September 20, 2021

Volume XI, Number 263

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September 20, 2021

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ESG and the Sustainable Economy - The Ethical Supply Chain

In recent years, supply chain risk management has received more attention in the context of investing with a focus on ESG and the sustainable economy. Specifically, efforts to address social issues, such as modern slavery and human rights abuses, in global supply chains have been prominent, both as a means of mitigating risk and as a proactive way to enhance brand reputation. Driving forces behind these efforts include consumers, shareholders, non-governmental organizations, and other advocacy groups calling for action.

Jurisdictions around the world have enacted or proposed legislation requiring companies to disclose their risks, policies, and proactive steps relating to modern slavery, such as forced labor and child labor, in their supply chains. Two types of legislation are emerging. The first type is disclosure-based requirements, essentially requiring companies to publish statements identifying what actions, if any, they are taking to address modern slavery in their supply chains. Examples of this type of legislation include the California Transparency in Supply Chains Act and the United Kingdom’s Modern Slavery Act. The second type of legislation goes further and imposes an obligation on companies to engage in human rights diligence in their supply chains. France’s duty of vigilance law and the Netherlands’ child labor diligence law are good examples.

However, legislation is only as good as the enforcement mechanisms that uphold it. While earlier laws lacked meaningful enforcement mechanisms, relying largely on naming-and-shaming lists and public image-related motivation as incentives for companies to take action, more recent legislation has included stronger penalty provisions, including the potential for civil fines, criminal sanctions, and disqualification of directors. For example, the New South Wales (Australia) Modern Slavery Act provides for financial penalties up to AU $1.1 million.

Litigation is also a business risk for companies that fail to meet established standards. Consumer class actions, human rights litigation by victims, and suits to enforce compliance with modern slavery and disclosure laws have become increasingly common. Higher insurance premiums, supply chain disruption, and related business continuity issues are additional tools to exert pressure that may be available in some jurisdictions. In the United States, goods produced with child labor or without payment of minimum wages can be enjoined from shipment under the Fair Labor Standards Act, and goods being imported to the country can be held at the border if they were produced with forced or child labor. These real business risks can have a meaningful financial impact on a non-compliant company when enforcement measures are taken.

It is challenging to determine how to assess these risks and the adequacy of measures companies are taking to prevent them. Without a uniform standard or set of criteria to consider, companies, investors, and fund managers are left to create their own policies and investment criteria relating to ESG matters and the sustainable economy. While the consequences of failing to meet any one stakeholder’s criteria may result in reputational and some commercial damage to a company, one stakeholder’s requirements are generally not enough to persuade a critical mass of supply chain participants to open up their activities for scrutiny, let alone change their operations. Thus, reliable, broadly applicable metrics for detecting and reporting supply chain risks are necessary to have a material impact. Corporate pressure in this area has been building, and we anticipate that it will increase in coming years, particularly as technology solutions, such as blockchain for tracking supply chain actions, become more broadly available.

Copyright 2021 K & L GatesNational Law Review, Volume XI, Number 182
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About this Author

Elizabeth Crouse Tax Lawyer K&L Gates Law Firm
Partner

Elizabeth Crouse is a partner in the tax group of the Seattle office. She provides business-focused solutions for U.S. federal, state, and international tax matters pertinent to mergers and acquisitions, corporate divestitures, internal reorganizations, cross-border transactions, private equity and venture capital fund creation and investments, and start-up companies.

Ms. Crouse is also experienced with U.S. federal and state alternative energy tax incentive programs (including the investment tax credit, production tax credit, and 1603 cash...

206-370-6793
Elisabeth McNeil Seattle International Energy Attorney K&L Gates LLP
Partner

Elisabeth Yandell McNeil represents a variety of U.S. and international clients. Her practice focuses on energy and infrastructure transactions, including mergers and acquisitions, joint ventures, and investments in wind, solar, biomass, and other energy projects and services. She also advises clients in transactions involving clean energy and energy efficiency technologies.

Elisabeth is recognized in The Best Lawyers in America© 2021 for Corporate Law and the Washington Rising Stars list (2016-20).

206-370-7824
Molly K. Barker Environment, Land and Natural Resources K&L Gates Seattle, WA
Associate

Molly Barker is an associate at the firm’s Seattle office. She is a member of the environment, land and natural resources practice group.

Professional Background

Prior to joining the firm, Ms. Barker served as an associate at an environmental and energy law firm where she focused her practice on environmental, real estate, energy, natural resources and land use law. She worked with public and private clients to conduct due diligence for permitting energy projects, obtain regulatory closure for contaminated sites, bring business operations into environmental regulatory...

206.370.7653
Caitlin C. Blanche, KL Gates, false advertising lawyer, unfair competition litigation attorney
Partner

Caitlin Blanche's practice primarily focuses on product liability and other complex litigation, representing manufacturers of pharmaceuticals, medical devices, food and beverage, apparel, sporting goods and other consumer products, as well as motor vehicles and accessories in personal injury, false advertising and unfair competition litigation. Caitlin also has experience counseling clients on measures for avoiding litigation in regards to sales and marketing practices, pre and post-market surveillance, and compliance with state and federal statutes posing litigation...

949-623-3526
Daniel Cohen, KL Gates Law Firm, Washington DC, Finance Law Attorney
Associate

Daniel Cohen is a first year associate in the Washington, D.C. office.

Admitted only in Virginia / Not Admitted in D.C.
Supervised by Soyong Cho, member of D.C. Bar

202-778-9020
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