Governance Through Contract and the Environmental Impact of Supply ChainssStill Waiting for a Rana Plazaa Moment of Global Recognition

Abstract

Most recent focus on supply chain governance mechanisms has been on contractually organized supply chains from business (e.g. cost management or R&D) or labor perspectives. Relatively little focus has been on the governance of environmental contingencies in contractually organized supply chains. In this paper I argue that recent developments in contractual governance mechanisms, such as the Accord on Fire and Construction Safety in Bangladesh, would provide functional examples for implementing effective supply chain wide governance in relation to environmental contingencies such as scope 3 emissions. A key requirement of any effective governance mechanism is representation. In business to business contexts, such as supply chain wide cost management or R&D, supply chain companies would have an interest in participating in any governance mechanism. In labor context, labor representatives ditto. With such contractual representation, a key additional motivating factor for effective governance is that it may allow lead firms to use contractual governance mechanisms not only to extend effective governance but also to control the liabilities potentially arising out of this extended governance. Without such control, the added governance may translate to major tortious liabilities that are not easily mitigated. However, in environmental contexts the question of representation is more challenging. Environmental NGOs and other similar actors could be seen as potential representatives that increase the legitimacy of environmental governance through their participation as parties to governance contracts. However, they typically do not have power to bind environmental interests in a way that would allow lead firms to control any environmental liabilities arising out of their governance efforts. While this may be offset by the current challenges of tort litigation in relation to scope 3 emissions, the situation is bound to change with the development of climate tort litigation. The question then becomes to what extent the increased legitimacy derived from incorporating NGOs or other actors representing environmental interests can be used to counter the increased liabilities arising from supply chain wide governance of scope 3 emissions, or whether other factors, such as positive image effects or regulatory requirements could offset any new liabilities. In sum, the effective governance of environmental contingencies, in particular scope 3 emissions, is very much possible in global supply chains following recent developments in contractual governance mechanisms. Involving actors such as environmental NGOs as parties in contractual governance mechanisms might help in this regard. From a lead firm perspective, the key challenge is balancing the liabilities potentially ensuing from such governance in a way that makes the implementation of effective governance attractive.