ESG considerations and your supply chain commercial contracts – working to Net Zero

In June 2019 the UK Government committed to reach Net Zero greenhouse gas emissions by 2050. To assist in achieving this aim, reporting requirements of large or listed companies were expanded to include sustainability matters.

This briefing looks at the increasing importance of incorporating environmental, social and governance (ESG) considerations in supply chain contracts with a particular focus on Net Zero following the publication of the BEIS Net Zero Review on 13 January 2023. The Review emphasises the need for the UK to go further and faster to reach Net Zero and recognises the need to seek to realise economic benefits of Net Zero.

Industry specific standards and initiatives continue to put decarbonisation on the agenda for entities which may not fall within the current reporting requirements referred to above, for example:

  • Providers of social housing are required by the Neighbourhood and Community Standard to “co-operate with relevant partners to help promote social, environmental and economic wellbeing”. In addition, the NHF model Code of Governance requires that boards give “specific consideration in setting such plans to value for money, financial sustainability, carbon neutrality and environmental sustainability, and social sustainability”.
  • The Financial Conduct Authority has published its consultation on the proposed Sustainability Disclosure Requirements (due to close on 25 January 2023) which, once in force, are expected to impact all FCA regulated firms. This includes matters such as sustainability labelling and pre-contractual sustainability disclosure requirements.
  • The UK Government has expressly recognised the role of the construction industry in achieving Net Zero. For example, in its response to the Environmental Audit Committee’s report “Building to net zero: costing carbon in construction” it acknowledged the need for the construction industry to improve their reporting on embodied carbon in buildings and confirmed an intention to explore the potential of a maximum embodied carbon level for new buildings in the future. The Carbon Emissions (Buildings) Bill (currently progressing through Parliament) would, if passed, require the whole-life carbon emissions of buildings to be reported and set a limit on embodied carbon emissions during the construction of buildings.

These policies and requirements have resulted in an increased importance being placed on the incorporation of sustainability / environmental considerations in supply chain contracts. There is also growing pressure from clients, customers, and investors for entities to consider their degree of social / environmental accountability.

A supply chain can provide a unique set of challenges when seeking to ensure ESG considerations are sufficiently reflected as each of the contracts involved may not appear to relate to such concerns. Additionally, suppliers may resist addressing sustainability matters in a contractually binding manner and/or seek to increase costs as a result of doing so. It is important to be aware of any commitments set out in your constitutional documents and policies and the potential consequences of any failures to comply with these commitments.

Any new commercial contracts should be reviewed in light of your ESG requirements. In addition, parties may wish to consider whether an assessment of existing contracts is necessary with a view to incorporating ESG friendly terms and conditions. Terms could include carbon monitoring and reporting obligations, setting carbon / Net Zero targets for your supply chain on a back-to-back basis, agreeing a Net Zero standard for all suppliers, or inserting a commitment to use renewable energy for all energy requirements. The use of specific green KPIs, metrics or benchmarking can ensure customers and suppliers make environmentally conscious decisions, for example surrounding the use and sourcing of materials.

When entering into / reviewing your commercial contracts, it is important to reflect on how you wish to tailor your response to the changing climate and consider making commitments in areas you can control. As a business you may wish to assess how these obligations will be monitored, and whether any of your policies and procedures could be updated.

If you require any further advice or would like to discuss how this may impact your organisation, please contact Jonathan Jarvis, Kris Kelliher, Joanna Bouloux or Shamila Atta.

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