Climate change and sustainability in supply chains transcript

Speaker	Transcript
Michael Barlow, Partner (Mike)	[Music] Hello and welcome to Environment Matters, a monthly podcast by the Environment Team at Burgess Salmon. I'm Mike Barlow, the head of the Environment Team. Each month I'll be joined by experts from across Burges Salmon to discuss the most pressing environmental developments and hot topics in UK law. In today's podcast we'll be discussing an ESG topic: how to manage climate change and sustainability in supply chains. At Burges Salmon our Environment Team collaborates with other areas of the firm to provide our holistic ESG services for clients and I chair our cross firm ESG steering group. We wanted to include an ESG topic in this podcast series and have picked supply chain management because it's an aspect of ESG that has particularly legal elements and we know from discussions with clients and contacts that these can pose particular challenges. Today, I'm delighted to be joined by Sarah Sackville Hamilton, who's a senior associate in the Environment Team, specializing in environmental regulation and sustainability projects. Sarah also works with me on our ESG Steering group. Hi Sarah, thank you for joining us today.
Sarah Sackville Hamilton, Senior Associate	My pleasure Mike, it's good to be here.
Mike	[Music] So can you start by telling us a little bit more about why supply chain management is such an important aspect of ESG?
Sarah	Of course, supply chains are for many businesses where the biggest ESG issues lie, that's both from a financial risk perspective because of penalties that could be imposed for breaches of ESG regulatory requirements, or operational disruptions caused by those breaches and it's also from a reputational risk perspective. Supply chains are also where, for many, there are the biggest opportunities to affect meaningful and measurable change through ESG strategies and policies. From my perspective as an environmental lawyer, and so my focus on the E element of ESG, one of the major concerns that organizations face with their climate impact is reducing their Scope 3 Emissions. Scope 3 are emissions that aren't produced by the organization through its own activities or through its purchased energy consumption, but instead from elsewhere in its value chain, particularly from suppliers and purchased products and services, so understanding what those Scope 3 emissions are and taking steps to reduce those supply chain emissions, where possible, is a really important element of most ESG strategies.
Mike	Thanks, that's really clear and I know we've been engaging with clients quite a lot over the last year or so in relation to these issues and are there any particular areas where clients need help in managing climate change and sustainability in their supply chains?
Sarah	Yeah there are there are two legal areas that I would pick out in particular, one key one is in understanding the legal reporting disclosure and due diligence obligations regarding supply chains. The regulatory regimes are evolving and staying aware of the requirements of the relevant frameworks and also horizon scanning for upcoming changes to those requirements is a really important area where we've been helping a lot of clients. The second key example I'd pick out is implementation of supply chain compliance requirements within the supply contract. This could be by drafting clauses which ensure the necessary information sharing and transparency to enable the customer organization to meet its regulatory obligations and it could also be clauses which promote environmentally sustainable practices in the supply chain and drive behavioural change.
Mike	So then turning to your first point on legal disclosure and due diligence obligations, can you give us some examples of the types of regulatory regimes that are relevant to climate change and sustainability and supply chains?
Sarah	In the UK we have a, what's a real patchwork of different regulatory regimes, which impose mandatory ESG obligations regarding disclosure and different parts of that patchwork apply to different types and sizes of organization. Navigating the patchwork and working out which of the regimes apply to you and what they require you to do is complex. At Burges Salmon we've developed an interactive tool to help clients with cutting through that complexity to make a start on this analysis. In the tool by identifying your organization type and size it shows you the applicable reporting regimes and you can click through to a summary of their requirements, if this would be helpful to anyone listening then please do get in touch.
Mike	Yeah I've had a look at that tool and actually it's really useful and very user friendly, I think.
Sarah	Yeah I think it's come out really nicely, it's sort of a nice visual way of seeing what are the applicable obligations and then quite an intuitive way of clicking through to get a bit more detail to start on that exercise of understanding what you need to do.
Mike	Yeah no, really useful.
Sarah	And sort of moving on from that, one of the elements of this UK reporting framework that's particularly relevant to climate change and supply chains is the obligation that's imposed on some obligations to make disclosures which are aligned with the recommendations of the TCFD, so that's the Task Force on Climate Related Financial Disclosures. The TCFD recommendations include making disclosures on Scope 3 greenhouse gas emissions and the related risks. TCFD aligned disclosures are currently mandatory for premium listed and standard listed companies and also for large companies and LLPs which broadly means those that have got more than 500 employees and which have got a turnover over 500 million, or meet certain other tests. TCFD align disclosures are also mandatory for Asset Managers, Life Insurers and FCA regulated pension providers and also for Trustees of Occupational Pension Schemes. As well as all those categories of organization or entity where those disclosures are mandatory, we're also increasingly finding that other organizations are electing to make those disclosures on a voluntary basis as part of their ESG strategy. So all of that is driving the importance of focusing in on those disclosures around climate change in supply chains.
Mike	Yeah, and I know we've got another tool as well, haven't we, to help pension trustees with their ESG requirements which also feeds into this topic. And you've touched on the obligations in the UK, but I know there's a lot as well going on in an EU level which is sort of moving on a little bit faster perhaps than the UK. Perhaps you could talk about a little bit about those regimes as well?
Sarah	Yeah absolutely and completely agree that the two ESG regulatory regimes that are getting a particularly high level of attention at the moment are the EU's CSRD and CSDDD so, always good to have an acronym, but CSRD stands for the Corporate Sustainability Reporting Directive and then the other one is the Corporate Sustainability Due Diligence Directive. The CSRD first, is a new EU directive which significantly expands the ESG disclosures which in scope organizations are required to make and it also significantly expands, albeit in a phased way over a number of years, the organizations which will be within scope of those disclosure obligations, and although, as it's an EU directive, following Brexit it's not part of UK law, the CSRD will still impact on many UK businesses and that's because, for example, EU parent companies will need to make disclosures in respect of their full group ultimately and that will include non-EU entities and it's also because the organizations that are within scope will ultimately include non-EU undertakings which have a large EU established subsidiary or EU branch. On the CSDDD, this directive isn't yet in force but it's currently expected to become law during 2024. It will impose far-reaching obligations on entities within its scope to carry out due diligence across their value chain and to take action to mitigate the actual and potential adverse impacts on human rights and the environment in that value chain. So while it's not directly applicable to UK companies, many which have got an EU company in their value chain, either up or downstream from them, will still be feeling the impacts of the CSDDD filtering through when it comes in.
Mike	Yeah thanks, that's a really useful summary and you know it's clear isn't it that these obligations even the ones in the EU which only have a more indirect effect are going to be rolled out more widely across the UK and it's going to be more and more important to be looking at the supply chains and contracts.
Sarah	I think that's right and I think it's also fair to say that what's happening at an EU level could be signs of similar regulations that might come into the UK itself in due course, although we're not bound to follow what the EU is doing it it could be a sign of a trend that we choose that the UK chooses to follow before too long.
Mike	Yeah exactly and if I was a betting man I would say that that will happen. So that takes us on to the second example you gave of where legal support can be needed in relation to supply chain management. So why do you think that it's important to think about introducing climate change and sustainability clauses into the supply chain contracts?
Sarah	There are a range of reasons why people could choose to introduce climate change and sustainability clauses and different reasons will carry different weight and residence for different organizations. For many I'd say a key driver will be ensuring that their organization can meet the increasing reporting and due diligence requirements placed on it by regulations, the types of regulatory requirements that we've just been talking about, for others an important reason will be matching stakeholder expectations that could for example be investor expectations, or alternatively it could be tender requirements, particularly from the public sector customers where we're seeing inclusion of some pretty extensive supply chain sustainability elements in tenders coming through and for others a really significant factor will be a desire to do the right thing, to leverage their organization's buying power to drive an improved ESG approach across the supply chain.
Mike	Yeah and I think it's really important not to lose sight of the fact that this is just not all driven by regulatory requirements but there are softer requirements as you say and tender contracts and so on and also push from stakeholders to, as you say, do the right thing. So can you give some examples of the type of clauses that we've been helping clients with in relation to supply chain contracts?
Sarah	Yeah of course, there are two broad types of clause; there are ones which drive supply chain behaviours and ones which drive transparency and data sharing. In that first category, as a baseline we've drafted clauses which require suppliers to comply with applicable ESG laws and regulations and manage their businesses in a manner which benefits the environment and reduces harm the supplier imposes on the environment. We've also worked with clients to develop drafting on more specific issues that are particularly important to the client like setting public emissions targets, developing and implementing Net Zero transition plans, procuring electricity from renewable sources, reducing resource use and pollution and using sustainable materials and practices. In the second category of clause, so transparency and data sharing, we've drafted clauses which require suppliers to respond promptly and diligently to requests for information on ESG matters and to inform the customer proactively of any breaches or ESG incidents. We've also worked with clients to develop tailored information requirements which elicit the specific data that they need from their suppliers whether to meet their reporting obligations or to feed into other internal metrics. A key area of focus has often been emissions measurement and reporting commitments, requiring suppliers to measure and calculate their total emissions, in line with specified reporting standards, and then to submit this data to the customer in line with a set reporting timetable.
Mike	Yeah there's a lot to sort of get through there isn't there and I think one of the real challenges with drafting clauses to put into the supply chain contracts is identifying both the sophistication and the resources of those in the supply chain and matching the clauses to the type of organization because it's really important that you give them something that's aspirational but also something that they can comply with, which helps towards the ultimate goal. So then beyond that really helpful summary of the types of clauses, have you got any top tips to those that are listening about what they might need to think about when introducing ESG clauses into their contracts?
Sarah	Yes, I've got a few that I would mention. My first tip is that work on supply chain clauses is a really tangible area where organizations can take concrete action to drive forward their ESG agenda. Conversations about ESG are often nebulous and turning talk into action can be really challenging, incorporation of ESG Clauses into supply chain contracts and then after that proper contract management to ensure compliance with those clauses is a really great area to make a difference and to see that difference. My second tip would be to orientate the supply chain ESG project around your business's priorities, work with the relevant parts of your business to identify what the key objectives are and where most impact will be achieved. That's both in terms of the areas you want to target through the clauses and also the suppliers where incorporating the clause will have the greatest impact. This prioritization exercise will help shape your supply chain project and in thinking about objectives and impact you should think about ESG in a broad sense rather than in a narrow sense; while today I've been talking exclusively about climate change and sustainability because I'm an Environmental Lawyer and this is our environment matters podcast, ESG is about so much more and there are a whole range of Social and Governance factors that could also be valuable to include in your set of ESG clauses. My third tip links back to the point that you just made Mike, and it's that a one-size fits all approach may not be appropriate, requirements that it might be realistic and reasonable able to impose on a major corporate supplier might not be appropriate to require a small supplier to sign up to. Similarly there may be more in the way of collaboration and support that the customer can and should provide to help those smaller suppliers on their ESG Journeys we've been working with some clients to develop menus of ESG Clauses with different tiers of ESG obligations that can be selected depending on the profile of the supplier for other clients it suits their objectives better to have a single standard set of clauses but to be prepared to tailor them or provide additional support for smaller suppliers. I think those are my main tips or, but my final one would be please do get in touch with us if we can help.
Mike	Thank you, an excellent final tip and that seems a really good place to finish our podcast today, I take away a number of things from that discussion; first of which is that you know, there is some regulation around this which is which is driving a need to look at supply chain contracts it seems to me that that is going to be on the increase over the years and is going to become more pervasive, but there are also a number of other really good reasons for looking at supply chain contracts which go beyond the regulations and then I suppose the last point I would take away is that you know quite a lot of thinking has been done on this it's a real opportunity to make a noticeable difference and there are a number of you know clauses which have already been developed which can be used so I think that's all really helpful stuff and I'm really grateful Sarah for you joining me and talking through that.
Sarah	Thanks Mike, it's been a really good discussion.
Mike	[Music] Thank you for listening to Environment Matters, if you'd like to know more about our Environment Team and how our experts can work with you, you can contact me and the rest of the team via our website and if you enjoyed this podcast you may also enjoy listening to our previous podcast episodes on Greenwashing, Natural Capital, Variable Monetary Penalties and our 2024 Horizon Scanning podcast. All of these are available on Apple, Spotify, or wherever you listen to your podcasts. Our next episode is going to be focused on waste and navigating that complex regime, particularly in the context of delivering a circular economy, so don't forget to subscribe and thanks for listening.