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Beyond Greenwashing: How to Make CSR Clauses Truly Effective (Part 2)

07/19/2018 By

Editor’s note: This is Part 2 in a two-part series covering EcoVadis’s recent study of CSR contractual practices among buyers and suppliers. Part 1 covered the limited effectiveness of today’s CSR clauses

Among buyers, inserting a corporate social responsibility (CSR) clause into their contracts with suppliers is a pretty common occurrence. According to EcoVadis’s 2018 study on CSR contractual practices, about 70% of buyers do so.

The same study found, however, that more than 50% of suppliers say that they have come across CSR requirements that could not be met, whether the obstacle had to do with product price, quantity or timing. After all, only a quarter of buyers take sector and size of the supplier into account and adapt CSR clauses accordingly.

But perhaps the greater problem is the fact that most CSR clauses are vague and ineffectual, providing for little enforceability and verifiability. “Establishing a CSR clause within a commercial contract in a way that ensures compliance and compatibility with all the business aspects is a major challenge in moving from sustainability clauses to sustainable contracts,” the report notes.

CSR clauses rarely cause suppliers to turn down a contract. EcoVadis’s survey shows that only 8% of suppliers have refused to sign a contract because of the CSR clause it included. Among those suppliers that did accept the contract, however, 20% did so because they needed the contract and had no choice but to accept the CSR clause as well.

Suppliers cited a lack of internal resources and expertise and a lack of understanding of the purpose of CSR clauses as primary reasons for dissatisfaction towards these clauses. These criticisms show, the report points out, a “lack of dialogue between contracting parties regarding the placement of CSR in their contractual relations.”

Starting with the Negotiation Table

Ensuring the future effectiveness of CSR clauses starts at the negotiation table. The EcoVadis study found four common reasons suppliers refuse to sign a contract due to a CSR clause.

The first is irrelevance of the CSR clause to the context of the transaction. As mentioned above, three-quarters of buyers do not adapt CSR clauses to the supplier’s size or sector. Yet making these sorts of case-by-case adjustments will improve both the likelihood that the supplier will sign the contract and the likelihood of compliance.

Source: EcoVadis

Suppliers may also be disincentivized to sign the contract because the cost of CSR compliance is seen as too high and the requirement of assessment believed to be too intrusive. The report suggests that buyers will need to clearly and persuasively communicate the benefits of CSR compliance to suppliers and, more importantly, offer incentives and assistance in mitigating the financial burden.

Similarly with the issue of enforceability — a supplier might be put off by penalties that seem too punitive — there should be both a fair share of responsibilities and a progressive system of penalties. This way, suppliers do not bear a disproportionate amount of the CSR responsibility, but nevertheless there is a strong incentive not to breach the contract.

More than a quarter of buyers say that their contracts do not define consequences in the event of breach of the CSR clause. Moreover, only 16.5% of buyers report that their organizations have actually resorted to penalties, be it termination, suspension or something else.

This does not necessarily mean that suppliers do not breach CRS clauses. In more in-depth interviews, suppliers told EcoVadis that reading all of the codes of conduct that they receive from buyers is simply too time-consuming. In other words, suppliers may not even be aware of their specific CRS duties. 

Boosting Buyer-Supplier Cooperation

After a contract has been signed, it is vitally important for buyers and suppliers to continue to collaborate in ensuring that the CSR clause will be followed. EcoVadis found that only 54% of suppliers view CSR clauses as legally binding, whereas 39% consider them to be “loose guidelines.”

For 6% of the suppliers, CSR clauses are not binding at all and merely serve as a “communication tool.” As one supplier told EcoVadis, “The buyers just want to put the clause in their contracts for their greenwashing process. They do not care about reality, they do not mind our difficulties or the process that we are making.”

It is no surprise then that many suppliers view CSR clauses as responsibilities that buyers are dumping on them, without regard to feasibility of the requirements. Furthermore, buyers tend to be reluctant to account for CSR requirements in pricing discussions with suppliers.

Hence, in order for CSR clauses to actually bring about better CSR performance, buyers need to share some of the burden. The report suggests that buyers start with the language of their contracts and avoid making suppliers exclusively responsible for reputational harm or damages to third parties. Contracts should specify obligations on the part of the buyer as well as the supplier.

Shouldering part of the financial burden is an important element, as well, albeit one that buyers might find hard to accept. A place to start is allowing the costs of CSR requirements to be factored into negotiations over the price of the contract. Buyers can also share expertise and resources to decrease the cost of compliance for suppliers. As buyers well know, one generally gets what one pays for — CSR efforts included.

The full report, “Sustainability Clauses in Commercial Contracts: The Key to Corporate Responsibility,” can be found here.