ESG in Commercial Contracts – How to Get Started

26th October, 2022 by Miles Barnes

With the UK government setting a net zero target by 2050 for the reduction of greenhouse gases, imposed environmental reporting requirements on large corporations, and the European Commission’s proposed directive on corporate sustainability due diligence, companies are coming under increasing pressure to start addressing environmental, social and governance (ESG) issues.

Incorporating ESG considerations into your business' contracts can have many benefits including regulatory compliance, improving customer relationships with others who have environmental targets they intend to achieve and the wider reputational benefits that come with being seen as a socially conscious business.

ESG can be a daunting area for those trying to tackle it for the first time, so we’ve set out below some easy ways to start incorporating ESG consideration into your commercial contracts:

Electronic Signatures – An easy win before you even get to the content of your contracts. Electronic signatures are quickly becoming the default method of signing all legal contracts and documents in business. As well as being environmentally friendly (that saved paper adds up quickly!), they also tend to be quicker and much easier to complete (reducing the risk of unsigned contracts or lost paperwork). If you’re not already using electronic signatures as your default, we strongly recommend looking into the options available.
Green KPIs/Metrics – Rather than just going straight to the standard “comply with our policies” wording which is often unpopular and, in many cases, completely unrealistic, why not try to come up with some specific KPIs or metrics that you ask your customers and suppliers to comply with. For example, if your products come with a lot of packaging, how much of the packaging can be made out of recyclable materials. As well as actually being measurable, such KPIs are easier to justify in negotiations and are a great way to demonstrate your ESG credentials to directors, shareholders, investors and the wider public.
Green Interest Remedies – If you want to get a bit more adventurous, you could try to incorporate green interest remedies. These are where payments are made either to a “green” cause, or an off-setter to offset any climate harm that may be being caused by the contract. These clauses are especially useful in contracts involving significant travel or shipping of products, where carbon offsets can be clearly calculated.
Climate-Friendly Governing Law – If you do a lot of cross-border international contracts, you might want to consider a climate friendly governing law clause. These usually say that any governing law that applies to the contract must be interpreted in a manner consistent with the objectives of the Paris Climate Agreement. By incorporating a clause like this it will still allow you to have the flexibility to choose what governing law is used to resolve disputes, whilst always ensuring whatever law applies is consistent with the requirements of international climate requirements.

These suggestions just provide a taster of some of the options available to start applying ESG considerations into your commercial contracts. They can all be incorporated into most standard commercial contract processes with little controversy.

Whilst there is an increased appetite for ESG investments and this is being matched with public policy and regulatory developments, it will take time to see these changes regularly reflected in day to day trading contracts. However, as the above examples show it’s not as complicated as you might think to start applying ESG standards to your contracts and it is well-worth doing for a host of legal, business and social reasons.

If you’d like to know more about ESG issues and how to better incorporate them into your business and commercial contracts, Howes Percival’s Commercial team are running a webinar talking through some of the current ESG trends and issues on 15th November 2022 - find out more and register here.

The information on this site about legal matters is provided as a general guide only. Although we try to ensure that all of the information on this site is accurate and up to date, this cannot be guaranteed. The information on this site should not be relied upon or construed as constituting legal advice and Howes Percival LLP disclaims liability in relation to its use. You should seek appropriate legal advice before taking or refraining from taking any action.

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