Texas-size challenges in managing supply chains.
By Sarah Fortt, Margaret Peloso, and Tom Wilson
Addressing investors’ focus on environmental, social, and governance—or ESG—issues, including climate change, human rights, and political/lobbying contributions, is a growing challenge for Texas-based multinational companies. Moreover, investors are increasingly focused not only on the ESG risks a company faces directly as a result of its business, but also those risks that result from a company’s supply chain.
Investors’ interest in supply chain ESG is not surprising, given how easily issues in a company’s supply chain can diminish the value of their investments. From the fashion to steel industries, companies have learned how quickly the discovery of ESG issues in their supply chains can hit their bottom line, and many investors now expect companies to consider ESG issues when managing their supply chains. Additionally, ESG issues in the supply chain may become particularly problematic for a company when those issues are combined with the motivations and expectations of a shareholder activist. For example, for some time now, shareholder activists have been focused on Monster Beverage Corporation, alleging that the company uses sugar cane produced in parts of the world where modern slavery is an issue. The activists allege that Monster has failed to perform any audits on and disclose adequate information about its supply chain.
Ultimately, while companies may be able to catalog the ESG risks most likely to arise from their operations, the challenge of identifying ESG risks in the supply chain can be particularly daunting. International companies in particular often have complex supply chains that are multiple layers deep, and the parent organization may not always be fully informed on the practices of every link in the chain. Moreover, too often companies do not have a coordinated approach to supply chain management and fail to focus on supply chain ESG issues until something bad happens—a significant human rights violation, a major environmental or safety incident, or a public failure to maintain ethical business practices. This failure to focus on supply chain ESG is a mistake, but it is a common one. In a recent survey conducted by the International Human Rights Committee of the State Bar of Texas International Law Section, half of all responding Texas in-house legal departments indicated that they were unaware of the risk posed to their company by international human rights issues stemming from their operations. Half of those who responded also indicated that their company had no policy related to these issues. Not surprisingly, 100% of the survey responders indicated they wanted more information on this topic.
Particularly for companies with extensive supply chains that stretch to areas of the world where human rights violations or environmental issues frequently arise, having an ESG plan and strategy is crucial for many reasons, with access to capital rapidly becoming among the most important. Many large banks are now evaluating ESG matters and how companies address them when making financing decisions. For example, in recognition of International Human Rights Day on December 10, 2018, Citibank issued the following update to its statement concerning human rights: “For project finance and project related corporate loans, any human rights mitigation requirements are included as a condition of financing.”
While the pressure to make public disclosures on ESG matters has never been greater, companies may also pay a pretty price for those disclosures. Companies may face litigation for providing disclosures that, in retrospect, fail to adequately inform investors of potential risks, even if the information regarding those risks was unavailable at the time the company made those disclosures. All of this means that when a company contemplates disclosures regarding risks in its supply chain, regardless of whether those disclosures are made in SEC filings or in public statements on the company’s website, the disclosures must be treated seriously and vetted by appropriate experts.
ESG is a rapidly changing space. It will be important for companies to stay ahead of the rising tide by keeping informed on trends in investor interest, peer disclosures, and evolving standards and ratings. Texas companies should work with their counsel to proactively conduct due diligence on potential supply chain ESG risks, develop strategies for dealing with those risks, and appropriately communicate those risks to their stakeholders.TBJ
practices principally in the areas of corporate governance, board representation, and securities law. As a member of Vinson & Elkins’ Environmental, Social and Governance taskforce, she advises clients on shareholder engagement and outreach efforts, ESG regime considerations, and voluntary disclosures and reporting, including climate change-related disclosures, enterprise risk management considerations, crisis preparedness, cybersecurity and cyber-risk considerations, and corporate governance activism.
practices environmental law and climate change. She handles a variety of matters related to climate change risk management, with a particular emphasis on the changing regulatory environment, climate change risk disclosure, and climate change adaptation issues. Peloso also handles complex environmental litigation matters and deals extensively with the notice and comment process on a wide range of federal environmental regulations.
has more than 30 years of experience counseling clients on labor and employment matters that impact their business processes and objectives. A leader of Vinson & Elkins’ Environmental, Social and Governance taskforce, he is sought after by businesses when they have questions about the social element of ESG matters. For example, Wilson has worked with a number of clients to establish good relations with indigenous people impacted by international projects. He advocated for and was the first chair of the State Bar International Law Section International Human Rights Committee. Wilson has also served as the chair of the State Bar of Texas International Law Section and as the communications director of the International Bar Association Human Rights Law Committee.