Climate and Change: Decarbonizing Procurement Contracts

As momentum in favor of Environmental Social and Governance (ESG) issues continue to rise, so does the correlation between societal values and corporate investments. According to a recent Edelman poll of big investors, 52% of respondents said they’d put more trust in a company that linked executive compensation to ESG goals such as comprehensive data privacy policies and fighting global warming. Corporate leaders must take notice as ESG initiatives are increasingly affecting the bottom line. As Lex Suvanto, global managing director of financial communications and capital markets at Edelman put it, “ESG priorities are ‘no longer optional’ for companies as they seek to attract investors and employees.”

ESG initiatives have not only captured the attention of investors but the overarching business world as well. Let’s look at climate change, specifically. A report published in May by CDP, an organization that helps disclose the environmental impact of major corporations, reveals 215 of the world’s biggest companies view climate change as a likely threat to the bottom line within the next five years. In fact, just this week, the Governor of the Bank of England, Mark Carney, stated, “climate breakdown could render investments help by millions of people worthless.”

According to the CDP report, supply chains account for between 50% and 70% of total corporate emissions. Consider that BASF Group says approximately 85% of its emissions originate in the supply chain, and Mondelez International, spun out of Kraft Foods in 2012, estimates that certain emissions represent over 90% of its overall greenhouse footprint. [1]

Contracts are a link in the climate solution

Using contracts as leverage over partner and supplier behavior, procurement and legal departments can be a link in the bridge toward sustainability, particularly because multinationals and their supply chain relationships often extend to jurisdictions that have weak environmental regulations. While regulations are often seen as the primary motivator for responsible corporate action, we are seeing that they are not the only tool available to corporations.

Often considered a blunt instrument for motivating responsible corporate action, regulations are not the only tool available to corporations.

Alignment with transnational public-private initiatives, as well as industrial and corporate codes of conduct, is often embedded in agreements. This extends to M&A due diligence, compliance with voluntary standards and corporate social responsibility provisions, and risk management around sales exposure and obligations.  Organizations need visibility across their contract corpus in order to identify and potentially avoid non-compliance risks and contractual breaches, as well as reputational damage and capital flight by environmentally responsible investors.

A poll of publicly available corporate contracts held by the U.S. Securities and Exchange Commission found that half of them incorporate some kind of environmental requirements, representing about 80% of the total sales in their respective markets.

In a study by Pace University and the Institute of International Commercial Law, nearly 80% of companies now require climate-aware contracts with partners, and close to 70% deem inclusion of sustainability clauses in contracts highly or very important.

Decarbonizing contracts with artificial intelligence

It remains a struggle for negotiators to parse through thousands of contracts, work that is typically done manually by lawyers and specially trained experts in the finance or procurement departments. Technical jargon contained in contracts varies significantly from one document to the next, and their sheer number and diversity of contracts means that sales teams are often overlooking or misunderstanding pivotal decarbonization details buried in text.

Artificial intelligence raises the bar and can be deployed across an entire contract group to identify relevant contractual texts dealing with CO2 and other greenhouse emissions. This may involve identifying procurement contracts with clauses and terms that are missing or require updated climate change provisions or finding and analyzing those that already include private or public regulatory obligations in order to determine if they are in scope. Contract analytics can equip business users with the necessary information regarding climate-change provisions, or identify the lack thereof, allowing companies to update contracts more regularly to align with their ESG priorities and initiatives. Extending current contract analytics use cases to deal with climate change is certainly not a big leap. In fact, the technology and expertise are already in place to do this.

Identifying contract clauses and terms that are sub-optimal, not just for the company but also for humanity, will not solve the climate crisis on its own, but it is a step in the right direction and one that is within our grasp.

To read the extended article featured in Supply Chain Drive, click here.