Environmental, Social and Governance (“ESG”) Risks and Standards and Supply Chain Due Diligence Laws in Mexico

published on 12 September 2023 | reading time approx. 5 minutes

In the year 2023, Mexico continues to grapple with significant challenges related to the rule of law, labour rights, environmental protection and corruption. Despite these ongoing concerns, Mexico is progressively emerging as a pivotal destination for foreign trade and investments, drawing especially attention from Europe, East Asia, and the United States. This article aims to outline prevalent compliance risks and standards that companies engaging in operations within Mexico should be mindful of. Additionally, it will offer insights into essential supply chain due diligence laws that are relevant to the Mexican business landscape.

ESG Risks and Standards through the main Domestic Laws »
Mexico’s Supply Chain Due Diligence laws under the United States-Mexico-Canada Agreement (“USMCA”) »
Summary »

ESG Risks and Standards through the main Domestic Laws

Corruption

Corruption is pervasive in Mexico, particularly in public procurement and services. Foreign companies face significant corruption risks, especially in the judiciary, police, and business registration processes. This entails the risk for foreign companies, if they engage in common Mexican corruption practices, to become guilty under anti-corruption laws of their home state, for instance such actions of a German company in Mexico are punishable under German law. Further, under the Mexican Federal Criminal Code (Código Penal Federal) and the National Code of Criminal Procedures (Código Nacional de Procedimientos Penales) legal entities are directly liable for crimes when the offenses are committed in their name, on their behalf, for their benefit, or using means provided by them; and when the entity did not have proper controls in place.

Human Rights

Foreign companies doing business in Mexico need to be aware that Mexico is confronted with problems regarding the rule of law, meaning that the state performs poorly in the areas of corruption, openness of government and enforcement of regulations. Consequently, companies should be particularly mindful that those advocating for land rights face high vulnerability and are subjected to threats, attacks, and even murder. This should always been taken into account when investing in commercial real estate. Thereby, the domestic legal framework for the protection of human rights, including private property rights, provides the Mexican constitution (Constitución Política de los Estados Unidos Mexicanos).

Labour Rights

Collective labour rights are often undermined by Mexican companies, resulting in insufficient protection of crucial elements such as the right to collective bargaining and freedom of association. Both flaws within laws and specific practices create conditions that facilitate frequent violations. Aforementioned issues should always be borne in mind when foreign companies work with Mexican partners within their supply chains or if they establish subsidiaries with a Mexican management in Mexico. Furthermore, foreign companies should be aware that the majority of labour in Mexico is still informal and child labour, especially in agriculture, continuous to occur. The Mexican Federal Labour Law (Ley Federal del Trabajo) is the primary legal instrument for the protection of workers, but Mexico has also ratified international agreements like the International Labour Organization (“ILO”) conventions.

Environment

In Mexico prevails a high risks for ecological threats to the country, and thus also for non-compliance with domestic and international due diligence regulations for companies if they do not make efforts toward prevention. First and foremost, Mexico is experiencing moderate to severe fresh water scarcity which regularly cuts off households from water supplies during drought and high industrial consumption. Moreover, waters and rivers in Mexico are persistently severely polluted by the discharge of poorly treated sewage and waste. Foreign companies operating in Mexico must comply with the Mexican Ecology Law (Ley General del Equilibrio Ecológico y la Protección al Ambiente) which aims to, among others, combat water inequality and pollution.

Mexico’s Supply Chain Due Diligence laws under the United States-Mexico-Canada Agreement (“USMCA”)

USMCA´s Objective

The USMCA, also known as “T-MEC” in Mexico and “CUSMA” in Canada, is a trilateral trade agreement that replaced the North American Free Trade Agreement (“NAFTA”) and came into effect on the 1st July 2020.

The USMCA includes provisions related to forced labour and supply chain due diligence to address concerns about unethical labour practices and human rights violations in supply chains. These provisions aim to improve transparency, accountability, and protection for workers, particularly in the context of forced labour. This aligns with the broader international consensus that forced labour is a grave violation of human rights and must be eradicated from supply chains (e.g. the German Supply Chain Due Diligence Act). As a result, labour concerns that arose while NAFTA was in force are addressed and, particularly in Mexico, the agreement intends to ameliorate working conditions, wages and workers' rights to prevent a race to the bottom within the territory of the agreement.

Forced Labour Resolution

Under the USMCA, Mexico is required to implement significant changes in its labour laws and enforcement mechanisms to meet higher labour standards.

Now that the most recent labour market reform has been fully implemented, Mexico took its first step to comply with its forced labour import ban obligations under the USMCA (Article 23.6 of USMCA) on the 18th May 2023. Namely, the Forced Labour Resolution came into effect. It includes regulations to prohibit the importation of goods produced wholly or partly by forced or compulsory labour, including child labour. The Forced Labour Resolution allows the Ministry of Labour and Social Welfare (Secretaría de Trabajo y Prevención Social; “SPTS”) to commence an inquiry, either on its own or upon request from a private entity or natural person, to investigate whether forced labour was employed in the manufacturing of goods. After conducting the procedure, if the SPTS concludes that specific goods were indeed produced using forced labour, it will publish these findings (referred to as "resolutions") on its website in accordance with the Forced Labour Regulation. Consequently, any goods falling under these resolutions will be barred from entry into Mexico. The decision of the authorities must be made principally within six months after the petition is filed, and the import ban on the covered goods becomes effective 90 days after the decision was published.

Mexican importers will be required to retain information and documentation proving that the goods they import are not included in the lists posted on the STPS website. To comply with this requirement, companies must implement strong and efficient due diligence measures. This includes adopting appropriate systems, controls, and training in accordance with industry best practices, ensuring greater traceability and transparency within their supply chains, and formulating plans that align with regulatory expectations.

Facility Specific Rapid Response Labour Mechanism (“RRM”)

The USMCA contains an enforcement regulation which is called the Rapid Response Labour Mechanism (Annex 31-A USMCA) and only applies between Mexico and the United States. It allows the aforementioned parties to take enforcement actions against individual factories if they fail to comply with domestic freedom of association and collective bargaining laws. The mechanism comes into effect every time if one party has a good faith basis belief that a covered facility denies rights under the USMCA. For example, the RRM was already applied for a General Motors´ facility in Silao, Mexico, and for Tridonex, a subsidiary of Cardone Industries, in an auto parts facility in Matamoros, Mexico.

As a conclusion, companies must be able to prove that they are compliant with the USMCA regulations. Otherwise, remedies may include suspension of preferential tariff treatment for goods manufactured at the covered facility or the imposition of penalties on goods manufactured at or services provided by the covered facility.

Summary

As outlined above, conducting business in Mexico can entail substantial risk stemming from potential deviations from ESG standards. Precisely because the USMCA sets a framework for addressing forced labour and supply chain due diligence, effective implementation and enforcement of such standards gradually gains importance. For companies operating in North America, it will be crucial to incorporate these recent legislative actions into supply chain due diligence and import compliance strategies. In this context, with our expertise we assist companies by navigating these complex laws and new requirements.