Demonstrating ESG commitment by revitalising contracts
With the continuing focus on environmental, social, and governance (ESG) issues, companies are being challenged to seek new ways to demonstrate their commitment to ESG principles. One way to demonstrate this is through commercial contract drafting. This involves incorporating ESG considerations into the contracts that your company signs with your suppliers, customers, and other third parties.
Generally, such clauses can apply a metric against which to hold suppliers accountable in connection with set ESG criteria, or to oblige suppliers to disclose their own ESG performance. These clauses can cover a wide remit of ESG related issues, for instance including compliance with the following:
- environmental standards;
- cyber security;
- anti-modern slavery; and
Taking environmental standards as an example, companies can demonstrate their commitment to environmental sustainability by including clauses which require that any electricity purchased for its operations must come from renewable sources such as wind or solar power. Another example is applying similar logic with regard to the sustainability of materials used in manufacturing processes.
Similarly, commercial contract drafting can be used to address governance issues. For example, a carefully drafted provision could require a supplier to maintain certain governance structures, such as an independent board of directors or an audit committee, helping to ensure transparency and accountability.
A key challenge when utilising commercial contract drafting to demonstrate ESG compliance is ensuring that this drafting is not merely a "signal" of a company's commitment to ESG issues. Critics highlight that often this drafting is relegated to the "aspirational" rather than legally binding obligations that courts are able and eager to enforce. This is particularly the case when seeking to rely on non-specific or non-binding contractual provisions which read as an aim instead of an obligation or that may also conflict with other obligations in the contract.
Companies are able to address this challenge by integrating relevant drafting that is both legally binding and consistent with other obligations in the contract. By making such provisions as specific and focused as possible (rather than setting out general aspirations), enforceability risks can be mitigated.
In some circumstances, tailoring the clauses to the relevant supplier can improve the clauses' practicability and achievability, which is likely to also improve their enforceability. For example, a requirement to seek to only rely on certain energy sources will be difficult for some suppliers to comply with both practically and financially, and difficult to enforce. Setting actual measured metrics which must be reported on and working collaboratively with suppliers is much more likely to result in a measurable, enforceable obligation where the parties are working together to work better.
In conclusion, commercial contract drafting offers an accessible avenue for companies to demonstrate their commitment to ESG issues. By incorporating relevant drafting in your commercial agreements, you can differentiate your company from your competitors, manage your ESG risks, and align yourself with your customers and business partners who share your values. However, ESG clauses must be legally binding, specific, and practical to be effective.