Are CSR Clauses Truly Effective in Improving Supply Chain Sustainability? (Part 1)

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Editor’s note: This is Part 1 in a two-part series covering EcoVadis’s 2018 study of CSR contractual practices among buyers and suppliers.

Corporate social responsibility (CSR) clauses are a common feature in contracts between buyers and suppliers. Yet the vague language of the majority of these clauses suggests limited effectiveness in actually bringing about sustainable practices, according to a recent study of more than 550 buyers and suppliers conducted by EcoVadis.

Today, the adoption of CSR practices is quickly becoming the norm. According to the International Association of Contract and Commercial Managers (IACCM), nearly three-quarters of companies include a sustainability clause in their procurement contracts. Moreover, half also monitor their suppliers’ environmental and social performance.

Breaking Down the CSR Clause

The EcoVadis report identifies the following four key features of a CSR clause: reference to environmental, social and governance standards (precision); obligation of assessment or certification (verifiability); consequences in case of breach (enforceability); and tier-n reach (coverage depth).

To analyze the effectiveness of one of the four features of a CSR clause, the report categorizes it as “basic,” “progressing” or “advanced.” For example, a clause with “basic” precision would express general principles, in contrast to “advanced” precision, where specific objectives are set. A basic level of verifiability refers to self-assessment or no assessment at all, and an advanced level would require regular third-party assessments.

More than three-quarters of the clauses that the report analyzed expressed only general principles, and fewer than 5% contained precise objectives. When it comes to verifiability, only a quarter of CSR clauses say that assessment costs will be shared by buyers and suppliers. Naturally, in the other cases, the supplier would be incentivized to conduct its own assessments or skip the assessment altogether.

Similarly, if CSR clauses do not provide for enforceability via penalties, then suppliers will not be as disincentivized to breach the clause. EcoVadis found that while three-quarters of clauses say that violations can lead to an early termination of the contract, only 12% have actually done so.

The analysis of the coverage depth of CSR clauses revealed more positive news, however. Nearly half of CSR clauses require tier-1 suppliers to extend the same requirements in their own procurement contracts, which guarantees the penetration of CSR practices at least through the second tier.

How Effective Are Today’s CSR Clauses?

Improving environmental and social practices in one’s supply chain and mitigating legal risks are the two top reasons companies include CSR clauses, the report found. The vast majority of CSR clauses consider environmental concerns, human rights, labor practices, corruption and safety.

Source: EcoVadis

Two-thirds of the surveyed buyers said that all of their contracts include a CSR clause. Those that left out CSR clauses at least in some contracts gave a variety of reasons for doing so, as the chart below shows.

Source: EcoVadis

Eighty-three percent of the surveyed suppliers reported that they have been asked to sign a CSR clause, and 67% have been asked by buyers for information about their own suppliers. About half have also been asked by buyers to include the same CSR requirements in their own contracts with sub-suppliers.

Four out of five suppliers say that CSR requirements have a positive effect, whether it’s raising awareness or bringing about the implementation of concrete actions. For those that disagreed, most found the requirements unnecessary, and some found them too complicated or costly.

Check back Thursday for Part 2, in which will cover how buyers and suppliers can improve the effectiveness and success of CSR clauses. The full report can be found here.

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