SESG in supply chain management: Common legal tools for practice

Many stakeholders are pressuring businesses to include SESG (Sustainability and Environment, Social and Governance) policies and practices into their daily operations, corporate management and particularly in their supply chain. Failure to do so can result in substantial financial, legal and reputational risks. It can, for example, have an impact on an organisation’s valuation in a transaction or result in illegal activities remaining undetected. It may also influence the outcome of RFP processes. At the same time, these efforts enable organisations to showcase their values and ethics, increase the overall brand reputation, and finally result in more responsible and profitable business.

Consequently, many organisations are implementing SESG requirements into their supply chain management. This includes making these standards an integral part of their contractual relationships with suppliers. Here, we discuss the common legal tools that organisations can use to realise this objective in practice, in particular, supplier codes of conducts and CSR contract clauses.

Although their effectiveness greatly varies depending on the available monitoring and sanction mechanisms, supplier codes of conducts and CSR contract clauses can in any case be helpful to support the SESG strategy.

Supplier codes of conduct

Supplier or vendor codes of conduct form the backbone of many companies’ SESG strategy and commitment. They set out minimum requirements that suppliers need to comply with and define the standards that customers, consumers, investors and other stakeholders can expect from the organisation.

Supplier codes of conduct help to set clear expectations for suppliers and protect an organisation’s reputation in case of an incident. Indeed, a solid SESG framework demonstrates that the necessary precautions had been taken to prevent them. This is especially relevant to companies with complex supply chains or with supply chains involving countries that are known for low compliance levels with SESG standards.

Their content varies depending on the industry sector and the type of organisation. Some sectors – like retail – are more familiar with the concept of supplier codes of conducts than others, although they are used across virtually all sectors and industries.

In most cases, the content of a supplier code of conduct reflects similar principles, inspired by instruments such as the International Bill of Human Rights, the UN Global Compact and the UN Guiding Principles on Business & Human Rights, the International Labour Organisation’s (ILO) Declaration on Fundamental Principles, Rights at Work and the relevant national legislation (e.g. UK 2015 Modern Slavery Act). Also, international industry standards – such as ISO or SAI standards – often constitute the foundation of a supplier code of conduct.

Typical topics covered in a supplier code of conduct concern:

• Business ethics and principles of integrity, fair competition, conflict of interests, anti-corruption and anti-bribery, business gifts and entertainment
• Regulatory compliance with applicable laws and regulations
• Employment practices including respect for the freedom of association, requirements relating to anti-discrimination, prohibitions on forced and underage labour, requirements on working hours, wages and benefits and the need to establish adequate and written whistleblowing policies, discipline and grievances mechanisms and procedures
• Health and safety practices
• Environmental policies and considerations
• Data protection and information management as well as a requirement to have in place business continuity and disaster recovery plans
• Protection of relations with government, media and investors and maintenance of positive community relations
• Supply chain identification including requirements for suppliers to be aware of all links of their supply chain and to be able to provide details
• Supply chain diversity which seeks to encourage suppliers to engage diverse and inclusive suppliers within the local communities where they operate and to ensure a diverse workforce composition
• Outsourcing and subcontracting requirements to increase control over the upstream or downstream supply chain

The legal force assigned to supplier codes of conducts differs. Some companies adopt these standards to encourage and inspire suppliers to adhere to the same values and principles. In many codes, an obligation is expressed that suppliers should expect the same from their own supply chain, thus including subcontractors. Others confer a binding character upon these provisions by including them by reference into supplier agreements. The agreement can also set out that (material) breaches of the obligations in the supplier code of conduct are to be considered as a material breach of contract and may lead to the termination of the business relationship with the respective supplier.

To monitor compliance and enforce a supplier code of conduct, different mechanisms exist. These range from self-monitoring obligations, over a duty to report or document on compliance, to even extensive audit rights on the supplier and its subcontractors.

CSR clauses

Corporate Social Responsibility (CSR) clauses are another common legal tool to foster implementation of companies’ SESG strategies.

Today, many supplier agreements include a CSR clause to embed these practices into the contractual relationship. These can incorporate the company’s supplier code of conduct by reference or be stand-alone clauses imposing broad – or more specific – SESG requirements on the contracting party.

Although in principle contractual CSR clauses will be legally binding on the supplier, the actual effectiveness largely depends on:

• the degree of precision of the clause. If only general principles are referred to, it can be questioned whether these type of clauses can effectively lead to better implementation of SESG practices on the supplier side;
• whether the clause is backed by an appropriate verification mechanism; and
• the extent to which sanctions are available in case of a breach.

Legal effects aside, by simply raising the issue during contract negotiations, this could have an awareness-raising effect. Also, it underlines the importance of SESG considerations and may reflect positively on the organisation.

Conclusion

It follows from the above that there are two main tools to embed SESG practices into supplier relationships. Supplier codes of conduct and CSR clauses can be used alternatively or as part of a combined contract management strategy to complement each other. Now more than ever, these tools are essential instruments to concretise an organisation’s SESG strategy.

More information about DLA Piper’s sector-specific sustainability and our sector experience can be found here. If you require legal advice in this respect, please contact the authors.