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The hard consequences of soft law: CSR & ESG

It is easy to be cynical about corporate social responsibility (CSR). But the reality is that the days of CSR as “window dressing” are all but dead and gone. Today, CSR is much more about compliance, legal and business risk and business trust than it is about marketing or PR.
CSR and ESG terms in legal services agreements (a brief guide for suppliers and buyers of legal services)

Legal service providers to large multi-national corporations (MNCs) will no doubt have noticed the increasing amount of questions about CSR in requests for proposal (RfPs), the introduction of CSR provisions into standard terms and conditions (T&Cs), and the growing number of requests to sign CSR-related supplier codes of conduct. This is not by chance.

A raft of legislation adopted in the US, EU, Australia, the UK, France and the Netherlands (and more from the EU and various states on the horizon) requires large MNCs to monitor and report on certain forms of human rights abuse in their supply chains and on their policy and practice with respect to environmental protection, labor practices, business ethics and diversity.

Meanwhile, voluntary (soft law) CSR norms such as the principles of the United Nations Global Compact (UNGC) may now have hard business consequences when they are linked, in business practice, with the ever-expanding CSR and Environmental, Social and Governance (ESG) ratings industry. Today, many investors choose which companies to invest in based on ESG rankings. Companies may chose who to do business with based on CSR performance. Many consumers choose what to buy based on sustainability ratings and most employees want to work for responsible businesses. For example, in the legal services sector in particular, MNCs are edging towards making certain CSR information (in particular related to diversity performance) a critical factor in deciding which firms to work with (most recently 170 GCs penned an open letter to law firms asking them to improve on diversity or lose out on business). It is likely that GCs will begin to view law firm sustainability performance in the same manner. 

A key aspect of the hardening CSR-business landscape is the use by MNCs, of various contractual and quasi-contractual practices, in order to hold their business partners accountable with respect to CSR and ESG. For example, supplier ethical codes of conduct (see here an example from Siemens) are used, as a matter of course, to confirm supplier compliance with “soft law” norms.  The norms typically derive from e.g. the UNGC principles, the United Nations Guiding Principles on Business and Human Rights (UNGPs), various ILO standards (related to child and forced labor, industrial relations and non-discrimination) or the OECD Guidelines for Multinational Enterprises. These are generally very broad norms requiring, amongst many other things, that companies must respect all internationally proclaimed human rights.

At a minimum, this would include all rights within the Universal Declaration of Human Rights. This can mean anything from freedom of expression, association and thought to the rights to privacy, rest and leisure. These human rights norms are implemented only partially within national legal systems and implementation varies widely from one part of the world to the next and even between countries in the same region (thanks in part to the large discretion afforded to states within the prevailing system of international human rights law). Although legal opinions vary, in the absence of a binding treaty, only a fraction of this body of international law and norms is currently directly binding on private enterprises under national legal systems.

Nevertheless, MNCs are, to some extent, directly applying these international norms to their business partners within their supply chains – effectively making “soft law” “hard” by creating legal and business consequences to non-compliance. Indeed, many suppliers, with limited bargaining power in relation to MNCs, may simply agree to and sign CSR/ESG codes of conduct, without fully understanding the scope of the representations they are being asked to make or the nature of the legal and business risks in doing so. Legal service providers are not exempt from this.

This blog post seeks to provide an overview of some of the business measures MNCs are deploying to promote CSR/ESG norms in their supply chains and the legal and business risks for the suppliers (in particular, suppliers of legal services). The aim is to raise awareness about the need for legal service providers to take CSR/ESG governance seriously, rather than as an exercise in marketing. 

Promoting CSR/ESG accountability through business agreements

Let us now consider four ways in which MNCs are seeking to influence their suppliers CSR/ESG performance in the context of business contracting:

  1. Pre-contract questionnaires: many large MNCs now routinely require their suppliers to fill in CSR or ESG questionnaires prior to entering into a contract with them (see an example from the automotive industry here). The questionnaires often need to be filled in as part of the bidding process (within RfPs). Such questionnaires may be superficial (e.g. simply asking suppliers to confirm if they are signatories to the UNGC, if they adhere to the UNGPs or whether they have a policy e.g. on human rights, modern slavery or environmental protection. Other times they may be incredibly detailed, requiring exhaustive information about the suppliers’ policies and public reporting in relation to various CSR and ESG topics (human resources, worker health and safety, information security, corruption and bribery, environmental management etc.).
  2. Third Party Audits, Rankings, Benchmarking and Certifications: For some MNCs, it is easier to simply outsource the burden of collecting and assessing supplier CSR and ESG performance information to third parties. A lucrative benchmarking and ratings industry has emerged to provide such services. EcoVadis, a private French company undertaking CSR audits and providing ratings, is illustrative here. EcoVadis has managed to quickly capture vast market share and is used as a default by many of Europe’s largest MNCs (including the Coca-Cola System, much of the chemicals industry and beauty industry. MNCs (buyers) that work with EcoVadis require their suppliers to be audited and rated by EcoVadis, often as a precondition to entering into a commercial contract. Such audits are anything but “light-touch”, typically requiring suppliers to answer hundreds of questions, share various internal policy documents and provide KPIs on everything from whistleblower complaints, information security training participation rates, energy consumption and waste.
  3. Supplier codes of conduct (CoC): As already mentioned, as a requirement of entering into a commercial agreements many MNCs are now requiring their suppliers to adhere to codes of ethical conduct (typically by including such codes into commercial contracts by reference). Even in 2010, a survey revealed that 77 of 100 FTSE 100 companies had adopted CoCs. Such codes will often incorporate soft law norms in relation to human rights, environmental protection and business ethics (e.g. from the UNGC or UNGPs). MNCs are often unwilling to negotiate the terms of their CoCs and may only accept modest amendments to them (if any at all) (see examples of CoCs here, here and here).
  4. Contractual Provisions Related to CSR/ESG (and inclusion in General Terms and Conditions): MNCs may also include specific provisions related to CSR/ESG in their commercial contracts (see an example here) or T&Cs. Often these are linked to their codes of ethical conduct. For example, a MNC might include warranties in the supply agreement or T&Cs, which require the supplier to confirm that its CSR/ESG policy and practice meets the standards established in the CoC. In addition, a MNC may include a provision within the supply agreement or T&Cs that grants it (the MNC) the right to perform one or more audits to verify compliance with the CoC. While many CSR/ESG related provisions in CoCs are so broad and vague that serious questions need to be raised about legal certainty and enforceability (in particular where they relate to environmental protection), this is changing. There is a strong push from the global business and the human rights movement (which includes in-house CSR/ESG experts, lawyers, academics and civil society organizations) to strengthen contractual mechanisms for promoting human rights and environmental protection within the supply chain. One focus of this effort is developing much more specific and enforceable CSR/ESG clauses for use in T&Cs and supply contracts (see e.g. here, here and here). It is also clear that the increasing amount of legislation touching upon CSR (referred to above) will have the effect of further strengthening contractual provisions related to CSR/ESG (as happened following the introduction of the UK Bribery Act 2010).  
The Legal and Business Consequences for Suppliers of Legal Services accepting CSR/ESG terms in MNC Business Agreements

So what are the legal and business consequences of these various measures for suppliers in general and suppliers of legal services in particular? Despite emerging from soft law norms, they can have hard legal and business consequences. Ultimately, where CSR/ESG norms are incorporated into commercial supply agreements (which can happen in a number of ways – see more below) they become binding on the supplier. Failure to comply with the relevant standards of conduct may then result in breach of contract and the attendant legal remedies will follow (damages, non-performance, forced execution, termination).  Where suppliers knowingly make false assertions about their CSR/ESG policy and practice there may even be question of civil or criminal fraud. Even in the absence of legal consequences, there may be harsh business consequences, in terms of terms of reputational damage, for suppliers caught making false statements about their CSR/ESG policy and practice.    

Business consequences

Even in the absence of legal consequences, if found out, the business consequences of lying or providing false or misleading information in CSR/ESG questionnaires or falsely confirming compliance with CoCs may severely damage business reputation and erode trust. For example, imagine a situation where a law firm has made contractual warranties (e.g. in the context of a panel agreement), that it has an environmental management system in place, meeting the expectations set out in the buyers CoC. Imagine that the relevant contract also provided a right to the buyer to conduct a CSR/ESG audit of the supplier during the contract term. If the buyer subsequently requests to carry out such an audit (which buyers are beginning to do as they hire professional CSR supply chain managers), and the law firm has no environmental management system in place (or only a rudimentary policy regarding sustainability) this will look very bad. In the very best case, it may result in a rather uncomfortable conversation with an important business partner. Moreover – although not many MNCs are consistently or publicly doing this yet – it is likely that MNCs (especially in high-risk sectors such as retail, extractives, IT and finance) will ultimately move towards using CSR/ESG performance (especially diversity, sustainability and human rights performance) as a basis to determine which companies to do business with. In that case, being unable to meet the growing expectations of MNCs will likely mean that suppliers miss out on business opportunities.

Legal consequences (for more detail on legal consequences see here and here)

Information provided by suppliers in CSR/ESG questionnaires (pre-contract) may form part of that contract under certain circumstances (for example, if relied upon by the buying MNC as a critical factor to enter into the commercial contract). Consequently, in some jurisdictions, providing false information about CSR/ESG policy or practice in such questionnaires may constitute misrepresentation or deceit, whether intentional or unintentional, (and, although unlikely, possibly even fraud) and may therefore result in the contract becoming voidable or nullified and/or in restitution or damages. A relevant example would be where a law firm supplier falsely claims to be carbon neutral in a pitch document or pre-contract questionnaire. If discovered to be untrue, a buyer of legal services could argue that it had believed that the law firm lived up to this claim, and that if it had known the truth, it would not have entered into business with the firm in the first place. This could potentially open the law firm to both contractual and tortious liability.  In the case of tortious liability, such claims might even arise from competitors.  

Supplier Codes of Conduct, often considered as voluntary instruments, are typically not viewed as binding (not even on the MNC itself). However, they may have legal consequences if incorporated clearly into business contracts by reference. This could be the case where the CoC is referred to in the relevant commercial contract, for example within a warranty, stipulating that the supplier must meet the standards expressed in the CoC. Alternatively – although fact-dependent – the CoC may also form part of the contract if the CoC is signed by the supplier or shared with the supplier as part of the offer, prior to signing the commercial contract. Moreover, where the same standard CoCs are used over long-term business relationships between buyer and supplier, these can be incorporated into future business contracts unless explicitly stated otherwise.  The CoC may also be binding if considered as a self-standing contract, the consideration of which is the main commercial agreement (i.e. the supply contract in question).

Ultimately, where CoCs are incorporated into commercial contracts, they will create binding legal obligations on suppliers. Failure to meet these obligations may result in breach and afford the MNC with a range of legal remedies (the most common being damages, non-performance, termination, and forced execution). Moreover, the signing of CoCs by suppliers in the hope of securing new business, when the stated normative standards are not in fact met and where this is relied upon by the buying MNC as a critical factor to enter into the commercial contract, may constitute misrepresentation, deceit or even fraud (even where the supplier has not bothered to read the contents).

Meanwhile, any CSR terms included in the body of commercial contracts, provided they are sufficiently clear and certain to be legally enforceable, will obviously be binding on suppliers. Failure to comply with such terms will have the relevant consequences flowing from breach of contract (already mentioned above).  As mentioned earlier, in future MNCs are likely to get much more prescriptive and detailed in their CSR/ESG provisions.   

Finally, suppliers may also be held liable for any false or misleading information provided to third party CSR/ESG rating companies, where the MNC buyer has relied on that information and has consequently suffered losses. Typically, the contract between the supplier and the ratings company would contain relevant indemnities to that effect.

The above comments are personal and not attributable to Dentons.

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Credits
Lamin Khadar

Lamin Khadar is the Pro Bono Manager for Dentons Europe and Global Adjunct Professor of Law at New York University. Based in Dentons’ Amsterdam office, Lamin works across multiple locations in Europe and Central Asia to manage Dentons’ international pro bono practice. On an on-going basis, Lamin works with teams of Dentons lawyers on pro bono matters for a range of clients including NGOs and international organizations.

Before joining Dentons, he worked variously for an EU law think tank, a commercial law firm and an international human rights organization. Lamin is also the co-founder of The Good Lobby, a Brussels-based civic start-up operating across Europe and a contributor to Rights CoLab, a New York based think tank contributing to research into business, rights, technology and finance. Lamin also manages the NYU Paris European Public Interest Law Clinic where he supervises US law students to work for non-profit clients on public interest projects.

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