Bates Wells convenes a regular Impact Counsels’ Forum for senior counsel within impact investors, B Corps, and other purpose-driven businesses. A recent meeting of the forum discussed how purpose-driven businesses are approaching the impact of their supply chain, particularly on the environment. Inspired by the forum discussion, we share our thoughts on how businesses can drive greater supply chain environmental sustainability.

With supply chain emissions accounting for over ten times more emissions than operational emissions, addressing supply chain sustainability is key for any business which wishes to improve its sustainability. With regulatory frameworks not yet igniting the urgent action needed to prevent a 1.5°C rise in global temperature, purpose-driven businesses are leading the way in tackling emissions in their supply chains.

The agreements businesses put in place with their suppliers can make a significant difference to the environmental impact of their supply chain. Although driving sustainability can be a challenging process, purpose-driven organisations are finding creative ways to overcome this.

Contracting for impact

The forum felt that supplier agreements with broad, one-size-fits-all sustainability obligations are less effective in improving sustainability than agreeing specific steps for the parties to take. Overly broad provisions can be tricky for smaller suppliers to comply with and can be counter-productive if they incentivise withholding information about possible breaches of sustainability provisions.

The forum also discussed how difficult these provisions can be to enforce and that, once you have negotiated a new supplier arrangement, it’s time-consuming and disruptive to end the relationship, even if sustainability obligations are not being met. Contracts often don’t include tailored solutions to address issues around sustainability and it is likely that there won’t be any actual losses to the customer, so it is difficult to see what a claim could be brought for.

A better approach uses tailored solutions to sustainability breaches, which could include:

  • liquidated damages payable to the communities actually impacted by the breach, or alternatively to organisations, such as charities, working to restore the environment;
  • remediation processes focused on resolving the damage caused by the breach; and
  • the involvement of third-party groups or communities – broadly representative of the affected stakeholders – to take steps to resolve the breach.

Leading through collaboration

The forum participants discussed how working collaboratively with suppliers has the potential to improve outcomes for all parties. This can include:

  • both parties agreeing to take specific steps to achieve mutual sustainability outcomes, which are reflected in the supply agreement
  • keeping an open dialogue around sustainability and any challenges faced by either party during the term of the agreement
  • a process for the parties to provide support to each other to overcome any issues which arise during the term

This approach encourages the parties to be transparent about the challenges facing them, address issues as they arise and, ultimately, achieve better outcomes on sustainability goals.

Some forum members noted that working with other purpose-driven businesses in their supply chain had helped them achieve their sustainability goals and improve transparency. Working with organisations which have the same aims meant that they approached issues with the same mindset.

Sustainable supply chains in practice

Bates Wells recently worked with a client that wanted to demonstrate its commitment to sustainability in its agreements with its customers and needed to ensure that its supply chain allowed it to fulfil these. The client is committed to improving its environmental sustainability and creating a positive impact.

Rather than including broad sustainability aims for every supplier, we worked with the client to draft an agreement which could be tailored to include specific sustainability obligations for each supplier. This allowed our client to ensure that each of its suppliers focused on achieving relevant sustainability goals that were realistic and achievable.

Being able to back-up claims about the business’ “green” credentials is essential to help manage the risk of being accused of ‘greenwashing’. This is something that some UK regulators are scrutinising more closely, such as the CMA with its ‘Green Claims Code’ and recent launch of investigations into certain high-profile fashion brands.

Supply chains: investment risk and opportunity

Investors are increasingly aware of the importance of supply chains, whether they are seeking to support specific impact goals with their investment, invest for long-term sustainable returns, or avoid the harms of hidden ESG risks. Procurement services firm Proxima conducted research with 1,000 investment managers in the US and UK, finding that 97% consider the sustainability standards of a business’s supply chain when investing.

Investors can manage supply chain risk through several approaches, such as:

  • filtering out investees who don’t meet ESG requirements during due diligence
  • requiring investees to adopt and monitor a supply chain risk management policy
  • investor monitoring, possibly using third-party verification
  • considering tools such sustainability-linked loans and bonds, where returns are dependent on ESG performance

The forum noted that the investment agreement should clearly set out the investor’s intentions regarding investee sustainability performance, demonstrating the importance of those goals. However, alongside this, a collaborative approach to the investment relationship underpins the ability of the parties to work together on improving sustainability performance over time.