Supplier Codes of Conduct: a Realistic Approach
Even as supply chains face increased pressure due to COVID-19, the invasion of Ukraine by Russia, sanctions imposed upon Russia, and extreme weather, businesses continue to implement and develop Supplier Codes of Conduct in order to make their supply chains more ESG-compliant.
From a legal perspective, having a Supplier Code of Conduct makes sense. From the long-anticipated SEC amendments enhancing climate change-related disclosures (released March 21st), to the proposed New York Fashion Sustainability and Social Accountability Act, to the EU draft Corporate Sustainability Due Diligence Directive, it’s clear that the ESG disclosures of the future will put an increased burden upon end-user companies to understand, and have some level of accountability for, the workings of their supply chains. For example, the SEC’s proposed rule – on which Vinson & Elkins, together with PwC, are giving a presentation on March 28th – includes consideration of “Scope 3” emissions, which are any emissions occurring upstream or downstream in the activities of a registrant’s “value chain.”
But, from a practical standpoint, Supplier Codes of Conduct need to be carefully considered before they are adopted. If your business is an end user with a supply chain, it seems tempting right now to plan for the more burdensome ESG framework of the future by implementing a stringent Supplier Code of Conduct and tough contractual requirements for your suppliers to meet.
But, in the current environment, a blunt sledgehammer approach may backfire. If a company is engaging suppliers that are unable to comply with its Code of Conduct, it may be setting itself up for business issues, disclosure issues and legal issues. At the same time, if a company’s message to its suppliers – e.g., do the work quickly and cheaply – cannot be reconciled with the requirements of its Code of Conduct, it’s setting itself up for failure. Companies need to address supply chain issues head on, but they need to do so realistically. And regularly reviewing supplier performance in the context of the standards in the Code of Conduct is essential to ensuring that there is no inconsistency between the business’s stated aspirations and the reality on the ground.
We regularly counsel companies on the appropriate approach to take in their Codes of Conduct depending on their objectives and circumstances, and how to do so in a way that can allow supply chain relationships to thrive. More likely than not, if you’re reading this, you have a Supplier Code of Conduct. We’d be more than happy to discuss our approach and recommendations in light of the rapidly changing landscape.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.