International Law
ESG Matters
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
SARAH FORTT
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.
MARGARET PELOSO
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.
TOM WILSON
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.
