Q&A on commercial contracts in 2024 and beyond: businesses are looking further than their ESG initiatives to achieve net zero.
This article answers some frequently asked questions. With the current climate change emergency at the forefront of many businesses’ minds, companies are becoming increasingly eager to ensure that they are incorporating net zero ideas and plans into any commercial contracts they are involved with. This means making sure that there are net zero policies and procedures in place, and clearly outlining each party’s responsibilities towards a more sustainable planet, and to help parties achieve any targets they may have set in relation to a more environmentally friendly way of business.
Many businesses are opting to choose greener suppliers when considering their impact on their scope 3 emissions. Businesses have several commercial questions to ask themselves before making any decisions and to ensure that contracts are aligned with any new ESG initiatives:
Does the agreement already contain environmental provisions? A good place to start is to review whether your agreement already contains any environmental provisions. Perhaps you agreed the contract many years ago and the specifics of any environmental-related clauses have long been forgotten during the course of the term of the agreement. It would be prudent to check that you are not in breach of these requirements you did not realise you were meant to comply with. You could risk being sued for breach of contract if the other party pursues you for any environmental provision.
Can I stay with this supplier and ask them to comply with our ESG strategy? A proper look into the contract would need to be taken, especially in respect of whether you have a change control process or a right to vary the contract, or if both parties want to get back to the drawing board and re-agree an environmentally-aligned contract in line with both parties’ ESG strategies. You may consider an open conversation with the other party to come to a decision as to what you both find important in order to move forward.
You may wish to ask the supplier to consider supporting and following any ESG strategies you are proposing. Many suppliers will be aware of the need to support greener initiatives, and as such, will likely be willing to make an effort environmentally. Studies show that in 2021, one in five UK retailers cancelled contracts with suppliers who fell foul of ethical and sustainable standards, to a value of £7.1billion. Statistics such as this are likely to emphasise to suppliers that environmental practices are important to consumers, and as such, they may be more willing to adopt greener practices.
Some suppliers may offer benchmarking, whereby they are ranked against other, similar providers. This means that suppliers will be competing with each other, to ensure that they are offering sensible, worthwhile and adequate ESG initiatives.
What do I need to cover in a contract with a greener supplier? There are a multitude of provisions you can put in a contract to help further your ESG strategy. A few examples include:
- Obligations to procure energy from renewable sources
- Benchmarking mechanisms so you can compare the other party against their competitors in the market by their greenhouse gas emissions-Late payment clauses which allow parties to consider payments that are made either to a “green” cause or an off-setter
- Obligations on the supplier to have, monitor and enforce appropriate policies and procedures
Shall I end this relationship altogether? As always and for whatever reason, if you do want to end your agreement with a supplier it is always better to do so in line within the provisions of the agreement itself. If you wanted to terminate, and do so such that you are not in breach of the agreement, you should be considering points such as any processes in the agreement you would need to follow before being able to terminate, any notice periods and how notices need to be given, as well as any post-termination obligations you and the other party have.
Commercially, you may consider how it would be best to transition your services to another supplier so that there is the least interruption to your business as possible, and conduct due diligence which satisfies you that they are the right supplier for you to further your ESG strategy.
We encourage you to start thinking about net zero and how your contracts line up with your ESG strategy. If you would like to have a conversation about how your business can use climate change clauses in its commercial contracts, please contact our commercial team.
