ESG: How Supply Chain Contracts Affect Human Rights with Sarah Dadush and Olivia Windham Stewart

In this episode of On Record PR, Gina Rubel goes on record with Sarah Dadush and Olivia Windham Stewart, leaders of the Business and Human Rights Law Program at Rutgers Law School in New Jersey. They discuss environmental, social, and governance considerations (ESG for short) for global businesses.

Sarah Dadush is the founding director of the Law School’s Business & Human Rights Law Program. She is also a co-leader of an ABA Business Law Section Working Group that has developed a comprehensive toolkit for upgrading international supply contracts to protect workers’ human rights better. Her research and teaching lie at the intersection of business and human rights, and her work explores innovative legal mechanisms for improving the social and environmental performance of transnational corporations.

Olivia Windham Stewart is an independent business and human rights specialist, Senior Fellow, and Deputy Director of the Business and Human Rights Law Program. She works on a range of projects to enhance corporate accountability and supply chain due diligence across sectors. Olivia has worked extensively in production countries worldwide, particularly in South and Southeast Asia.

What is ESG?

Sarah Dadush: E stands for environmental, S stands for social, and G stands for governance. It’s an increasingly important area that investors and consumers are paying attention to because investors and consumers are becoming more concerned about where their money is going and what types of positive or negative impacts their money may be supporting or contributing to. And our project is particularly focused on the S in ESG. And even more specifically, we are focused on the human rights performance of international supply chains.

Gina Rubel: The way I describe ESG is it’s an umbrella term for all the things we’ve been working towards for decades, in terms of environmental sustainability, social justice, DE&I, and the governance of those things

How did you become interested in the connection between contracts and human rights?

Olivia Windham Stewart: Sarah has a tradition; she is a contracts professional professor. I think she has a different angle from me. As you said in the introduction, I’m an independent business and human rights, specialist. And for many years, I’ve been working exclusively on the issue of human rights in supply chains. And through that work, I’ve spent a lot of time in production sites, a lot of time on the ground in production countries, really thinking about the human rights impacts after they’ve happened and trying to think about what caused them to happen or what contributed to them happening.

Through those conversations and through long-term engagements with suppliers, in particular, I came to understand that the commercial relationship and the way the commercial relationship is structured, particularly through the contracts, because that’s where it lies, is having a profound impact on the human rights in the factory or on the field or elsewhere.

I came to the issue of contracts through that route of the supply chain from the factory floor. And then, I was put in touch with Sarah, and as soon as I saw the project, I thought, “Aha, this is something I very, very much want to be involved in.” And we’ve just been doing very exciting work on this particular issue ever since. That was how I came to it.

Sarah Dadush:  I teach contracts and business and human rights and corporate social responsibility in these types of subjects. When I came across the first version of the ABA working groups model contract clauses, I was absolutely taken with this strategy of using contracts to improve human rights outcomes in global supply chains. I’m utterly persuaded that we can think about contracts as the legal links in the supply chain. If we improve the strength of those links, we can improve the human rights performance of supply chains.

You’ve mentioned the model contract clauses and the model contract clauses for the human rights project. What are model contract clauses developed by the ABA business law section?

Sarah Dadush: Olivia and I are co-leading along with David Snyder, who is a professor of law at American University and College of Law, and Sue Maslow, who is a partner of Antheil Maslow & MacMinn. We have developed a set of 33 model contract clauses that are designed to be integrated into international supply contracts for the manufacturing of goods. And the purpose of these model contract clauses is to improve the human rights performance of the supply contract and, by extension, the human rights performance of these global supply chains.

The model contract clauses are pan-industries, so firms in any sector or industry can take them and integrate them into their supply contracts. They are also modular, so we don’t expect a one-size-fits-all. We don’t expect to take them wholesale cut and paste. They are to be adapted and edited to suit the needs of the individual firms.

Gina Rubel: Sue Maslow is an attorney from Doylestown, Pennsylvania, where I live and work. I have known Sue for 20 years, and we only put two and two earlier today. Otherwise, Sue would be here as well. I have so much respect for her. The funny thing is my colleague, Jennifer Simpson Carr, who’s also the podcast producer, heard you speak at LegalWeek, and that was the intro. It’s such a small world. And the reason I bring that up is that what you are doing, and even this new relationship we’ve formed as a result of this podcast, shows what a small world it is. And the contracts with the suppliers that you are referring to, whether it’s in Asia or South America, or anywhere in the world, affect us in so many ways. And that’s a real small-world example of someone that literally, her office is a mile from where I’m standing at this moment.

More resources about the MCC:

• ABA Contractual Clauses Project
• Getting Contractual Provision on Human Rights, Right
• Thomson Reuters’ podcast on The Model Contract Clauses (MCC) for Human Rights Project

Now that we know what the model contract clauses are, what is the connection between contracts and social or human rights performance, and why does it matter?

Sarah Dadush: One of the ways that we think about the model contract clauses is, Why? Why do they exist? Why do we develop them? There are two gaps that the model contract clauses seek to fill. One is that contracts, contract law, and commercial law generally do an okay job of assessing the non-conformity of goods based on the product quality itself, not so much on the production process quality. Contract law would have a pretty easy time saying that a soccer ball that does not bounce or is imperfectly stitched is nonconforming under the contract.

It would have a much harder time identifying a soccer ball that is perfectly stitched and perfectly bouncy, but that was stitched by children, or that was stitched by workers who haven’t been paid their wages, or who work under very unsafe unsanitary conditions as nonconforming. This is one gap that the model contract will also try to fill. Is this distinction between how you recognize and contract goods problematic for human rights waves as nonconforming?

The other gap that we fill is a very practical one. Many firms have ESG policies or objectives they claim or wish to achieve. And they also will have human rights policies. Let’s say, “We have zero tolerance for forced labor anywhere in our supply chain,” things like this. But their contracts don’t support the achievement of those policies. Don’t support the implementation of those policies or the achievements of those objectives. And that’s what we refer to as a coherence gap, that there is a coherence gap between what the company says it wants to do with respect to human rights and what its contracts tell it to do with respect to human rights. The MCCs, the model contract clauses, come in to give practical guidance and practical tools to firms to improve their contracts and fill both these gaps.

To understand what I think I hear, before these types of initiatives, the quality of how the workers were treated was not addressed in contracts until recently?

Sarah Dadush: Correct. I think Olivia can talk about why this doesn’t work, but what you would see most typically is that if a company does have a human rights policy. It does want to make it contractual. The way that it will do that is it will incorporate the policy by reference in the contract and have some representation or warranty by the supplier that it is and will always be in compliance with the buyer’s human rights policy. You may see that is not an infrequent occurrence, and it’s not an odd way for companies to build human rights into their contracts, but it doesn’t work. And I’d love to ask Olivia to tell us why that doesn’t work.

Olivia Windham Stewart:  As Sarah says, it’s not that human rights are absent from contracts. It’s just that they’re handled in contracts in ways that we don’t think are effective. Because the way they’re handled tends to be the buyer asks the supplier to represent and warrant that they can uphold all the human rights standards listed in the policy, more or less, no matter what. No matter what the buyer does, the supplier can uphold and maintain these standards. Now, anyone who’s ever been in a production site knows that that’s impossible, often quite unlikely. And the reason for that is often not just because of the difficulties the supplier themselves have to manage these circumstances and these standards, but the behavior of the buyer and the way the buyer’s behavior is putting pressure on the supplier to maintain those standards.

Because the buyer may have, for example, ordered goods with a very, very, very thin profit margin, if any profit margin. There’s lots of evidence showing that it’s possible to buy quite a large quantity of goods under the cost of production because the market is so competitive. Of course, if that’s the scenario you are starting with, it’s going to be very difficult to uphold labor standards because you are going to have to meet your costs. You’ve got to fix costs, your electricity, your production site costs, and you’ll have to squeeze wages to make back the profit.

And then, through the performance of the contract, lots of other things can change. The buyer might ask for more of a certain order, or they might ask for something different in a certain order, or they might ask for it quicker in a certain order. That can put massive pressure on the supplier who is still single-handedly asked to uphold standards in the code of conduct, even though the buyer is having a very significant impact on how that plays out on the ground.

What we are proposing through the model contract clauses is that the buyer gets involved. There is a shared responsibility contracting regime rather than a representations and warranties regime. And that’s much more realistic when managing human rights on the ground.

Where does that conversation start with the buyers? Does it begin with the GCs in the corporations that are buying? Does it start with their outside counsel? Really, who needs to know that that has to not only be part of the process but it also there has to be some governance?

Olivia Windham Stewart: The three teams that need to know, and all of them need to know, general counsel, the legal, the ethical human rights compliant, whatever that team is called, they all have different names and procurement. What often happens is that those three teams work in silos. The human rights team is charged with implementing their human rights policy by asking their suppliers to deeply promise that they won’t run afoul of the standards that they have.

The legal team is charged with limiting legal risks as much as possible through implementing a system of representation and warranties that pushes all the responsibility onto the supplier. And procurement is tasked with getting as many goods at a lower price as possible, as quickly as possible.

If you have those three teams working with those incentive structures in that business, it will create an enormous human rights risk. That if you have a reason to bring those three teams together and design better contracts, then you will have much better human rights outcomes.

Sarah, you used the term pan-industry, and I think that’s important for our listeners to understand is this crosses all industries. This isn’t just the production of goods, but it could also be services. I know it’s more goods where we see human rights violations.

Olivia Windham Stewart: No, I think you are entirely correct. The logic is the same. If you are ordering services or ordering goods, and you’re placing pressure. If you’re not communicating between teams, the outcomes will be very similar. There are slight nuances and differences, but even with services. However, the MCCs is the production of goods; with services, you could equally design something that addresses those issues in the same ways through a due diligence regime in contracting.

Sarah Dadush: COVID has done a lot to highlight the weaknesses of international supply chains in many respects, including human rights. It has exposed how unfair practices within supply chains can contribute to adverse human rights impacts. It’s accelerated a lot of legislative development to get a better grip on human rights issues within supply chains. And we see that very much in the European Union with the emergence of mandatory human rights due diligence legislation.

But we also see it here in the US with the increased use of withholding release orders by customs and border protection. And now, as I thought just last week, the coming into effect of the weaker force labor prevention act. I believe there is something very particular about this time in our history, this time in our world, calling for a different level of scrutiny of the human rights performance in international supply chains.

What are withhold release orders?

Sarah Dadush: I’m not an expert on this, but how it works is if there is a suspicion or a reasonable belief, I should say, by the US Customs and Border Protection agency, that goods coming into the US market from overseas are tainted goods in the sense that they have been made in whole or in part with forced labor, they can be seized at the border of the US.

There is the 1930 Tariff Act. The relevant provision is that goods made with forced labor can’t be sold in the US. And until 2016, there was what they call the consumptive demand loophole, which said, “If we can’t fill the US demand with nontainted goods, then we can bring in tainted goods.” Still, that loophole was closed under President Obama’s administration. And when that loophole closed is when we started to see an increase in the use of withholding release orders. In the last two years, there’s been something like 30 compared to 15 over decades.

Gina Rubel: My eyes just bugged out of my head, and Olivia shook her head up and down like, “Yeah, this is what’s going on in the world.” You can’t see that we’re interacting on Zoom as we record the podcast. Many people who didn’t attend law school don’t understand that none of us as lawyers can understand all of the nuances of the law. What I’m hearing is, that the work you are doing is affected at every level of the supply chain. And there are so many nuances to it, and that’s why you spend so much time and energy trying to make a difference in this space. For that, I want to thank you, as I’m learning from you. Because I am not an expert in this area.

Why doesn’t contracting as usual work for achieving good social performance, and what do MCCs do differently?

Sarah Dadush: The big thing is what Olivia was saying earlier, that we have traditional contracts essentially tend to contain these fictitious supplier-only representations and warranties that everything is great in the supply chain. Those types of reps and warranties are fictitious or empty because a supplier can’t possibly truthfully say, “Categorically, there are no human rights problems in my supply chain now or for the duration of our contractual relationship.” We view this type of supplier only representation as contributing to the tick box form of compliance, which is just ticking a box and doesn’t change anything in the way business does business.

The other reason that contracting, as usual, doesn’t work is because, again, calling back what Olivia was saying, supply contracts tend to disregard how the buyers’ purchasing practices can contribute to adverse human rights impacts and make it hard for the supplier to meet the human rights standards that the buyer wants the supplier to meet.

And a third reason why contracting, as usual, doesn’t work is because contract remedies typically are designed to flow from the breaching party to the non-breaching party. But in the case of the social breach of contract, where a third party, the workers, has been harmed by a violation of the human rights standards contained in the agreement. Typical contract remedies don’t work. They need to be redirected to be channeled to the victims, not between the parties, but to redress the human rights violations that have occurred under and through the contractual relationship.

The work is brilliant, and I’m sure there’s more that we, as consumers, can be doing and that there are some trends you may be seeing in the industry. What can we as consumers, and what can people be doing? And what are some of the trends we should be mindful of as we look at how this all plays out?

Olivia Windham Stewart: It’s an interesting one. From the consumer angle, I guess there is a range of… People have different views about how much consumers can play a role in some of this stuff, how much they can learn, and how much leverage they have. It’s different in different jurisdictions.

There’s often been a powerful narrative of personal responsibility of shopping correctly of knowing the products you buy. I do believe in all of that to an extent, but I’m also a bit more sort of a structuralist. And I think that most of the crucial trends lie in this kind of work, the kind of work that you can do at scale and the work that you can do through legislation. My experience working in supply chains is that it’s like the wild west. It’s just lawless. It’s a very complicated place to work.

Suppliers are under a lot of commercial pressure, workers are under a lot of stress, and the things we need to do to address those are huge. It needs to be a wholesale change. I think it’s essential for consumers to educate themselves about the way that supply chains work. I’m an advocate of buying less, more responsibly, but I don’t think that that would fundamentally shape the outcomes in the way that we would like to see.

And it’s an interesting one because, on some level, I don’t think consumer action is necessarily a be-all-end-all. Still, it is interesting to see that the most active work in this area does tend to be in an industry like apparel, where businesses are very conscious of the consumer.

Like I work in this industry, I’m technically pan-industry. Still, most of the work is in the apparel or electronics industry or where the companies think that consumers care. It’s not in car tires. It’s not in pots and pans for the kitchen, glassware, or any of this stuff. That’s just not where the activity is.

I think it’s interesting to think about the things you can take from those areas, where there is a lot of consumer pressure and make them pan-industry and ensure that they’re reaching all workers everywhere. But it’s going to take a lot of work from all directions.

For corporations, then, what can we do in terms of is there an opportunity for more focus on ESG and ESG investing? What can the average company that perhaps is not involved with the supply chain be doing?

Sarah Dadush: I’m going to take the question a little different and be like companies that are involved in the supply chain. What can they do in this building on what Olivia was saying about the structuralist approach? Contracts are a part of supply chain infrastructure. And not only are they a part, but they’re also an important part. And not only are they an important part, but they’re a part of the supply chain infrastructure corporations control.

The contracts are an area over which firms have dominion. They can do with them what they want, and our firm recommendation is that they enlist their contracts as allies in achieving their human rights and ESG objectives. As it is, contracts aren’t supporting the achievement or the implementation of companies’ human rights and ESG policies. And this can be relatively easily changed.

You don’t need legislation to come and tell you how to make your contracts differently. Every company can do this reflective work of rethinking how their contracts align with and support their own beyond financial objectives, let’s say. And what we’re seeing is that there are… Or at least, our work proposes that there are ways in which you can enlist your contracts as more effective allies in achieving your ESG objectives and implementing your human rights policies. And that in so doing, you will reduce business risk associated with things like your goods being withheld at the border or associated with covered by media human rights incidents that are very embarrassing for the company.

And contracts can also be effective allies in achieving legal compliance with, for example, these evolving non-final disclosure requirements that we’re seeing coming out of the SCC, that we’re seeing coming out of the European Union. There are plenty of ways corporations can get on board, which still affords them a lot of discretion. Because it’s their contracts, they can do what they want with them.

It makes me think about a lot of different things. Is there a responsibility in contracting for the people in transportation, for the retail distributors? Is there a responsibility there as well? For example, how can they hold the manufacturers responsible, and is that even a relevant question?

Olivia Windham Stewart: I think the question is, the people involved in this process are not simply the buyer and the manufacturer. There are also all the ancillary services, the other tiers of the supply chain, and the people who are providing products and services to the manufacturer. How do you reach those people as well?

Gina Rubel: Correct.

Olivia Windham Stewart: The contracts build on two key international instruments, soft law instruments. The first is the United Nations Guiding Principles On Business and Human Rights, which sets out the protection, respect, and remedy framework for states, businesses, and workers. The second is the OECD Due Diligence Guidance for Responsible Business Conduct.

Both contain within them the concept of human rights due diligence. And human rights due diligence is what has informed the drafting of the model contractual clauses, and that’s really about proactively identifying, preventing, mitigating, and addressing risk and adverse human rights impacts in your supply chain throughout.

It’s not simply your direct business relationship. It’s thinking, where does that direct business relationship take me? Is it taking me to a risky area, a few tiers down, or is it in contact with a challenging service provider or some other type of high-risk situation that I should be aware of? And what are my top risks? Where are they, and how can I address those?

It’s about not just taking the business relationship as your primary point of focus but taking a risk-based approach. The contracts encourage the buyer and the supply to do in this arrangement. And then, through the contracts cascade throughout the supply chain, you can be sure that there’s information flowing up and down and that the requirements cascaded throughout.

Gina Rubel: That’s exactly what I was trying to get at. I’m sitting here thinking, without naming any big-box retailers, what obligation do they have to ensure human rights due diligence of the products that they’re putting on their shelves, of the companies that they’re contracting with to sell their goods? You answered my question, and I was just wondering, do they have a responsibility? I think, in my mind, yes. And are they doing it?

Olivia Windham Stewart: The responsibility is often believed to be proportionate to the contribution that the company might make. The amount of business they have with that particular provider, their connection, the length of their relationship, this kind of thing. So because of the way the supply chain is structured, many companies will be working with many different companies. It’s not a straightforward, easy business relationship.

It’s up to the kind of lead firm and all the following firms to understand what their role is with the firms they’re connected with. It isn’t effortless. It’s a whole ecosystem of businesses. But proactive due diligence will be about taking an extensive view, understanding where your goods are coming from, mapping, and then thinking, “Okay, what are the hotspots? How can we address those? Also, how can we collaborate with others who have the same hotspots, and how can we work together and increase our leverage to mitigate risk in those areas?” It also has a lot to do with collaboration between different firms.

Gina Rubel: One of the interesting things is that many people will say, “Well, what does this have to do with public relations?” Human relations is public relations, and this is On Record PR. We’re talking about issues that affect businesses globally. Sarah had mentioned, well, it would be pretty embarrassing to be involved with a company that has human rights violations. And I was just thinking how the big box stores, the companies selling the goods, have so much leverage to push the enforcement of these things. Because they don’t want to see, that story comes out in The Economists or the Wall Street Journal or the New York Times that says, “They’re selling goods that were manufactured in factories that are violating human rights.” That’s where my mind went. That’s why that question. But it all ties back to whether they are doing the right thing? We want that to be the first.

Sarah Dadush: Right. And I think it’s imperative to underscore that with human rights due diligence, the right thing doesn’t mean perfection. There is no expectation of perfection. There is an expectation that you have a duty of care specific to you, your supply chain, your leverage, and your power within that supply chain. It’s very context-specific how we’re going to determine what your standard of care is and whether you have met it. But there isn’t an expectation of perfection.

In particular, the US audience struggles to wrap their head around that because we tend to think of, “Well, if there’s a human rights problem, that should be a strict liability issue. Bad thing happens, puff, liability.” And of course, we all want more accountability for corporate misconduct, but we mostly want corporations to do better. And human rights due diligence helps get you there. That frame, which is very deeply rooted in shared responsibility, is the way that we think corporations stand the best chance of doing better in terms of human rights.

What parting thoughts of wisdom do each of you have regarding how to make a difference in human rights and the supply chain?

Sarah Dadush: I suppose the main takeaway I would want to leave your audience with is that your contracts aren’t just transactional documents but relational documents. And they can be more or less fair, more or less effective as allies for you in living your corporate values. Take a good look at them. Take a good look at your contracts. Take a look at our model contract closes and see how your contracts fair against them, and view these instruments as a bridge for you to relate within your supply chain in ways that are more in line with your values. Our short sense of this space of contracts and human rights is that you can’t do good ESG without having good contracts. And you can’t do good human rights due diligence without having good contracts. So get your contracts good.

Olivia Windham Stewart: My advice to people who might not know very much about how to assess a company, how to understand how a company’s operating when it comes to human rights is, one thing to pay attention to how a company is talking about treating their workers, which aren’t usually actually their workers, and they don’t have direct contact with, try and understand and gather information on how businesses are treating their suppliers and what their relationship with their suppliers it’s like. Because if they’re being transparent about that, and if they’re talking about those relationships, if they’re talking about fair commercial practices, if they’re talking about procurement and lead times and how the’re actually managing those business relationships, it’s a very, very positive indicator that they’re doing the work necessary to have good human rights outcomes in the end.

That’s the thing that I would encourage consumers to pay more attention to. And look for indicators that the legal agreements that companies have, the commitments that they have are serious and that they’re committed to the outcomes at the end of the supply chain. People are encouraged not to look at that as much as they’re encouraged to look at working conditions. It leapfrogs, so I guess it’s a good hint if you can see something about that on a company website.

Learn More & Connect

Sarah Dadush

LinkedIn: www.linkedin.com/in/sarah-dadush-8335b132/

Twitter: @sarahdadush

Sarah Dadush is a Professor of Law at Rutgers Law School. Her research lies at the intersection of business and human rights. Her scholarship explores various innovative legal mechanisms for improving multinational corporations’ social and environmental performance. She is the founding director of the Law School’s Business & Human Rights Law Program and co-lead of an ABA Business Law Section Working Group that has developed a comprehensive toolkit for upgrading international supply contracts to protect workers’ human rights better.

Before joining the Rutgers faculty, Professor Dadush served as Legal Counsel and Partnership Officer for the International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations based in Rome. Before that, she was a Fellow at NYU’s Institute for International Law and Justice, where she administered the Institute’s research program on Financing for Development. She also worked as an Associate Attorney at the global law firm, Allen & Overy L.L.P., specializing in international investment arbitration and cross-border banking transactions. She received her JD and LL.M. in International and Comparative Law from Duke University School of Law in 2004.

Before joining the Rutgers faculty, Professor Dadush served as Legal Counsel and Partnership Officer for the International Fund for Agricultural Development (IFAD), a specialized agency of the United Nations based in Rome. Before that, she was a Fellow at NYU’s Institute for International Law and Justice, where she administered the Institute’s research program on Financing for Development. She also worked as an Associate Attorney at the global law firm, Allen & Overy L.L.P., specializing in international investment arbitration and cross-border banking transactions. She received her JD and LL.M. in International and Comparative Law from Duke University School of Law in 2004.

Olivia Windham Stewart

LinkedIn: https://www.linkedin.com/in/olivia-windham-stewart-4414b683/

Twitter: @olivwindhamstew

Gina Rubel

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