Commercial contracts: in 2022 and beyond businesses are looking further than their ESG initiatives to achieve net zero.

In the wake of COP26 and the ever-heightening consciousness of the economy as it faces the climate change emergency, businesses are looking to implement their net zero plans into the drafting of their commercial contracts to make sure that the businesses they are engaging with can help their business achieve their targets.

The benefits of this are paramount: you achieve your net zero targets and by having specific protections in your contract you ensure that the shared responsibility you have for the planet is reflected in your relationships with others. A big part of ESG and net zero economy is ensuring that those you work with, whether that be suppliers, clients, strategic partners are doing their bit for the environment.

Ensuring that your goals and targets are aligned with those you do business with can be achieved in a number of ways:

1. Due diligence – checking which systems and processes are in place

2. Ongoing monitoring – checking that those systems and processes are being followed and adhered to

3. Contractual drafting – ensuring appropriate obligations are flowed down to the relevant parties to ensure they are abiding by the requirements.

Set out below is a brief overview of some of the protections which you might want to include in your commercial contracts:

• A general obligation to have policies, procedures in place and to follow them in order to work towards net zero.
• Renewable energy requirements in supply contracts – this is a clause which requires the supplier to procure energy from renewable sources and could help to meet funder, customer or government procurement requirements and help achieve net zero targets
• Benchmarking mechanism which allows you to start a benchmarking exercise which benchmarks the contractor against their competitors in the market by their greenhouse gas emissions
• ‘Coolerplate’ clauses which are boilerplate clauses linked to climate issues and your net zero targets and allow your climate initiatives to flow down into the contract management and the commercial lifestyle.
• Creative late payment clauses which allow parties to consider payments are made either to a “green” cause or an off-setter.
• Usually a governing law clause is used to ensure that parties construe a contract in a particular law. A ‘Green’ governing law clause could be used to require that the contract is interpreted in a manner consistent with the objectives of the UNFCCC and the Paris Agreement (the Paris Agreement is a legally binding international treaty on climate change adopted by 196 parties at the COP21 in Paris in 2015).
• Termination rights – you may wish to include a right to extract yourself from thr relationship if the environmental requirements are not being adhered to.

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 get in touch with the commercial team at Herrington Carmichael.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to your own particular matter before action is taken.