Non-Financial Reporting and the Model Contract Clauses, Version 2.0

13 Min Read By: Susan A. Maslow

The requirement of non-financial reporting. Financial market regulators and stock exchanges across the world have issued guidance and/or requirements on non-financial reporting for listed companies.  An increasing number of jurisdictions, however, are changing non-financial reporting from a voluntary element of CSR to a legal requirement, often with extra-territorial reach. Non-financial reporting is a company’s formal disclosure of certain information not traditionally related to finances, including environmental, social and governance (ESG) factors. Such reporting elevates Corporate Social Responsibility (CSR) and sustainability to the next level.  The resultant transparency is intended to help organizations, investors and other stakeholders identify and measure the biggest non-financial challenges facing business today: climate change, diversity, equity and inclusion, and human rights impacts. 

Given the different regulatory regimes across the globe governing ESG disclosure[i] and discrepancy within industry norms, companies that previously enjoyed a degree of latitude in the context of non-financial reporting are under increasing pressure.  Companies are now expected to gather accurate data to ensure that their disclosures in non-financial reports are comprehensive and reliable.  Banks and investors alike are looking for company-specific information that identifies impacts, risks and opportunities within ESG categories. On January 19, 2021, together with the Principles for Responsible Investment (PRI), the European Leveraged Finance Association (ELFA) and the London-based Loan Market Association (LMA) jointly published a Guide for Company Advisers on ESG Disclosure in Leveraged Finance Transactions (Guide).  The Guide addresses considerations for including ESG-specific contractual obligations in documentation such as credit agreements.  Such provisions would require quarterly and/or annual reporting with respect to ESG factors, ESG-compliance certificates, and third party verification (optional). As ESG metrics become more prevalent, the Guide anticipates covenant protections may be elaborated to refer to pre-determined performance thresholds or metrics, akin to a financial covenant.[ii]  And a series of recent announcements by the U.S. Securities and Exchange Commission (SEC) underscores the agency’s commitment – and allocation of resources – to a heightened focus on ESG disclosures and related litigation.[iii]

More importantly, ESG issues are increasingly recognized as yet another aspect of corporate risk management included in expected financial reporting.  As more ESG issues are rightly included in regulatory and financial reporting requirements, companies will be expected to provide specific data rather than broad statements and assurances with respect to their policies. 

How MCCs 2.0 can help. The ABA Business Law Section’s UCC Committee Working Group to Draft Model Contract Clauses to Protect Human Rights in International Supply Chains (Working Group) recently published its 2021 Report and Model Contract Clauses (MCCs) for International Supply Chains, Version 2.0 which can be found here.  The Working Group’s 2021 Report and the MCCs Version 2.0 are the culmination of more than four years’ research and consultation with international companies, trade associations, NGOs and civil societies.  The MCCs offer modular terms companies can use in contracting and operational practice, and can significantly assist companies with complex international supply chains in satisfying non-financial reporting obligations.  The MCCs can help a company accurately “tell its ESG story.”[iv]

Section 1.1(b) of the MCCs Version 2.0 requires timely sharing throughout the supply chain of all relevant information relating to human rights threats in the supply chain by providing:

“[Buyer and Supplier each] [Supplier] shall and shall cause each of its [shareholders/partners, officers, directors, employees,] agents and all subcontractors, consultants and any other person providing staffing for Goods or services required by this Agreement (collectively, such party’s “Representatives”) to disclose information on all matters relevant to the human rights due diligence process in a timely and accurate fashion to [the other party] [Buyer].” (Emphasis added)

Section 1.4 requires the creation of a functioning grievance mechanism and self-reporting cooperation with regular reports as to OLGM use and success as follows:

“Operational-Level Grievance Mechanism. During the term of this Agreement, Supplier shall maintain an adequately funded and governed non-judicial Operational Level Grievance Mechanism (“OLGM”) in order to effectively address, prevent, and remedy any adverse human rights impacts that may occur in connection with this Agreement. Supplier shall ensure that the OLGM is legitimate, accessible, predictable, equitable, transparent, rights-compatible, a source of continuous learning, and based on engagement and dialogue with affected stakeholders, including workers. Supplier shall maintain open channels of communication with those individuals or groups of stakeholders that are likely to be adversely impacted by potential or actual human rights violations so that the occurrence or likelihood of adverse impacts may be reported without fear of retaliation.  Supplier shall demonstrate that the OLGM is functioning by providing [monthly] [quarterly] [semi-annual] written reports to Buyer on the OLGM’s activities, describing, at a minimum, the number of grievances received and processed over the reporting period, documentary evidence of consultations with affected stakeholders, and all actions taken to address such grievances.” (Emphasis added)

Section 1.4 is immediately followed by Article 2, which addresses remediating adverse human rights impacts linked to contractual activity. Section 2.1(a) requires Supplier to prepare and provide a detailed summary of the human rights threat and how it was addressed stating:

“Within _____days of (i) Supplier having reason to believe there is any potential or actual violation of Schedule P (a “Schedule P Breach”), or (ii) receipt of any oral or written notice of any potential or actual Schedule P Breach, Supplier shall provide to Buyer a detailed summary of (1) the factual circumstances surrounding such violation; (2) the specific provisions of Schedule P implicated; (3) the investigation and remediation that has been conducted and/or that is planned as informed by implementation of the OLGM process set forth in Section 1.4; and (4) support for Supplier’s determination that the investigation and remediation has been or will be effective, adequate, and proportionate to the violation.” (Emphasis added)

To ensure the contractually required sharing of all relevant information relating to a discovered human rights abuse or likely abuse without vulnerability to the argument that there has been a waiver of the attorney-client privilege or other barrier to a defense in the event of a dispute, Section 2.2(b) addresses the parties’ respective concerns with the following text:

Each party shall provide the other with a report on the results of any investigation carried out under this Section; provided that any such cooperation in the investigation does not require Buyer or Supplier to waive attorney-client privilege, nor does it limit the defenses Supplier or Buyer may raise.” (Emphasis added)

And, turning to the implementation of a specific remediation plan, Section 2.3(d) insists upon proof of execution and stakeholder satisfaction by noting:

Supplier shall provide [reasonably satisfactory] evidence to Buyer of the implementation of the Remediation Plan and shall demonstrate that participating affected stakeholders and/or their representatives are being regularly consulted. Before the Remediation Plan can be deemed fully implemented, evidence shall be provided to show that affected stakeholders and/or their representatives have participated in determining that the Remediation Plan has met the standards developed under this Section.” (Emphasis added)

MCCs 2.0 are a practical, business-minded tool to meet legal and financial obligations and replace outmoded “check the box” routines.  MCCs 2.0 are not another guide to nonfinancial ESG reporting.[v]  They are instead a practical tool for gathering essential information at every tier of the supply chain.  This information is crucial to any board committed to satisfying its active oversight and subsequent monitoring obligations under In re Caremark International, Inc. Derivative Litigation[vi] and its progeny.[vii]  Data collected as a result of regular enforcement of the MCCs would also be sufficient to complete a questionnaire presented by a governmental unit, regulatory agency, stock exchange, fund manager, or lending source that is insisting on greater ESG transparency.

In the current risk landscape, contract provisions that continue to focus only on supplier representations and warranties with respect to the absence of human rights abuses such as forced labor, child labor and dangerous working conditions are simply insufficient to address human rights impacts in a company’s supply chain.  It is important to operate with the assumption that the chain is vulnerable to human rights abuse compromises which make the representations and warranties ineffective if not meaningless the moment a supply contract including such empty promises is signed.  It is essential that we change the focus of supply chain contract provisions to assess, clearly identify and address human rights abuses upon detection and add provisions that allow buyers and suppliers to acquire accurate data for required ESG disclosures.  Take a look; the MCCs Version 2.0 can help.   

[i] Recent examples of instruments include the Nasdaq Reporting Guide 2.0 ( -Guide.pdf) (2019), the B3 State-Owned Enterprises Governance Program ( (2017) and the Singapore Stock Exchange Listing Rules ( (2016) which requires every listed issuer to prepare an annual sustainability report on a “comply or explain” basis.    For example, EU Directive 2014/95/EU ( set out rules on disclosure of non-financial and diversity information from large businesses with more than 500 employees. Covered companies must publish reports on the policies they implement in relation to environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, and diversity on company boards. In June 2017, the European Commission published its guidelines to help business with this information ( but, under Directive 2014/95/EU businesses are given significant flexibility to disclose relevant information in the way they consider most useful using international, European or national frameworks to produce their statements.  They can reply on the UN Global Compact (, the UN Guiding Principles on Business and Human Rights (, or the OECD Guidelines for Multinational Enterprises (  Draft Directive (EU) 2021/338 of the European Parliament and of the Council of 16 February 2021 (EU 2021) intends to amend Directive 2014/65/EU as regards information requirements, product governance and position limits, and also contemplates revisions to Directives 2013/36/EU and (EU) 2019/878 as regards their application to investment firms.  Another example is the French Duty of Vigilance Law (2017), applicable to certain large French businesses headquartered in and outside France, which requires the development, implementation and publication of annual vigilance plans detailing the steps taken or to be taken to detect human rights risks and prevent serious violation, the health and safety of persons and the environment resulting from the activities of the business, its subsidiaries, suppliers and subcontractors.

[ii] See OECD Guidance on Due Diligence for Responsible Corporate Lending and Securities Underwriting and the Dutch Banking Sector Agreement, both of which involve a multi-stakeholder approach including banks, CSOs and governments.  In December 2019, GLS Bank and Pax-Bank called for a legal duty of care for human rights and the environment.  In February 2020, the New York-based Loan Syndications and Trading Association (LSTA) published a template ESG Diligence Questionnaire applicable to borrowers across all industries to facilitate due diligence reviews of the ESG profile of borrowers.  In April 2020, a statement, led by the Investor Alliance for Human Rights and signed by 105 international investors representing over US $5 trillion in assets under management called on governments to require companies to conduct human rights due diligence and, during the UN Forum in November 2020, BMO Asset Management explicitly supported mandatory human rights due diligence during a panel on the topic.    See the BankTrack Human Rights Benchmark ( which evaluates 50 of the largest private sector commercial banks globally against a set of 14 criteria based on the requirements of the UN Guiding Principles by looking at four aspects of banks’ implementation of the Guiding Principles: their policy commitment, human rights due diligence (HRDD) process, reporting on human rights and their approach to access to remedy.  For investors, there are resources which attempt to quantify the social and environmental factors that can contribute to the value of the investment but are not included in its financial reports such as the ESG Index and the Israeli Maala Index.  The Corporate Human Rights Benchmark ( is an investor-backed initiative which assesses 101 of the largest publically traded companies in the world on 100 human rights indicators including transparency.

[iii] In the United States, the standard for disclosure in financial reports is “materiality” as defined by the United States Supreme Court and the SEC.  This definition is based on what is deemed to be likely to significantly affect the total mix of information a reasonable investor considers in making an investment decision.  While ESG considerations are not currently required to be part of US public companies’ financial statements, the SEC requires companies to include non-financial information and metrics in their regulatory filings, effective for the upcoming proxy season in 2021.  Stepping up its focus on ESG reporting, the SEC announced on March 4, 2021 the creation of a Climate and ESG Task Force in the Division of Enforcement ( which will focus on identifying “material gaps or misstatements in issuers ‘disclosure of climate risks under existing rules,” examining “disclosure and compliance issues related to investment advisers’ and funds’ ESG strategies,” and evaluating whistleblower complaints related to ESG issues.  The previous day, on March 3, 2021, the SEC’s Division of Examinations announced its 2021 examination priorities with enhanced “focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors ‘best interest and expectations,’” noting that investment advisors are “increasingly offering investment strategies that focus on ESG factors” (

[iv] Proper implementation of the MCCs would also assist a company responding to a Customs and Border Protection investigation which might otherwise result in a Withhold Release Order and provide for the regular collection of data as indicia of satisfaction of mandatory human rights due diligence very likely to be soon imposed by Germany and EU 2021.  

[v] See the UN Guiding Principles Reporting Framework ( developed by Shift and Mazars, a tool to assist businesses in reporting on how they respect human rights; the GRI Sustainability Reporting Standards (GRI Standards) (, which provides a framework for businesses to report on the broad spectrum of sustainability issues, including human rights ( human-rights-related-gri-standards/); the International Integrated Reporting Framework, which aims at encouraging better corporate reporting, taking into account financial and non-financial performance; and the UN Global Compact Communication on Progress (

[vi] 698 A.2d 959 (Del. Ch. 1996) finding that the directors violated their fiduciary duties when the corporation’s information and reporting system in concept and design is “adequate to assure the board that appropriate information will come to its attention in a timely manner as a matter of ordinary operations…”  Id. at 970.

[vii] See, Stone v. Ritter, 911 A.2d 362 (Del. 2006) and Caremark at the Quarter-Century Watershed: Modern-Day Compliance Realities Frame Corporate Directors’ Duty of Good Faith Oversight, Providing New Dynamics for Respecting Chancellor Allen’s 1996 Caremark Landmark, E. Norman Veasey and Randy J. Holland, The Business Lawyer, Winter 2020-2021, Vol. 76, Issue 1, page 1.

By: Susan A. Maslow


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