ESG describes responsible corporate behaviour that aims to contribute to sustainable development while meeting legal requirements.
ESG criteria can be used to evaluate states, companies or financial product providers with regard to the three aspects of the environment (e.g. resource and species protection), social issues (e.g. working conditions and safety) and corporate governance (e.g. protection against exploitation or corruption). The implementation of ESG criteria is usually measured by sustainability rating agencies, which make the sustainability standards comparable with the help of various key figure systems (e.g. ESG score).
ESG is also playing an increasingly important role in the franchise industry, as investors, consumers and regulatory authorities are paying more attention to sustainability and ethical management.
Example of sustainability in the Food & Beverage (F&B) franchise KFC and Burger King:
As a company with international operations, KFC has also set itself the goal of improving the way it rears chickens. That is why KFC franchisees have signed the Better Chicken Commitment (BCC). This commitment aims to significantly improve the lives of chickens by 2026. It includes six criteria: More space in coops, increased investment in a more animal-friendly environment (e.g. exposure to natural daylight) and a commitment to breeding only chicken breeds that grow more slowly. KFC hopes that this will raise standards across the industry. Burger King is taking a similar approach with its plant-based products. The term ‘plant-based’ refers to products that are ideally regional or seasonal and undergo as little processing as possible: healthy eating that conserves resources. This form of nutrition also plays an important role for Burger King. These companies are positioning themselves as pioneers in the system catering industry. Conflicts between franchisors and franchisees often arise in this context at the interface between system specifications regarding the purchase and use of food and products and the range offered in the respective jurisdictions.
Another example is the German Supply Chain Act (Lieferkettengesetz (LkSG)): the LkSG serves to ensure compliance with human rights and sustainability efforts in the corporate sector and is thus a result of ESG. The law requires a human rights and environmental compliance organisation and corresponding risk analyses. According to the LkSG, violating such due diligence obligations will result in heavy fines. In the franchise industry, there are points of friction between franchisors and franchisees in various areas.
On the one hand, there are problems regarding possible liability scenarios for circumstances that cannot be influenced by the companies. The stated aim of the law is to implement human rights standards and ensure basic ecological and social minimum standards. Many of the due diligence requirements laid down in the Supply Chain Act are – if they are to be pursued sustainably – beyond the control of smaller companies in particular and can only be influenced indirectly by third parties.
The complexity of supply chains in franchise systems can also lead to disputes. The tasks assigned to companies under the Supply Chain Act impose on them the obligation to monitor global supply chains at all supplier levels. Adherence to the standards requires precise knowledge of the local circumstances. The complexity of reality therefore sets limits to legislative measures. In practice, companies make use of NGOs and testing organisations (including TÜV Süd, international consulting firms) that offer testing and certification services.
Recognising these problems and developing solutions presents challenges for franchise companies and harbours potential for dispute:
The implementation of ESG standards is often complex and demanding, which is why it poses some challenges for the franchisor:
In this context, the question also arises as to how a franchisor can ensure that its franchisees comply with its ESG standards.
One solution is to explicitly include the ESG standards in the franchise manual (as part of the franchise agreement) in order to legally oblige the franchisee to comply. In addition, regular training and further education should be offered to the franchisees, which should lead to a harmonisation of the standards. Audits should be introduced for monitoring purposes and, as far as possible, a central procurement strategy should be developed by the franchisor.
Jiri Jaeger