Sustainability and Global Supply Chains

by Pedro Aránguez Díaz

On 3 November 2023, the University Carlos III of Madrid held the International Conference Sustainability and Global Supply Chains in the Face of the Climate Crisis, analysing the contractual, corporate, financial and dispute resolution perspectives of a fascinating legal challenge.

Professors Pilar Perales Viscasillas and David Ramos Muñoz directed the conference. In their presentation, they highlighted the key role of supply chains in the sustainability transition, and the deep transformations that supply chains will endure, especially in the light of new proposed legislation. We highlight some of the interesting legal issues the speakers discussed.

Contractual Approach

The first panel was moderated by Petra Butler (Victoria University of Wellington), and counted with speakers Ingeborg Schwenzer (University of Basel), Katarzyna Kryla-Cudna (University of Bristol) and Valle López Triana (Repsol). Ms. López Triana gave her in-house counsel insight into how the new proposed legislation will force companies to change their contractual obligations, always providing an obligation of means rather than results, with companies almost exercising a legislative function through contracts which might be inadequate for supply chains that do not always follow a hierarchical model.

Prof. Schwenzer focused on diverse ways to bring sustainable standards into the CISG, referring to Prof. Butler’s research on a potential inclusion through Art. 7(1), but preferring the incorporation of these standards through Art. 35 or Art. 8. Prof. Kryla-Cudna proposed prioritising sustainable contractual remedies, like repair, instead of replacement or avoidance, also highlighting difficulties in the enforcement of the remedies.

Corporate Approach

The second panel was moderated by Rafael Marimón Durá (University of Valencia), and counted with speakers Beate Sjajfell (University of Oslo), Mikel Arrieta (Iberdrola), and Souichirou Kozuza (Gakushuin University). Prof. Sjajfell defended a profound transformation of corporate law which abandoned shareholder primacy, and emphasised that European corporate laws gives wider discretion for the board to act on ESG, rather than being influenced by the American school of thought following Friedman.

Mr. Arrieta remarked that a listed company cannot limit itself to shareholder value creation, and that ESG has been incorporated into investment criteria, share price and remuneration policies among others, outlining the strategy of his company as a practical example of the implementation of sustainability. Prof. Kozuka discussed developments in Japan and expressed concerns for agency problems between the management board and its shareholders, for instance in the case of amendments to the charter as the shareholders’ mean to control management for ESG.

Interplay between Corporate Governance and Financial Regulation

Blanaid Clarke (Trinity College Dublin) delivered this special talk. Prof. Clarke focused on the distinctive features of funds which result in certain divergences in sustainability. The main obstacle is that the unique fund governance consists of investment managers de facto selecting and appointing members of the fund board, who then find investors. Under this structure, managers have the detailed knowledge and expertise on the risks, and the board wants to maintain the best relationship with the manager by overviewing without micromanaging, but ESG is a risk for which directors are collectively liable. There are still doubts on the materiality requirements, the future application of the CSRD to funds, and the possibility of a purpose different to profits.

Global Chains in the Financial Sector

The third panel was moderated by David Ramos Muñoz (UC3M), and counted with speakers Edgar Loew (Frankfurt School of Finance and Management), Alexia Femia (European Banking Federation), and Seraina Grünewald (Radboud University Nijmegen). Prof. Loew discussed the pillars of financial ESG action, including capital flows into sustainable investments, sustainability in risk management, and disclosure of sustainability factors, and criticised the lack of accuracy of the Green Asset Ratio.

Ms. Femia praised the taxonomy but pointed out that some measures like the Green Asset Ratio might be misleading, for instance if a bank has high exposure to SMEs it will have a worse assessment on that metric, and claimed for higher legal certainty, among others, on the scope of the downstream value chain and the consequences for unintentional greenwashing. Prof. Grünewald explained that ESG investments are not always low risk, and thus there is a tension between prudential requirements and ESG requirements. She further remarked the need to define transition plan obligations and to increase the engagement between banks and their counterparts.

Global Chains, Financial Sector and Litigation

Javier Solana Álvarez (University of Glasgow) delivered this special talk. Prof. Solana outlined the three pillars of sustainability, namely labeling, disclosure, and liability. He focused on liability, and particular on litigation risks and his research on how these can be integrated as financial risks. He demonstrated the trend towards more litigation in this area, for instance under the French duty of vigilance law, and forecasted a further increase with the approval of the CSDD. He also explained several cases on this topic in the financial sector, such as the 2023 cases against BNP Paribas.

Supply Chains and Climate Justice

The fourth and final panel was moderated by Pilar Perales Viscasillas (UC3M), and counted with speakers Joana Setzer (London School of Economics), José Luis Aragón Cardiel (Permanent Court of Arbitration) and Burkhard Hess (University of Vienna). Prof. Setzer pointed out that the trend for increased climate litigation is not always pro-ESG, litigation is also used to prevent or delay climate action. To manage litigation risks she recommended robust due diligence and controls at the board level, and a later incorporation of the legislation requirements into the contractual requirements with suppliers.

Mr. Aragón Cardiel addressed members of the civil society using arbitration as a pro-ESG tool, where there are important challenges of jurisdiction and standing. He analysed the Hague Rules as a model to overcome the specific challenges of these proceedings, and defended the role of the PCA as the preeminent institution for these cases following the experience of Accord Bangladesh arbitration. Prof. Hess revealed inconsistencies between the CSDD proposed civil liability regime and the Brussels I bis rules on jurisdiction, concluding that this type of litigation will likely not have a head of jurisdiction unless the reform of Brussels I bis or an expansive judicial interpretation addresses the issue.

Conclusion

For the researchers on the law of sustainability and supply chain, like me, the conference was highly enlightening as expected given the comprehensive coverage of the topics and the excellent level of the speakers. The additional value of the conference resided on the debates among the speakers, and among the diverse attendees from academia, institutions and private practice.

At the beginning of the conference, Prof. Butler asked how many of the attendees believed supply chains were a “disruptor”, for which current legal rules on sustainability were not sufficient. To end the conference, Prof. Ramos proposed a concept of supply chains as “constructors”: a structure that allows to build on sustainability if devised correctly. Beyond the debate on the convenience of a special regime for supply chains rather than the application of ordinary rules, Prof. Perales rightly noted that a sustainable transition necessarily requires a sustainable supply chain, and to achieve that goal the distinct areas of the law must dialogue and collaborate in surpassing the current challenges.

The conference was generously supported by the Deloitte Legal Chair of Business Law. The conference was further part of Grant PID2020-114549RB-I00, funded by MCIN/AEI/10.13039/ 501100011033, and Grant TED2021-130293B-I00, Climate Change and Sustainable Finance, funded by MCIN/AEI/ 10.13039/501100011033 and by the European Union NextGenerationEU/PRTR.