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Increasingly, environmental, social and governance (ESG) factors are dominating corporate agendas, forcing companies to view their business strategies, investments and business models through the lens of ESG metrics. These ESG metrics are often defining reasons as to why an investor chooses to buy shares, why a consumer chooses to purchase a product, or why leaders choose to do business with one another.
There are a number of ways in which a company can incorporate ESG metrics into their operations, whether this be by ensuring diversity on the board, having a clear energy policy or auditing their supply chain. However, the purpose of this article will be to look at how companies can implement ESG metrics into their commercial contracts to ensure that their supply chains and partners can enable them to achieve their targets.
Every organisation is impacted by the agreements it makes with vendors, suppliers, landlords, partners, merged and acquired businesses, and so on. The first place to improve an organisation’s evaluation against ESG metrics is to ensure that those metrics are reflected within their commercial contracts. The importance of implementing these ESG metrics into commercial contracts was recognised by The Chancery Lane Project (TCLP), which is a collaborative project involving lawyers with expertise across a range of sectors and industries. Through a series of working groups, TCLP have developed a number of clauses that can be implemented into certain contracts and legal documents. Details of the relevant agreements and clauses are set out below:
|Shareholder Agreements||A clause which requires shareholder to support climate change mitigation strategies and achieve climate change goals, the outcome of which may be directly linked to dividend payments.|
|Employment Contracts||A clause which requires an employer to provide, and the employee to participate in, ESG training sessions.|
|Non-Disclosure Agreements||A clause which requires the parties to consider how climate change mitigation can be achieved as part of any future commercial relationship.|
|Commercial Leases||A clause that requires the landlord to act reasonably and not delay its consent if a tenant propose alterations that will improve the environmental performance of the premises, the building or the wider development.|
|Residential Leases||Covenants for inclusion in a lease that require the tenant to occupy the property in an energy efficient manner. This could also include a number of specific green tenant covenants including the use of sustainable materials and 100% renewable electricity, recycling, composting, heating, and ongoing compliance with regulations relating to the environmental performance of the property.|
|Supply Agreements||A clause to enable a customer to terminate a supply agreement if it wants to engage an alternative supplier to achieve a reduction in its carbon footprint or emissions or if the supplier’s environmental practices bring into disrepute the customers reputation.|
|Construction Agreements||A clause that contains contractual obligations in respect of material usage, and waste management procedures to ensure emissions and material wastage are minimised.|
The importance of these clauses cannot be overstated. Similar clauses are also increasingly common in loan facilities, joint-venture agreements and in M&A transactions. By virtue of implementing such clauses into commercial contracts, companies are documenting and taking proactive steps towards conducting their business in a sustainable and ethical manner. Ensuring contractual obligations address a company’s commitment to ESG standards will allow these companies to position themselves as progressive market leaders among employees and customers.
This article has been produced for general information purposes and further advice should be sought from a professional advisor.
This article was co-authored by Trainee Solicitor, James Greene.