accountability to shareholders’.79 Although the CSDDD was expected to pass in February 2024, Germany and then Italy opposed the final proposal; the Council of the European Union adopted a watered down version of the directive in March 2024. The main changes were to increase the size of companies to which legislation would apply and to lengthen the timeline for phase-in.80

New sector-specific due diligence requirements that may affect water use

The EU has also developed sector-specific legislation to combat deforestation in supply chains for certain products including palm oil, cattle, timber, coffee, cocoa and soy, as well as derived products like leather.81 Deforestation increases stress on water, as trees play an important role in delivering rainwater to underground aquifers and help prevent desertification and reduce the risks of soil erosion and landslides in the event of heavy rainfall. Therefore, policies to fight trade-driven deforestation can have positive impacts on water systems. The regulation on deforestation-free products, which entered into force in June 2023, requires that operators and traders verify their compliance with EU standards. Responsibility for checking product supply chains to ascertain whether traders are following due diligence laws lies with member state authorities.82

Deforestation increases stress on water, as trees play an important role in delivering rainwater to underground aquifers and help prevent desertification and reduce the risks of soil erosion and landslides in the event of heavy rainfall.

In addition, the new EU batteries regulation, which entered into force in August 2023,83 requires due diligence according to the Organisation for Economic Co-operation and Development (OECD) standards for minerals from high-risk areas, including social and environmental risks. Because the mining sector is a major contributor to water stress and pollution, the standard’s inclusion of risks to the environment along the supply chain has the potential to encourage sustainable water use. This builds on the 2017 EU conflict minerals resolution,84 which did not have environmental provisions but aimed to prevent human rights violations from the minerals sector. NGOs have criticized the 2017 conflict minerals resolution for failing to address human rights abuses because of the lack of member state compliance and enforcement.85 As the sustainable batteries regulation will also be enforced at the member state level, there is a risk that it has the same weaknesses as the 2017 resolution. The 2017 resolution set up mechanisms for compliance support, including the European Partnership for Responsible Materials.86 Lessons learned from this partnership could support the broadened due diligence standards for batteries.

Member state acts

In addition to EU measures, member states have enacted their own policies such as the French 2017 Corporate Duty of Vigilance Law, which requires companies to identify and prevent severe risks to human health and the environment. This law has been used to challenge water rights violations.87 Germany’s 2023 Act on Corporate Due Diligence Obligations in Supply Chains aims to prevent human rights violations and includes penalties for non-compliance and violations.88 This may address water issues because it includes environmental protection ‘where environmental risks can lead to human rights violations’,89 such as water that is poisonous for human consumption or chemicals that are dangerous for people or the environment. However, these are all new pieces of legislation and have yet to be tested through legal cases. Until then, it is unclear whether they will directly affect practices regarding water sustainability, although the trend points to more scrutiny and penalties for violations in EU supply chain regulations.

UK legislation

The UK is another major importer of virtual water,90 and the country has signalled its commitment to sustainability disclosures. Compared with the EU, the UK has fewer laws and policies that address its international supply chains, and the present government is not planning on replicating EU commitments as it sees the current regime as sufficient.91

Experience with the 2015 Modern Slavery Act

The UK has experience of mandating disclosure in international supply chains through the 2015 UK Modern Slavery Act. This legislation requires large businesses with a yearly turnover of £36 million or more to publish annual ‘modern slavery statements’, in which companies report on their progress to identify and address slavery risks in their operations and supply chains. There are no financial or legal penalties for failing to comply with reporting requirements, which can be as simple as stating ‘there are no slavery risks’, although the UK secretary of state (in practice the home secretary) has the power to apply for an injunction requiring companies to disclose further information.92 In 2021, the UK House of Commons published a report assessing Uyghur forced labour, which notes that modern slavery statements are not monitored and argues that there should be fines for non-compliance, concluding that ‘the Modern Slavery Act is out of date, has no teeth, and we do not accept that businesses should be excused from doing basic due diligence’.93 This experience shows the challenge of addressing the human rights impacts of trade using due diligence measures without enforcement measures. Subsequently, trade measures to address the UK’s water footprints would likely face similar difficulties.

Enforcing the 2021 Environment Act – a work in progress

The UK’s 2021 Environment Act may influence the UK’s supply chains for forest products as well as the country’s water footprint (as deforestation has negative impacts on water systems). The Environment Act made it unlawful for UK companies to use products (including cattle, cocoa, coffee, maize, palm oil, rubber and soy) from land that was illegally converted or occupied, and proposed due diligence requirements.94 The detailed due diligence requirements, the scope of these regulations and the enforcement mechanisms have all yet to be determined. Civil society groups have critiqued the act’s definition of illegal, which only applies to the producer country’s laws and not the UK’s, because it would not prevent illegal deforestation in the Brazilian Amazon.95 At the same time, the Brazilian government argued the act could harm trade and might not be WTO-compatible.96 According to the Department for Environment, Food and Rural Affairs (Defra), the principles set out in the act should be implemented in additional legislation at the earliest possibility following consultation in June 2022.97 Another piece of legislation, the 2023 Financial Services and Markets Act, requires a review of whether the UK financial system is adequate to eliminate financing of illegal forest risk commodities.98 However, proposed due diligence measures have not been included in the final act99 or further legislation as of February 2024.

Towards disclosures, but no enforcement mechanisms yet

In 2022, the UK government mandated disclosure on climate-related financial information in line with recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD).100

The UK’s Sustainability Disclosure Requirements for financial products and firms within the UK could encourage wider company disclosures on sustainability related issues and eventually impact investment patterns.

However, reporting on climate risks including water metrics is not mandatory,101 and the UK Financial Conduct Authority’s review of TCFD-aligned disclosures found that companies tend to focus on greenhouse gas emissions rather than other environmental impacts.102 The UK’s Sustainability Disclosure Requirements (SDRs) for financial products and firms within the UK, published in November 2023 and due to come into force in December 2024, could encourage wider company disclosures on sustainability related issues and eventually impact investment patterns. These standards align with the IFRS SDRs, and financial companies will be obliged to disclose sustainability objectives, progress towards these objectives and, in some cases, investment policy and management approaches, as well as label their products accordingly. However, measures only apply to companies within the UK, although there is scope to extend to overseas finance companies in future.103 Notably, neither disclosure of principal adverse impacts104 nor independent verification are required.105 The lessons learned from the Modern Slavery Act suggest that the SDRs and TCFD will have limited relevance for embedded water in international trade without setting basic reporting requirements or ensuring independent verification.

Despite various pieces of related legislation to tackle sustainability and social issues, it remains to be seen how effective the UK will be at addressing the negative impacts of trade on water. If secondary legislation is created, the UK’s Environment Act could limit water footprints indirectly by reducing UK demand for forest products from deforestation that harms ecosystems and water cycles. While it may not have a direct impact on water, the Modern Slavery Act can be used to prosecute labour violations and shows the importance of including enforcement mechanisms in any further legislation. The SDRs can encourage disclosure of sustainability objectives, but without independent auditing its impacts may be limited. Compared to the EU, this legislation covers fewer value chains, is less detailed and has fewer enforcement mechanisms. This approach decreases the burden on businesses but is less likely to encourage sustainable water footprints.

Setting standards for market access

Countries have long placed conditions on access to their markets and used standards for public procurement to build demand for desirable goods. Due to the principles of openness and fair competition, enshrined in the WTO’s GATT, there are legal and political considerations to this approach. Under the WTO Technical Barriers to Trade agreement, countries can develop their own standards, but these must not be discriminatory and not create unnecessary trade barriers (see Box 6). From a political point of view, if standards are used internationally and are already understood by different actors, like businesses, they may be more acceptable as conditions for market access.106 A key barrier to applying market access conditions related to water is that there are no international treaties on water that are comparable to international agreements on human rights or climate change. Without an international agreement on water, it is necessary to explore creative ways of tying sustainable water use to market access and the available legislation.

Box 4. WTO-compatible standards for market access

It is possible for countries to enact standards under the Technical Barriers to Trade agreement for certain purposes including environmental protection and consumer information. Countries are encouraged to use already established international standards and to ensure that standards do not create undue barriers to trade.107 Here, it is important to distinguish between public and private standards. Standards set by states may not violate WTO rules and may still be challenged by other countries: for example, palm oil producers have brought complaints to the WTO about the EU’s action on palm-oil based biofuels.108 Fully private, voluntary standards undertaken by companies and NGOs do not violate WTO rules.

Setting market access standards: lessons from forestry

The timber industry has shown the potential impact of setting standards for market access – but also the long timescale needed. The Forest Stewardship Council (FSC) developed standards for sustainable forest management in the 1990s, which were then used in the 2000s to push the UK government to amend the national timber procurement policy to require forestry products to meet FSC sustainability standards.109 The EU also used similar standards to address import sustainability, setting standards for timber and paper product legality as well as setting up bilateral agreements between timber producing countries and importers. The use of voluntary partnership agreements should ensure that imports of these products meet EU standards, although there are implementation difficulties such as a lack of sufficient monitoring. The EU’s new regulation on deforestation-free products, mentioned above, replaces the EU timber legislation, introducing tougher measures to ensure that imports do not result in deforestation.

Banning products that breach importing country standards: the US approach

A more top-down approach to controlling imports that violate national standards involves banning products. The US monitors human rights violations and bans offending products from problem sectors and locations, putting the burden of proof on companies. For example, the 2015 US Trade Facilitation and Trade Enforcement Act prohibits all imports made with forced labour including child and prison labour.110 For certain products and locations, such as tobacco from Malawi, products can only enter the US if the importer can provide compelling evidence that goods were not made with forced labour.

In 2021, the US Government Accountability Office had a positive assessment of the policy’s effectiveness to reduce forced labour supply chains but pointed out that supply chain complexity makes flagging forced labour difficult (for example, cotton picked with forced labour may be mixed with other cotton). Another problem is that companies may cut ties with suppliers or avoid reporting violations rather than working to improve conditions. The severing of ties risks offending exporting governments, which may raise the issue at the WTO and could potentially worsen local conditions.111 For example, the Government Accountability Office report noted that the US withheld a release order for disposable rubber gloves produced in Malaysia in 2019, which led to workers’ employment being terminated. US officials interviewed for the report argued that the US should be ‘prepared to support workers who are placed in a position of increased vulnerability as a result of enforcement actions to prevent forced labor’.112

Steps towards market access standards

The development and application of environmental, social and governance (ESG) standards could address the issues of virtual water. Ideally, these would follow the example of the timber industry, moving from initially voluntary standards to market access rules. In the long term, such standards could be incorporated into trade agreements with water-stressed countries. These standards should also cover social sustainability aspects, for example working conditions and pay, as there are known cases of suppliers making up for environmental costs by cutting corners on labour, such as in the wine industry.113 Special attention should also be paid to supply chains with uneven power relationships such as that of tobacco.114

In extreme cases of water injustice, countries could expand existing human rights-based approaches to ban goods from locations or sectors that violate the human right to water and sanitation.

In extreme cases of water injustice, countries could expand existing human rights-based approaches to ban goods from locations or sectors that violate the human right to water and sanitation. For example, importers of products from certain high-risk areas could be required to show that they do not use unsustainable water practices that affect the local population’s water. Industries where there are patterns of heavy water pollution and industrial accidents such as textiles could be subject to similar requirements. To be effective, incentives should be designed to encourage producers to comply with water sustainability requirements and persuade buyers to work with suppliers rather than cutting them off.

Using trade agreements to encourage sustainability

Preferential trade agreements have increased dramatically since the 1990s, and have begun to include environmental provisions.115 Some studies of trade agreements suggest that these environmental provisions can increase ‘green’ trade and reduce ‘dirty’ exports from developing countries.116 Other studies show a more complicated picture: for example, the Peruvian government agreed to reduce illegal logging in the 2009 US–Peru Trade Promotion Agreement, but researchers using satellite data have shown that deforestation has increased (although not more than in other Amazonian countries).117

Sustainability in EU trade agreements

As a major importer of goods – worth over €3 trillion in 2022118 – the EU aims to address the negative international effects of its consumption on the environment by including sustainability in its preferential trade agreements.119 Since 2010, its trade agreements have included trade and sustainable development chapters with sustainability impact assessments. The coverage of these assessments varies, for example, the sustainability impact assessment in the EU–South Korea trade agreement does not cover agribusinesses. There are several weaknesses in these assessments including the lack of coverage of environmental issues such as deforestation and fishing, weaker dispute settlement mechanisms, the inability to enforce penalties in the case of non-compliance, and a lack of consequences for violations or withdrawal from multilateral environmental agreements.120

Sustainability in UK trade agreements

The UK also includes environmental provisions in its trade agreements, which vary for different partners. For example, the environment chapter of the 2023 Australia–UK agreement does not include freshwater provisions and only addresses water when it comes to marine environment impacts due to shipping, fishing and marine litter.121 Other trade agreements are more advanced on dispute settlement including the 2022 New Zealand–UK trade agreement, which includes a dispute settlement mechanism for environmental commitments, including those that can impact water ecosystems such as fishing and forestry.122 The agreement includes details on how disputes will be adjudicated, such as reporting panels to assess compliance and recommend solutions. To monitor and implement these chapters, the UK has set up a group with industry and civil society including, among others, the WWF and UK Fashion and Textile Association.123

When it comes to trade with developing countries, the UK’s 2023 Developing Countries Trading Scheme (DCTS) gives 47 least-developed countries (LDCs) comprehensive preferences, i.e. few barriers to trade, and it extends further preferences to 18 further low-income countries.124 The DCTS removes previous requirements for countries to ratify and implement international environmental conventions but retains the right to suspend a country due to human rights and labour rights violations, as well as violations of anti-corruption, climate and environmental conventions.

To understand how international trade affects local water use, the next two chapters examine water-trade linkages in Malawi and Morocco. Malawi and Morocco were chosen because of their water stress and their trade with the UK and the EU. The case studies explore how trade partner policy measures, such as disclosure and import standards, can influence water sustainability.

UN Global Commission on the Economics of Water (2023), ‘Turning the Tide: A Call to Collective Action’, March, https://turningthetide.watercommission.org.

CDP (2023), Shaping High-Quality Mandatory Disclosure: Taking stock and emerging best practice, September, https://cdn.cdp.net/cdp-production/cms/policy_briefings/documents/000/007/292/original/CDP_High_Quality_Mandatory_Disclosure.pdf?1693840960.

Kelly, L. et al. (2022), Triggering market transformation for fair water footprints, Edinburgh: Declaration for Fair Water Footprints, https://fairwaterfootprints.org/app/uploads/2022/12/WWI_FWF_IIED_Market_Transformation_report_proof_05.pdf.

Lamb, C., Paccagnan, V. and Zehra, D. (2022), ‘Setting the high-water mark for mandatory disclosure’, CDP, https://cdn.cdp.net/cdp-production/cms/policy_briefings/documents/000/006/409/original/Setting_the_high_water_mark_for_mandatory_disclosure.pdf?1660576398.

European Commission (2022), ‘Sustainable Finance’, press release, 26 July 2022, https://ec.europa.eu/newsroom/fisma/items/754701/en.

G20 (2021), ‘G20 Sustainable Finance Roadmap’, 7 October 2021, https://g20sfwg.org/wp-content/uploads/ 2021/10/G20-Sustainable-Finance-Roadmap.pdf.

TNFD (undated), ‘Knowledge Partners’, https://tnfd.global/about/knowledge-partners.

Tin, Y. K. F. et al. (2024), Accountability for Nature: Comparison of Nature-Related Assessment and Disclosure  Frameworks and Standards, United Nations Environment Programme World Conservation Monitoring Centre  (UNEP-WCMC) and United Nations Environment Programme Finance Initiative (UNEP-FI), https://www.unepfi.org/ wordpress/wp-content/uploads/2024/01/Accountability-for-Nature.pdf.

International Financial Reporting Standards Foundation (2023), ‘General Requirements for Disclosure of Sustainability-related Financial Information’, IFRS S1 Sustainability Disclosure Standard, https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s1-general- requirements-for-disclosure-of-sustainability-related-financial-information.pdf?bypass=on.

Ibid.

IFRS (2023), ‘ISSB at COP28: close to 400 organisations from 64 jurisdictions, including associations gathering over 10,000 member companies and investors, join multilateral and market authorities to commit to advance the ISSB climate global baseline’, https://www.ifrs.org/news-and-events/news/2023/12/issb-at-cop28-statement-of-support.

Kerschner, S. et al. (2023), ‘Eight things to know about the Taskforce on Nature-related Financial Disclosures’, White and Case, https://www.whitecase.com/insight-alert/eight-things-know-about-taskforce-nature-related- financial-disclosures.

For an overview, see Ponte, S. (2020), ‘The hidden costs of environmental upgrading in global value chains’, Review of International Political Economy, 29(3), pp. 818–843, https://doi.org/10.1080/09692290.2020.1816199.

European Commission (2022), ‘Sustainable Finance’, press release, 26 July 2022, https://ec.europa.eu/newsroom/fisma/items/754701/en.

European Financial Reporting Advisory Group (2021), Proposals for a relevant and dynamic EU Sustainability Reporting Standard-Setting, https://www.efrag.org/Lab2.

PWC (2023), ‘Final European Sustainability Reporting Standards have been adopted’, 4 August 2023,  https://blogs.pwc.de/de/sustainability/article/238819/final-european-sustainability-reporting-standards-have- been-adopted.

European Commission (2023), ‘Questions and Answers on the Adoption of European Sustainability Reporting Standards’, 31 July 2023, https://ec.europa.eu/commission/presscorner/detail/en/qanda_23_4043.

Principles for Responsible Investment (2023), ‘Joint statement from EFAMA, Eurosif, IIGCC, PRI and UNEP FI on European Sustainability Reporting Standards’, press release, 7 July 2023, https://www.unpri.org/driving- meaningful-data/joint-statement-from-efama-eurosif-iigcc-pri-and-unep-fi-on-european-sustainability-reporting-standards/11525.article.

WWF (2023), ‘Controversial last-minute changes by Commission undermine draft standards for corporate sustainability reporting’, press release, 12 June 2023, https://www.wwf.eu/?10868941/Controversial-last- minute-changes-by-Commission-undermine-draft-standards-for-corporate-sustainability-reporting.

Hoffman, C. and Rees, C. (2023), ‘Comment: New EU reporting rules have a loophole that will jeopardize a green and just transition’, Reuters, 6 July 2023, https://www.reuters.com/sustainability/society-equity/comment-new-eu- reporting-rules-have-loophole-that-will-jeopardize-green-just-2023-07-06; see also Jayna, R. (2023), ‘Asset managers unite to urge European Commission to tighten ESG reporting rules’, BusinessGreen, 14 July 2023, https://www.businessgreen.com/news/4120159/asset-managers-unite-urge-european-commission-tighten-esg- reporting-rules.

European Commission (2022), ‘Corporate sustainability due diligence: Fostering sustainability in corporate governance and management systems’, https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en.

Research interview with water expert with EU experience, under the condition of anonymity, April 2023.

E3G (2022), ‘EU Sustainable Corporate Governance doesn’t truly address directors’ duties’, press release, 23 February 2023, https://www.e3g.org/news/eu-sustainable-corporate-governance-doesn-t-truly-address- directors-duties.

Gergondet, E. et al. (2024), Human Rights and the Enviroment: What to expect from the Corporate Sustainability Due Diligence Directive, Mayer Brown, 19 March 2024, https://www.mayerbrown.com/en/insights/publications/2024/03/human-rights-and-the-environment—what-to-expect-from-the-corporate-sustainability-due-diligence-directive.

European Commission (undated), ‘Deforestation-free products’, https://environment.ec.europa.eu/topics/forests/deforestation/regulation-deforestation-free-products_en.

Covington (2023), ‘EU Deforestation Regulation Set to Come Into Force’, 30 May 2023, https://www.cov.com/en/news-and-insights/insights/2023/05/eu-deforestation-regulation-set-to-come-into-force.

European Commission (2023), ‘Circular economy: New law on more sustainable, circular and safe batteries enters into force’, 17 August 2023, https://environment.ec.europa.eu/news/new-law-more-sustainable-circular- and-safe-batteries-enters-force-2023-08-17_en.

European Commission (2021), ‘Conflict Minerals Regulation: The regulation explained’, https://policy.trade.ec.europa.eu/development-and-sustainability/conflict-minerals-regulation/regulation-explained_en.

IPIS/PAX (2023), The EU Conflict Minerals Regulation: High stakes, disappointing results, https://ipisresearch.be/publication/the-eu-conflict-minerals-regulation…inting-results.

European Partnership for Responsible Minerals (undated), ‘homepage’, https://europeanpartnership- responsibleminerals.eu.

Business & Human Rights Resource Centre (2021), ‘In wake of health crisis in Chile, water giant SUEZ is summoned on the basis of French duty of vigilance law’, 7 June 2021, https://www.business-humanrights.org/ en/latest-news/chile-in-wake-of-osorno-health-crisis-water-giant-suez-is-summoned-on-the-basis-of-duty-of- vigilance-law.

German Federal Government (2021), ‘Supply Chain Act (Lieferkettengesetz): Greater protection for people and the environment in the global economy’, press release, 3 March 2021, https://www.bundesregierung.de/breg-en/service/archive/supply-chain-act-1872076.

CSR in Deutschland (2023), ‘Fragen und Antworten zum Lieferkettengesetz’ [Questions and answers about the Supply Chain Act], https://www.csr-in-deutschland.de/DE/Wirtschaft-Menschenrechte/Gesetz-ueber-die- unternehmerischen-Sorgfaltspflichten-in-Lieferketten/FAQ/faq.html.

Of the UK’s global blue water footprint, 49 per cent comes from places under severe water stress, this level of withdrawal is unsustainable. Hoekstra, A. Y. and Mekonnen, M. M. (2016), ‘Imported water risk: the case of the UK’, Environmental Research Letters, 11(5), https://doi.org/10.1088/1748-9326/11/5/055002.

Linklaters (2022), ‘UK government does not plan to replicate proposed EU Directive on Corporate Sustainability Due Diligence’, 13 June 2022, https://sustainablefutures.linklaters.com/post/102hqhm/uk-government-does- not-plan-to-replicate-proposed-eu-directive-on-corporate-susta.

However, there is no requirement for a detailed disclosure. See UK Government (undated), ‘s.54(11) Modern Slavery Act 2015’, National Archives, https://www.legislation.gov.uk/ukpga/2015/30/part/6/enacted. See also UK parliament (2019), Independent Review of the Modern Slavery Act 2015, https://assets.publishing.service.gov.uk/media/5ce5116e40f0b627de48663d/Independent_review_of_the_Modern_Slavery_Act_-_final_report.pdf.

House of Commons Business, Energy and Industrial Strategy Committee (2021), Uyghur forced labour in Xinjiang and UK value Chains, https://committees.parliament.uk/publications/5095/documents/52855/default.

WWF (2022), Due diligence on forest-risk commodities, https://www.wwf.org.uk/sites/default/files/2022-03/WWF-UK-Due-Diligence-Secondary-Legislation-External-Policy%20Briefing-V2.pdf.

WWF (undated), ‘Due Diligence in the UK’, https://www.wwf.org.uk/what-we-do/due-negligence-report.

Jordan, L. (2022), ‘Brazil threatened UK with trade action over deforestation legislation’, Greenpeace Unearthed, https://unearthed.greenpeace.org/2022/09/27/brazil-threatened-uk-wto-deforestation-legislation.

Defra (2022), Consultation Outcome: Tackling illegal deforestation in UK supply chains, https://www.gov.uk/government/consultations/tackling-illegal-deforestation-in-uk-supply-chains.

UK Government (2023), ‘Financial Services and Markets Act 2023’, National Archives, https://www.legislation.gov.uk/ukpga/2023/29/enacted.

Global Witness (2023), ‘MPs should vote for new deforestation due diligence law in Financial Services and Markets Bill’, 22 June 2023, https://www.globalwitness.org/en/campaigns/forests/mps-should-vote-new- deforestation-due-diligence-law-financial-services-and-markets-bill.

BEIS and HM Treasury (2021), ‘UK to enshrine mandatory climate disclosures for largest companies in law’, press release, 29 October 2021, https://www.gov.uk/government/news/uk-to-enshrine-mandatory-climate- disclosures-for-largest-companies-in-law. See also BEIS (2022), Mandatory climate-related financial disclosures by publicly quoted companies, large private companies and LLPs, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1056085/mandatory-climate-related-financial- disclosures-publicly-quoted-private-cos-llps.pdf.

TCFD (2021), Guidance on Metrics, Targets, and Transition Plans, https://assets.bbhub.io/company/sites/ 60/2021/07/2021-Metrics_Targets_Guidance-1.pdf.

Financial Conduct Authority (2022), ‘Review of TCFD-aligned disclosures by premium listed commercial companies’, https://www.fca.org.uk/publications/multi-firm-reviews/tcfd-aligned-disclosures-premium- listed-commercial-companies#lf-chapter-id-summary.

Financial Conduct Authority (2023), Sustainability Disclosure Requirements (SDR) and investment labels, Policy Statement PS23/16, https://www.fca.org.uk/publication/policy/ps23-16.pdf; BEIS (2023), Resilience for the Future: The UK’s Critical Minerals Strategy, https://www.gov.uk/government/publications/uk-critical-mineral-strategy/resilience-for-the-future-the-uks-critical-minerals-strategy.

Principal adverse impacts refer to the negative impacts of investments or advice on sustainability. There is, however, accompanying handbook guidance stating that firms should consider disclosing their impact on the environment and/or society. Financial Conduct Authority (2022), Consultation Paper: Sustainability Disclosure Requirements (SDR) and investment labels, https://www.fca.org.uk/publications/consultation-papers/cp22- 20-sustainability-disclosure-requirements-sdr-investment-labels.

Financial Conduct Authority (2023), ‘FCA updates on its Sustainability Disclosure Requirements (SDR) and investment labels consultation’, https://www.fca.org.uk/news/news-stories/fca-updates-sustainability- disclosure-requirements-and-investment-labels-consultation.

Research interview with water expert with EU experience, under the condition of anonymity, April 2023.

WTO (undated), ‘Technical barriers to trade’, https://www.wto.org/english/tratop_e/tbt_e/tbt_e.htm.

Reuters (2023), ‘Growing tensions between Asian palm oil producers and the European Union’, 16 January 2023, https://www.reuters.com/markets/commodities/growing-tensions-between-asian-palm-oil-producers-european-union-2023-01-13/; WTO (undated), ‘European Union and certain Member states – Certain measures concerning palm oil and oil palm crop-based biofuels’, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ ds600_e.htm.

Kelly et al. (2022), Triggering market transformation for fair water footprints.

Government Accountability Office (2021), Forced Labor: CBP Should Improve Communication to Strengthen Trade Enforcement, https://www.gao.gov/products/gao-21-259.

Ibid., p. 31.

Ibid.

Ponte, S. (2020), ‘The hidden costs of environmental upgrading in global value chains’, Review of International Political Economy, 29(3), pp. 818–843, https://doi.org/10.1080/09692290.2020.1816199.

For further information on labour risks in tobacco supply chains, see Ramos, R. K. (2018), ‘Child Labor in Global Tobacco Production: A Human Rights Approach to an Enduring Dilemma’, Health and Human Rights Journal, 20(2), pp. 235–248.

Morin, J. F., Blümer, D., Brandi, C. and Berger, A. (2019), ‘Kick-starting diffusion: Explaining the varying frequency of preferential trade agreements’ environmental provisions by their initial conditions’, The World Economy, 42(9), pp. 2602–2628, https://doi.org/10.1111/twec.12822.

Brandi, C. (2020), ‘Do environmental provisions in trade agreements make exports from developing countries greener?’, World Development, 129, https://www.sciencedirect.com/science/article/pii/S0305750X20300255.

Peinhardt, C., Kim, A. A. and Pavon-Harr, V. (2019), ‘Deforestation and the United States–Peru trade promotion agreement’, Global Environmental Politics, 19(1), pp. 53–76, https://doi.org/10.1162/glep_a_00498.

O’Neill, A. (2023), ‘European Union: Import of goods from 2012 to 2022’, Statista, https://www.statista.com/statistics/253584/import-of-goods-to-the-eu.

Blot, E. and Kettunen, M. (2021), Environmental credentials of EU trade policy – A comparative analysis of EU free trade agreements, Institute for European Environmental Policy, https://ieep.eu/publications/environmental-credentials-of-eu-trade-policy.

Blot, E., Oger, A. and Harrison, J. (2022), Enhancing sustainability in EU Free Trade Agreements: The case for a holistic approach, Institute for European Environmental Policy, https://ieep.eu/publications/enhancing- sustainability-in-eu-free-trade-agreements-the-case-for-a-holistic-approach.

UK Government (2023), ‘UK-Australia Free Trade Agreement’, https://www.gov.uk/government/collections/uk-australia-free-trade-agreement.

Department for International Trade (undated), ‘Environment, Climate Change, and Sustainability in the UK-New Zealand Free Trade Agreement’, https://assets.publishing.service.gov.uk/government/uploads/system/ uploads/attachment_data/file/1057637/uk-new-zealand-free-trade-agreement-environment-climate-change- and-sustainability-explainer.pdf.

Department for Business and Trade and Department for International Trade (2022), Trade and Sustainable Development Domestic Advisory Group: Meeting agendas and minutes, https://www.gov.uk/government/publications/trade-and-sustainable-development-domestic-advisory-group-tsd-dag-meeting-agendas-and-minutes.

Department for Business and Trade (2023), ‘Developing Countries Trading Scheme’, https://www.gov.uk/government/collections/trading-with-developing-nations.

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