From a legal perspective, having a Supplier Code of Conduct makes sense. From the long-anticipated SEC amendments enhancing climate change-related disclosures (released March 21st), to the proposed New York Fashion Sustainability and Social Accountability Act, to the EU draft Corporate Sustainability Due Diligence Directive, it’s clear that the ESG disclosures of the future will put an increased burden upon end-user companies to understand, and have some level of accountability for, the workings of their supply chains. For example, the SEC’s proposed rule – on which Vinson & Elkins, together with PwC, are giving a presentation on March 28th – includes consideration of “Scope 3” emissions, which are any emissions occurring upstream or downstream in the activities of a registrant’s “value chain.”

But, from a practical standpoint, Supplier Codes of Conduct need to be carefully considered before they are adopted. If your business is an end user with a supply chain, it seems tempting right now to plan for the more burdensome ESG framework of the future by implementing a stringent Supplier Code of Conduct and tough contractual requirements for your suppliers to meet.

But, in the current environment, a blunt sledgehammer approach may backfire. If a company is engaging suppliers that are unable to comply with its Code of Conduct, it may be setting itself up for business issues, disclosure issues and legal issues. At the same time, if a company’s message to its suppliers – e.g., do the work quickly and cheaply – cannot be reconciled with the requirements of its Code of Conduct, it’s setting itself up for failure. Companies need to address supply chain issues head on, but they need to do so realistically. And regularly reviewing supplier performance in the context of the standards in the Code of Conduct is essential to ensuring that there is no inconsistency between the business’s stated aspirations and the reality on the ground.