How lawyers are cleaning up supply chains

Multinationals are digging deeper into the legal plumbing of their own organisations to maximise their sustainability credentials and meet climate or social pledges.

As organisations reassess their supplier networks in order to fulfil environmental, social and governance (ESG) commitments, in-house lawyers can play an important role in helping to hit these targets by renegotiating supplier contracts and managing regulatory compliance.

“Supply chains have been pulled closer to the centre of corporate sustainability commitments,” says Daniel D’Ambrosio, a senior associate at law firm DLA Piper. That means the legal department needs to be involved in procurement and the reporting and disclosure process, to help further ESG aims, he explains.

Under pressure to improve the resilience and sustainability of their own operations, and of their suppliers, many organisations have stepped up their commitments.

In 2020, Swiss pharmaceuticals company Novartis said it wanted full carbon emissions neutrality across its supply chain by 2030. Also last year, Applied Materials, a US chipmaking supplier, launched an initiative to reduce emissions, shift to recycled packaging, and increase contracting with women- and minority-owned businesses.

Companies that get this wrong now risk public opprobrium for lax supply chain practices. Fast-fashion retailer Boohoo was forced to shake up its board last year after investigations uncovered dangerous working conditions and underpayment of workers. Its rival H&M, meanwhile, has been caught up in a battle between the Chinese government and western NGOs concerned about human rights in China’s cotton-producing region of Xinjiang.

“For ESG, we are starting to see contractual provisions or a linkage to a supplier code of conduct,” says Vanessa Havard-Williams, a partner and head of the global environmental and climate change practice at Linklaters. “That is often buttressed by [key performance indicators] and obligations to notify if there is a problem, and to allow audits.”

Such provisions include requiring energy suppliers to report on the percentage of renewables used for power generation, and for suppliers to report information about diversity within their organisations, she says. Where companies breach supplier codes, in-house lawyers are likely to be involved in advising on investigation and potential solutions, Havard-Williams adds, which can include termination of arrangements.

ESG considerations are also increasingly important for companies trying to differentiate themselves to business-to-business customers, says David Young, a managing director at Boston Consulting Group, who leads the firm’s societal impact and sustainability work.

In some parts of the world, there are mandatory reporting requirements for supply chain practices. The EU and the US require “conflict minerals” disclosures, which have forced companies to drop unscrupulous suppliers of tungsten or gold from central African countries. The EU also requires supply chain reporting for timber.

The procurement process, which often starts with a request for proposal from a supplier, is an important way for companies to start asking about ESG criteria, in-house lawyers say. As a result, companies are starting to distribute long questionnaires to suppliers about environmental and social practices.

Hilton, the global hotels chain, is incorporating social and environmental criteria into its supplier registration and inquiry processes. Suppliers are required to adhere to a responsible sourcing policy, which is included in all property contracts, says Kristin Campbell, Hilton’s general counsel and chief ESG officer. The policy includes labour rights, humane treatment of animals, and encouragement of suppliers to provide sustainably sourced wood and paper products.

The company has partnered with EcoVadis, a Paris-based ESG ratings provider, to gauge suppliers’ sustainability risks and performance.

Most of these suppliers are located in developing countries and do not have the capabilities — they do not have chief sustainability officers

In some instances, in-house lawyers also play a crucial role in facilitating co-operation with competitors, in order to achieve sustainability goals that do not breach anti-competition laws. For example, Coca-Cola Europacific Partners’ general counsel Clare Wardle says legally safe co-operation has helped rivals comply with a deposit return scheme in Germany for bottles and cans.

“As a group, GCs have a huge role to play to set up the contractual frameworks that drive behaviour,” says Wardle. “Putting something in CCEP’s standard terms that requires permission from the GC to change means it is less likely to be challenged and drives our sustainability agenda.”

But forcing suppliers to comply with environmental and social criteria might not work, says Veronica Villena, an assistant professor of supply chain and information systems at Pennsylvania State University’s Smeal College of Business. She has studied the environmental and social practices in the supplier network at Philips, the Dutch healthcare tech company, and reckons that many of the companies involved are too small to comply. “Most of these suppliers are located in developing countries and do not have the capabilities — they do not have chief sustainability officers,” she notes

Multinationals should provide training to foster good environmental and social practices at suppliers, Villena concludes. “The carrot approach is a better way to incentivise suppliers to address their own environmental and social issues.”

Climate Capital

Where climate change meets business, markets and politics. Explore the FT’s coverage here.

Are you curious about the FT’s environmental sustainability commitments? Find out more about our science-based targets here