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Sustainability In The Supply Chain—December 2013 print edition

While codes of conduct can be well-intentioned, are environmental obligations enforceable?


January 27, 2014
by By Doug Sanders and Bill Woodhead

Increasingly investors, customers and the public are demanding that companies adopt environmentally sustainable practices internally and throughout global operations, including supply chains. The philosophy behind this trend is that many feel Canadian companies should not make profits in disregard of environmental consequences abroad. Through economic globalization, it’s increasingly difficult for businesses to ensure vendors are subject to legislative requirements demanding acceptable environmental practices. While procurement contracts present a potential opportunity to improve supplier sustainability practices, the issues that arise related to their practicality, enforcement and monitoring present more of a marketing opportunity than a method to improve sustainability.

The growing trend in many countries is that governments demand corporate social responsibility locally and internationally. In the US, the Dodd Frank Act subjects companies who mine conflict minerals in certain areas of Africa to governmental disclosure obligations. In Canada, a bill has been proposed which, if passed, would require Canadian companies to adopt policies designed to stop the use of conflict minerals. Although there are currently no legal requirements for Canadian companies to ensure global suppliers follow environmental practices, these trends and increasing pressure from consumers indicate that companies should consider improving sustainability within their supply chains.

Large organizations wishing to assure  customers and investors that environmental sustainability is an important corporate value have begun to adopt and publish codes of conduct that they require their suppliers to comply with it. These codes demonstrate supplier obligations regarding labour, corruption, safety and environmental practices. Options exist for drafting these codes, which vary based on company, supplier or industry in question; but all pose issues in relation to their practicality.

Codes of conduct are values, principles or rules based and may address environmental sustainability for the purchaser, suppliers or sub-suppliers. Value-based standards are usually high-level ethical values that suppliers commit to through representations and warranties. Principle-based standards involve an intermediate level of detail requiring that a supplier perform obligations in compliance with stated principles. Rules-based standards are the most detailed and provide comprehensive environmental practices for the supplier to follow.

While codes of conduct may be well intentioned, any attempt to create environmental obligations across a global supply chain present enforceability and practicality issues. Broad value or principle-based provisions make it difficult to determine whether a supplier has actually failed to comply. Overly detailed rules-based provisions will be difficult for the purchaser to establish, monitor and enforce as well as for the supplier to comply with. It’s important to consider the obligations imposed and whether they are realistic in the contract in question. Contractually imposed codes of conduct raise questions. What sustainability obligations are realistic? Should obligations flow down to sub-suppliers? How will the purchaser monitor the supplier’s compliance internationally? Should the purchaser have the right to termination if a supplier doesn’t meet obligations? Will the supplier have time to cure the default? Are damages more appropriate?

While far reaching codes of conduct may be difficult to enforce globally, there are ways in which companies may improve sustainability through procurement contracts. Suppliers could be required to reuse or recycle any goods supplied once they’re not needed. Companies may also wish to create packaging requirements for any goods supplied specifying the type and content of the materials used. Purchasers may also require that suppliers use environmentally sustainable transportation.

Due to increasing customer pressure and a signal that countries are beginning to require companies to comply with socially responsible practices, it’s well advised for Canadian companies to evaluate supply chain sustainability. Canadian companies can improve sustainability through procurement contracts. But due to global enforcement issues and the practicality of these types of provisions, procurement contracts intending to require environmental sustainability from suppliers may serve as more of a marketing tool than a way to reduce the environmental footprint of a company’s supply chain.

This article is for information purposes only and may not be relied on for legal advice. Doug Sanders (left) is a partner in the Vancouver office of Borden Ladner Gervais LLP. Reach him at dsanders@blg.com. Bill Woodhead (right) is an associate in the Vancouver office of Borden Ladner Gervais LLP. Reach him at bwoodhead@blg.com.