National laws and regulations have been the focus of ESG as a compliance mandate, especially given the spate of new legislation in the EU and US. Some of those are in limbo due to policy negotiations or lawsuits – leaving ESG professionals and advisors wondering if the importance of their work has weakened. Like it or not, many companies consider ESG a compliance function rather than an opportunity to manage risks and develop new business opportunities.
Yet even in light of regulatory uncertainty, ESG still holds a place in corporate compliance – although that is much less talked about. It might surprise some people that climate, human rights, environmental management, DEI and other ESG topics are frequently embedded in contract terms between customers and suppliers and in Purchase Order (PO) conditions. Business partnership arrangements (such as joint ventures) may also impose ESG performance goals and metrics on the parties. Additionally, banks have increasingly added ESG terms in loan covenants (while those are generally in sustainability or green instruments, that isn’t exclusively the case).
Frequently, these contractual requirements refer (or defer) to supplier codes of conduct or similar internal management practices rather than calling out ESG mandates or targets specifically. If you haven’t checked the ESG-related contract terms, PO conditions, supplier codes of conduct and similar obligations your company places on business partners, it would be worth doing. It is possible they are outdated, no longer applicable or perhaps it is apparent they are not achievable (e.g., timing of net zero goals). Likewise, you should check what contractual ESG obligations others have placed on your company through the same legal instruments. Hopefully, you won’t find any surprises.
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