Context: Corporate Responsibilities – Legal & Moral

In terms of environmental, social, ethical, and governance issues, there are few legal requirements of companies to ensure that actors in their supply chains are not contributing to or causing harm. In theory, suppliers have to follow legal requirements in their own country or region (for instance, EU laws), such as on minimum wages, discharges of hazardous chemicals into waterways, labour standards, or air pollution.

Much depends on enforcement, however, and there are countless instances where organisations fail to meet minimum legal standards.

Frameworks such as the UN Guiding Principles on Business and Human Rights, which address supply chains in some respects, are not legally binding. Similarly, the UN Global Compact’s 10 Principles imply that signatories extend the principles to their supply chains; nonetheless, violations of the Principles, even by signatories, are relatively commonplace, with a focus placed on remediation.

Due to the lack of binding legal frameworks, expectations with regard to the management of environmental, social, ethical, and governance issues within supply chains are largely left to individual companies to determine. To an extent, of course, they are guided by expectations and demands of various stakeholders, including shareholders.

However, there are some signs that supply chain due diligence may soon become a legal requirement in certain jurisdictions. European Commissioner for Justice, Didier Reynders, announced in April 2020 that the European Commission will propose new rules on mandatory human rights and environmental due diligence in EU companies’ global supply chains, as part of the Commission’s 2021 work plan and the European Green Deal. At the time of writing, the UK Government is also proposing some level of mandatory due diligence to combat deforestation in UK companies’ supply chains. Investors and companies alike will have to keep a close eye on further developments in the legal landscape.

Issues at stake for EdenTree

As responsible investors, our first task – like that of our investee companies – is to understand some of the risks and impacts within supply chains, be they social or environmental in nature (or, as is often the case, a combination of the two), or indeed what we might term ‘ethical’ risks.

Next, we touch on some salient risks and impacts in supply chains. Some are more relevant to some sectors than others; some will be a concern in almost all supply chains. Certain risks and impacts occur deeper in supply chains (e.g. at the point of raw material extraction); some occur in the transportation stage; some occur in the transformation stage (transforming raw materials into finished products); some occur after the supply chain, as usually conceptualised, has ‘ended’ (waste, pollution, and disposal of products). Whilst we divide these into ‘environmental’, ‘social’, and ‘ethical’ risks/impacts, it is clear that most are inter-related, and multi-dimensional: deforestation, for example, is at once a biodiversity, climate change, water, and land rights issue.