LexisPSL, in partnership with Simon Garbett, Ian Skinner and Sarah Rathke of Squire Patton Boggs, examine how authorities can ensure sustainable supply chains.
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The public increasingly hold organisations responsible for the impact of their suppliers' practices on the environment and local communities. Forward thinking and progressive businesses recognise there is a growing need for integrating environmentally sound and sustainable choices into supply chain management. Indeed, many organisations now routinely monitor and guide supplier conduct for ethical reasons, for reputation-management reasons, and to protect their brands. Supply chain sustainability has therefore gained considerable traction as an internationally recognised concept.
A sustainable supply chain provides value creation opportunities and offers significant competitive advantages for early adopters and process innovators. No longer are mere monetary cost, value and speed considerations the only drivers among purchasing and supply chain professionals. Responsible and progressive businesses are increasingly looking to put supply chain sustainability at the forefront of their organisational and cultural decision-making from the board level down—and see such steps as an essential tool to deliver long-term profitability.
The UN Global Compact
At a supra-national level, the UN Global Compact leads the effort to improve organisations' supply chain sustainability performance. The UN started this initiative in 2000 to promote its values within the global business community. Its directives are, however, non-binding and advisory only. Many businesses have nevertheless, signed up to the UN Global Compact as it is seen as ‘best practice’ for socially responsible corporates.
The UN Global Compact bases its work on ten principles, which are drawn from international declarations such as:
- the Universal Declaration of Human Rights
- the International Labour Organisation's (ILO) Declaration of Fundamental Principles and Rights at Work, and
- the UN Convention against Corruption
This promotes universal human rights, labour, environmental and anti-corruption standards within the global business community.
In 2010, the UN Global Compact established an Advisory Group on Supply Chain Sustainability. This led to the first major organised work on supply chain sustainability issues.
The UN Global Compact now defines supply chain sustainability as:
‘…the management of environmental, social and economic impacts, and the encouragement of good governance practices, throughout the lifecycles of goods and services.’
The description of supply chain sustainability also says:
‘…the objective of supply chain sustainability is to create, protect and grow long-term environmental, social and economic value for all stakeholders involved in bringing products and services to market.’
The concept of supply chain sustainability therefore includes, but is not solely limited to, environmental and preservation efforts.
Getting started—establishing a supplier code of conduct
The first step of any supply chain sustainability programme involves identifying the particular human rights, labour, environmental, or corruption risks in an organisation's supply chain. This can be done with the help of a consultant, but most organisations will have many in-house experts capable of identifying potential problems and risks in the organisation's supplier base. While there is some common ground between most organisations' supply chain sustainability programmes, the emphasis of an organisation's programme will to an extent shift depending on its particular operations and supply base.
By way of illustration, a food manufacturer that uses sugar, for instance, might be most concerned about instituting practices against ‘land-grabbing’ (the practice of seizing the land of indigenous peoples without permission), deforestation and exhaustion/erosion of soil. An electronics manufacturer, on the other hand, might be more concerned about security/sustainability of some resources (eg metals, water, etc) or, about the procurement of cobalt, much of which (according to a 2016 report by Amnesty International and Afrewatch) comes from areas in Central Africa where child-mining and poor labour conditions are prevalent.
Whatever an organisation's primary concerns, however, it is common and advisable to set them out in a Supplier Code of Conduct, which is published to the organisation's supplier base. The UN Global Compact has set out a number of best practices for drafting and implementing Supplier Codes of Conduct, including:
- as a minimum, requiring suppliers to comply with all applicable laws and ‘…take proactive measures to avoid environmental and social harm’
- consideration of ‘joint’ or ‘template’ Codes of Conduct available in the relevant industry to mitigate suppliers' compliance burden, whilst ensuring any applicable individual or industry specific concerns are adequately reflected
- being very clear about the organisation's expectations, enforcement mechanisms, and penalties for breach violations, and
- provision of enforcement mechanisms that can be realistically and quickly implemented against non-compliant suppliers (including the ability to terminate the contract)
The UN Global Compact also recommends that organisations adopt internal policies, solidifying how an organisation plans to implement its supply chain sustainability principles within the organisation. Another good practice is to establish an anonymous reporting (whistle-blowing) mechanism, where infractions can be easily reported (and to follow-up on them when they are), so that individuals feel comfortable and are able to raise concerns/issues free from fear of reprisal.
It is also advisable for an organisation to require suppliers to ‘flow down’ the Supplier Code of Conduct as far down the supply chain (eg to Tiers 2, 3 and so on) as possible, to get the maximum impact and buy-in to the document and the core principles. This can be done via clauses in the relevant purchase order or supply agreement, or simply as a clause in the Supplier Code of Conduct itself (though it should be appreciated that this may not be held to be an enforceable contractual promise).
Finally, organisations should be practically-minded, rather than effusive, in choosing the language used in the Supplier Code of Conduct. Although likely well intentioned, expansive pledges that an organisation cannot live up to invite a degree of risk and could theoretically even become the basis of future litigation against the organisation.
Developing a supply chain sustainability programme addressing human rights and labour concerns
Although human rights and labour practices vary by industry and geography, most supply chain sustainability programs addressing human rights and labour issues usually include the same key areas of focus:
- respect as to the personal and property rights of impacted individuals and workers that come into contact with the organisation's suppliers, and
- prohibition on the use of forced, trafficked or child labour
Helpful guiding principles concerning human rights and labour practices can be found in the UN Universal Declaration of Human Rights, and the ILO International Labour Standards.
The ILO is an international body that came into being in 1919 after the First World War, when the WWI Treaty of Versailles' signatories collectively determined to combat labour abuses worldwide, and particularly in developing economies. Over the years, ILO International Labour Standards have come to embody certain fundamental labour rights, namely:
- the freedom and right to organise
- the freedom from forced and trafficked labour
- the prohibition against child labour
- the right to a living wage, and
- the freedom from discrimination in employment conditions.
The ILO also publishes a number of Codes of Practice in Safety and Health for specific industries, such as mining, agriculture and forestry.
Although the ILO has not promulgated specific guidance for eliminating poor human rights and labour practices in supply chains, its 2015 publication, ‘Combatting Forced Labour; A Handbook for Employers and Businesses’, does helpfully suggest best practice organisational policies that can be extrapolated to supply chains. Accordingly, ‘red flags’ identified in the publication that signify potentially problematic labour or human rights practices include:
- a work force that looks badly treated, malnourished, afraid or very young
- a work force that is apparently not allowed to communicate with outsiders
- apparent failure to make regular payment of wages, including delayed wages, ‘in-kind’ payments, or payment via promissory notes
- evidence that workers are required to repay any sort of debt, including for so-called ‘training’ programmes
- lack of established employment policies governing issues like overtime, meal breaks and disciplinary action
- lack of official employment documents for workers, including verification of age and signed employment contracts
- poor safety and working conditions, including failure to provide protective equipment, lack of water and sanitation facilities, etc
- evidence that workers are not able to terminate their employment
- evidence of physical confinement
- the payment of recruitment fees for foreign workers, and
- evidence that foreign workers are not permitted to retain control over their personal documents
By contrast, practices that indicate that a company is conscious of its obligations not to commit human rights abuses or to use improper labour sources include evidence of normal turnover at an organisation, regularly and accurately kept employment records, and published employment policies that permit normal occupational activities, including collective bargaining.
Organisations can implement good human rights and labour practices in their supply chains through one of several mechanisms:
- supplier self-certification
- buyer certification/verification, or
- third-party auditing (eg SMETA audits by Sedex)
Whichever method is chosen, the principles set forth above can provide helpful and illustrative guidance as to what evidence organisations should ideally gather, records they should maintain and issues to to look out for. Moreover, labour practice standards have been established by Social Accountability International, at Standard SA 8000, and can be used either as supplier guidelines (as included in a Supplier Code of Conduct), or as certification standards.
Developing a supply chain sustainability programme addressing environmental concerns
Unlike human rights and labour concerns, supply chain sustainability practices that focus on the environment and conservation vary based on industry, business operation, and sometimes geography. Pressing environmental issues may also change over time. Indeed, there are a myriad of potential environmental concerns across the globe, which may include the use and/or transportation of toxic chemicals, land use and overuse issues, exhaustion of some unsustainable resources (eg metals, water, etc), land-grabbing and the land right of indigenous peoples, pollution control and the treatment of animals.
Recognising that environmental concerns can vary by circumstances, in 1996, the International Organisation for Standardisation (ISO) developed the ISO 14000 series of standards that:
‘…help organisations to take a proactive approach to managing environmental issues…environmental management standards that can…be implemented in any type of organisation in either public or private sectors[.]’
The ISO standards provide helpful guidance on how an organisation can evaluate its environmental performance and impact (once the principle concerns are identified), how to make valid environmental claims, and accreditation standards, among other guidance.
Although primarily designed and intended for use within an organisation's own operations, the ISO 14000 standards can be readily applied to supply chain partners too. And they can be used as either supplier guidelines or as certification standards, to be verified via self-certification, customer verification, or third-party auditor depending on the organisation's preference.
Developing a supply chain sustainability programme addressing corruption
The BA 2010 created several statutory offences relating to corruption, including the offences of:
- bribing another person (BA 2010, s 1)
- accepting a bribe(BA 2010, s 2), and
- bribing a foreign public official (BA 2010, s 6)
All of these illegal activities can take place within an unmonitored supply chain. For example, so called ‘facilitation payments’, to ease the passage of goods through certain ports, etc, may be bribes under the BA 2010. Even if those payments are in overseas locations, offences may occur in the UK.
So far as supply chains are concerned, section 7 of the BA 2010 also creates an offence of commercial organisations ‘failing to prevent bribery’. The obligation to ‘prevent bribery’ covers a commercial organisation's direct activities, ie it is an obligation for that commercial organisation to regulate its own employees. It can, however, also extend out to involve third party suppliers, if those suppliers are providing services for or on behalf of the underlying commercial organisation. For example, a commercial organisation may have an overseas agent who procures components for it, but sends those components (on the commercial organisation's instructions) to the overseas factory of a manufacturer, situated elsewhere in the supply chain. The commercial organisation would have an obligation under section 7 of the BA 2010 to ‘prevent bribery’ in the relationship between the agent and the manufacturer.
An anti-corruption policy, therefore, empowers stakeholders and employees to spot and prevent corruption, by monitoring and identifying its potential to occur within a business and its supply chain. Its existence and promulgation is also a defence to a charge under section 7 of the BA 2010 if bribery, notwithstanding an anti-corruption policy, nevertheless occurs within an organisation.
An effective anti-corruption policy will:
- foster the correct culture and minimise the risk of corruption taking place
- create a framework for compliance and reporting/whistle-blowing, and
- allow an organisation to respond appropriately if corruption takes place
Supply chain sustainability as litigation and risk mitigation
A supply chain sustainability programme will potentially assist with and complement an organisation's efforts and ability to comply with section 54 of the Modern Slavery Act 2015 (MSA 2015). MSA 2015 requires organisations to produce an annual ‘Transparency in Supply Chain’ statement (‘Transparency Statement’) if their turnover exceeds £36m and they are ‘carrying on a business or part of a business’ in the UK. Government guidance also encourages smaller businesses to produce an annual Transparency Statement in relation to modern slavery as best practice. In particular, the statement must set out what steps an organisation has taken in the last financial year to ensure modern slavery and human trafficking is not taking place within its business or any of its supply chains. If no such steps have been taken, then the statement must state this.
Instructive examples of some Transparency Statements can be found at the following website, which is a central repository maintained by a non-governmental organisation.
However, in the US at least, having publicly available supply chain policies can also be a litigation risk, if not drafted carefully. Over the last two years or so, putative classes of consumer claimants in the US have filed a handful of civil lawsuits against companies based on statements made in various supply chain sustainability policies that were available online—such statements being required under the California Transparency in Supply Chains Act 2010, being similar US legislation to the Modern Slavery Act. According to the claimants in these class action cases, the companies made promises about their supply chain practices that they failed to live up to—thus allegedly defrauding classes of consumers.
These cases included claims against:
- Costco in respect of seafood products, claiming that their supply chains were free of forced and trafficked labour, when allegedly these products were sourced from Thai fishing operations that trafficked, coerced and forced migrant and child workers into employment, and
- claims against Whole Foods for allegedly not enforcing the terms of its publicly-available supplier Animal Care Policy for the meat products that it sold
Although no claimants have yet prevailed on these types of claims in the US, their existence underlines the fact that, if an organisation, including in the UK, makes a supply chain sustainability policy public, it must ensure that the policy is true and accurate in all respects—companies really must be ‘walking the talk’ and if they are not, they may come unstuck.
More generally, clear and effective supply chain sustainability policies and procedures, as well as corresponding terms and provisions in contractual documents (eg terms and conditions), will allow companies to validly terminate contracts for good reason and/or to mitigate risk—thereby minimising the prospect of subsequent uncertain, costly and time-consuming litigation.
Some typical contractual protections, obligations and risk mitigation steps for organisations to consider with their suppliers are as follows:
- ensuring supplier compliance with:
- the organisation's policies, procedures and any supplier codes of conduct, and
= all applicable third-party labour and/or other codes
- seeking warranties from suppliers that all applicable laws and labour standards are being adhered to
- seeking warranties from suppliers that the supplier has not been investigated for, or convicted for any breaches of all relevant applicable laws
- periodic audit rights, as well as step in rights to inspect workplaces and/or interview employees in the event that suppliers are investigated for labour and/or other violations
- an obligation on suppliers to maintain and provide all relevant documentary records and annual reports, including, for example, going to issues of bribery and/or modern slavery compliance
- cascading requirements obliging the supplier to mirror provisions in contracts with their sub-suppliers, and to do appropriate due diligence on all such sub-suppliers
- contractual termination rights where labour and/or other sustainability issues are breached and not adequately remedied
Working with NGOs to address supply chain concerns
Often, supply chain sustainability issues are not attributable to a sole supplier or actor, but rather to practices prevalent in an entire industry or geography—or both. In such cases, it can be difficult for an organisation to unilaterally push organisational change onto its supply base because the practices that it wishes to encourage or curtail are at odds with well-established and prevalent norms and practices.
In situations like these, knowledgeable non-governmental organisations (NGOs) may provide assistance in beginning to address the sustainability concern at issue. While many organisations' worst nightmares may be an NGO that challenges a practice in their supply chain, many NGOs have superior knowledge of the industry or geography at issue, and can very likely help establish effective programmes that can nudge an entire industry or geography to more sustainable practices.
A well-known example can be found in ‘fair trade’ sourcing programmes, which have been developed for commodities such as coffee, cocoa, cotton, sugar and palm oil. The essence of most fair trade programmes is that an NGO, often in collaboration with private industry, will establish certification standards governing labour, environmental, or other sustainability practices; and suppliers who can demonstrate compliance with the standards become certified, thereby gaining an advantage in western markets.
Organisations working with NGOs to improve sustainability initiatives in their supply chains will want to be cautious, however. Organisations should be careful to establish the bona fides of all proposed NGO partners. Most are legitimate organisations with superior knowledge in the relevant area. But some are simply out for publicity, or to embarrass private companies. Some NGOs merely operate as ‘fronts’ for competing products or industries. Some have principles with problematic records and/or ulterior motives. Working with NGOs to achieve sustainability goals in supply chains may be difficult, but it is often easier than doing the work without a qualified NGO partner and it helps to demonstrate a commitment to the issue, which in turn may provide helpful mitigation in the event of a subsequent issue emerging.
An alternative to NGO involvement might be to ‘partner’ with another company or stakeholder, or indeed a competitor, who may well be wrestling with exactly the same issues and challenges, and who may be directly drawing products from the very same supply chain where the abuses/unsustainable practices identified by your own organisation are present.
And above all, working with an organisation's suppliers proactively can be particularly beneficial so that everyone knows and readily understands the issues, including from the supplier's perspective, to mitigate those risks (eg labour exploitation or malpractices). This can often be key to delivering a step change. Indeed, building good links with suppliers and incentivising them is often vital to ensuring that suppliers are committed to positive change. For example, this may take the form of rewarding good supplier compliance with preferred supplier status, while contractually ‘black-balling’ those that are unwilling or highly resistant to change.
Sustainable procurement—guidance: ISO 20400
The ISO has developed guidance on best practices to develop sustainable development policies within organisations. It approaches this in four segments:
- understanding the fundamentals
- Integrating sustainability into the organisation's procurement policy and strategy
- Organising the procurement function towards sustainability, and
- Integrating sustainability into the procurement process
When engaging with supply chains, the ‘best practice’ guidance suggests going beyond strict contractual requirements. This might include initiatives beyond the contract term with any given supplier and with a broad scope of activity, ie across various contracts and engagement beyond Tier 1 suppliers.
The ISO guidance recognises these as business-to-business initiatives based on good faith going beyond public relations. Success is thought to be more likely and easily achieved if:
- the interests, needs and capacities of suppliers throughout the chain have been identified
- the relationship these interests establish between the organisation and the supplier is direct and important
- a clear purpose and expectations for the engagement are understood
- the organisation and its suppliers have the necessary information and understanding to make informed decisions, and
- a fair and inclusive process and a balanced two-way communication is established
The guidance also suggests engagement techniques to develop, integrate and manage sustainability objectives in a given organisation's supply chains.
See paragraph 6.3.2, ISO 20400: ‘Sustainable Procurement—Guidance’, first edition 2017-04.
Supply chain sustainability is still very much an emerging field. However, there is now sufficient material publicly available for organisations to create and implement realistically effective national and international compliance programmes, whilst taking account of their UK legal obligations.
It is very much about businesses doing the right thing, because it is the right thing to do; and doing the right thing when no-one is looking. At its core, these sustainability programmes in essence will involve significant cultural and organisational change from the board level down, putting the promotion of anti-corruption methods, environmental concerns and international labour standards at the heart and forefront of the business. Organisations will need to push these sustainability values through their supply chains too. Indeed, continued supplier compliance will likely become a necessary pre-condition to a given supplier's on-going inclusion in the supply chain and/or in participating in large procurement programmes (eg government procurement exercises).