Ensuring there is a sustainable supply chain has rightly become one of the most important considerations for retail and consumer products brands in recent years. Global concern regarding climate change has made it a key issue for consumers and suppliers alike.
The full scope of what sustainability might ‘mean’ for supply chains was well summarised by the United Nations Global Compact, Supply Chain Sustainability: A Practical Guide for Continuous Improvement (Second Edition), which identifies that supply chain choices can impact upon and advance: human rights, including labour rights; climate resilience; environmental protection; inclusive economic growth; and ethical business practices. These considerations have come into sharp relief as the global economy responds to, and seeks to recover from, the ongoing impact of the COVID-19 crisis. As the Organisation for Economic Co-operation and Development has noted, that recovery presents a unique opportunity to affect a step change and align on “long-term emission reduction goals, factoring in resilience to climate impacts, slowing biodiversity loss and increasing circularity of supply chains”.
For businesses that rely on suppliers (whether one or several), there is a growing legislative and customer expectation that care should be taken to ensure that those suppliers are acting responsibly and can demonstrate a commitment to operating sustainably. The move towards more legislative involvement can be seen by the UK government’s announcement in October 2021 that the UK will become the first G20 country to enshrine in law mandatory requirements aligned with recommendations from the Taskforce on Climate-related Financial Disclosures. The announcement outlined that, from 6 April 2022, over 1,300 of the largest UK companies will be required to disclose “climate-related financial information”.
The European Commission is also seeking to introduce legislative change with sustainability in mind. The Commission recently outlined a proposed Directive focusing on corporate sustainability due diligence; it requires EU companies of a certain size to “identify and, where necessary, prevent, end or mitigate adverse impacts of their activities” on human rights, and on the environment, as a result of their global supply chains. Should the proposed Directive (as drafted) become law, fines (and other sanctions) may be imposed in case of non-compliance and victims affected by the lack of appropriate due diligence measures will have the opportunity to take legal action.
This article will consider some practical steps that brands can take when looking to increase their supply chain sustainability, particularly when entering into new agreements with suppliers. These considerations are broken down into the following two key stages:
- Pre-contract; and
The pre-contract stage is typically the first opportunity to gain an understanding of what governance the supplier has in place to promote sustainability. Depending on the number of suppliers a customer is inviting to submit proposals, it can place sustainability as a key metric to be used to evaluate options. For example, in Invitations to Tender (ITTs) or Requests for Proposals (RFPs), customers can ask that suppliers detail what sustainability measures they have in place, for customer review and comparison.
In addition to reviewing what the suppliers have in place, this stage also affords customers the opportunity to set out their requirements. This could include sharing a copy of a ‘Code of Conduct’ for suppliers. If a customer does not yet have its own supplier Code, this is a great time to construct one and set out what is expected of the suppliers if they are to work with the customer. With these matters addressed up front, there can be no ambiguity as to what is expected, and any proposals that cannot agree to the Code can be evaluated accordingly.
Another way of getting key sustainability requirements in front of the supplier at the outset is by including any relevant contractual clauses in a ‘Key Terms’ document. This consists of a simplified matrix of key clauses such as limitations of liability, warranties, and termination. Typically, this includes a column for the supplier to confirm whether they agree to the clause and, if not, a column for them to set out why. The Key Terms document also has the added benefit of speeding up contractual negotiations, allowing customers to identify which suppliers may be more amenable to the proposed contract.
This is generally when customers can really emphasise their sustainability requirements as part of the commercial agreement with the supplier. At this stage, key terms should have been shared with the supplier already and any deal-breaker issues resolved up front. Therefore, the key contractual clauses are likely to include:
- Compliance with Code of Conduct for Suppliers. Customers should consider placing compliance with the Code of Conduct within the terms and conditions of the agreement. Making it an express requirement that the supplier agrees to comply will have the result of demonstrating how important sustainability is for the customer, and for the agreement as a whole. Suppliers are then clear as to the customer’s expectations and the contractual effects of not meeting those expectations,
- Specific sustainability obligations. Additionally, customers can introduce more specific clauses to deal with sustainability issues. These would depend on the product or service being purchased, but customers should think creatively as to how commercial contracts can be leveraged to place sustainability as a key item on the agenda. For example, a fashion retailer may want a prospective supplier to agree to provide products which are recyclable to a minimum percentage, to minimise waste. With a heightened desire for consumers to be able to recycle the products they use, customers will want that from their suppliers.
- Reporting obligations. As mentioned in our Tax Scape article focusing on proposed changes from the EU Commission aimed at carbon neutrality, legislative changes impact business practices on plastic use and extend responsibilities for producers of goods, the burden to be able to report on compliance increases. Customers that want to be kept regularly updated on the sustainability initiatives being undertaken by a supplier could request that any developments are notified to the customer at certain times in the year. Any reports would allow the customer to gain further insight to what their suppliers are doing to drive the sustainability agenda. This would then tie in well with any rights of inspection which a customer has introduced.
- Right of inspection. While a supplier might make certain claims with respect to their sustainability credentials, some customers would prefer to be able to verify this themselves. Inspection rights within agreements can be powerful clauses that permit a customer, for example twice a year and with reasonable prior notice, to enter the premises of a supplier. This has historically been deployed to verify health and safety practices, or equipment quality, but it would also be a suitable mechanism for inspecting sustainability claims the supplier has made.
- Termination clauses and business continuity. Being able to cease working with a supplier that has breached their sustainability obligations is an important consideration, not least given the significant reputational impacts this could have on brand confidence. There are two elements that customers should consider then when considering termination:
- Are sustainability concerns covered adequately in the termination provisions? Is it clear what constitutes a ‘breach’ and are the triggers for breach sufficiently flexible for the customer to rely upon, but clear for the supplier to understand? and
- Has the supplier considered business continuity in the context of transitioning to another supplier if a breach were to occur?
As regards the second of the above elements, successfully transitioning to another provider quickly and efficiently in a ‘termination for cause’ scenario is vital. There should be some contractual assurances from the supplier that if it became necessary to work with an alternative supplier, due to a breach, this would not significantly harm the customer’s business continuity. Typically, it is for the customer to consider what would happen if a new supplier was needed, but suppliers confident in their sustainability practices should be prepared to anticipate such a business continuity scenario.
Please get in touch with the Deloitte Legal team if you would like to discuss any of the above or answer any questions you may have on the topic of sustainability.