Contract

Formalise sustainability expectations

Once a supplier is selected you can begin formalising sustainability expectations in the contract. This process involves translating the technical specifications and award criteria from your tender documents into contract clauses and conditions. These clauses and conditions may apply to, product end-of-life management responsibilities, data sharing, and disclosure requirements.^{1, 2}

Consider also making use of performance-based sustainability clauses based on measurable outcomes and associated KPIs. Performance incentives can include, supportive price adjustments, gain share payments, contract extensions, favourable payment terms, or flexible timelines.

EXAMPLE: Vodafone and CDP's finance framework encourages suppliers to reduce carbon emissions³

Vodafone and CDP created a framework offering preferential financing rates to suppliers to reduce carbon emissions. Suppliers' environmental performance determines their financing rates. Initially available to Vodafone's suppliers via Citi, the initiative aims to reduce carbon emissions and contribute to Vodafone's Scope 3 emissions targets. This model is expected to expand industry-wide.

EXAMPLE: Gain-Share Incentive for Reducing GHG Emissions⁴

Jess & Rory's Clause is template contract clause designed to encourage a counterparty to reduce greenhouse gas (GHG) emissions using gainsharing to reward performance. In this case supplier's that exceed the emissions reduction target are paid a percentage of the value of the goods or services provided.

Specify reporting requirements

If not already outlined in the RFx, establish reporting requirements in the contract to ensure that the supplier is providing regular updates on their sustainability performance.

Conditions can include regular sustainability reports or other relevant documentation. Make sure to define the frequency, format, and structure of the sustainability reports, including any specific metrics or standards that must be used. And clearly outline what data that must be collected and reported on for each sustainability performance indicator. You can also include methods for verifying the sustainability reports' accuracy and completeness, such as third-party audits or certifications.

Specify liabilities related to sustainability risk

Draw attention to sustainability risks by specifying relevant liabilities in the contract terms or using shared-risk contracts. For example, for climate change, these risks could be related to physical risks, such as flooding, heatwaves, and fires; or transition risks, such as regulatory changes and shifting markets, or termination of the agreement in the event of non-compliance.

Ensure the enforceability of your desired sustainability outcomes

Ensure desired outcomes are achieved by developing enforceable agreements and contracts. This requires defining corrective and remedial actions for non-compliance and enforcing them through contract provisions. You also need to ensure that the appropriate resources will be available to support and monitor performance outlined by the sustainability clauses. It may be helpful to bring together relevant advisors from other departments, such as legal and sustainability, to help inform compliance planning.

EXAMPLE: Telecom company adding emissions reduction clause to supplier contracts

In its effort to meet its supply chain emissions targets, BT Group introduced a climate clause for suppliers which commits them to make measurable carbon reductions across their value chain during the contract term. The clause started out as voluntary but became mandatory.⁵ The financial benefits of energy savings have helped the idea gain traction and it is now embedded in contracts with several key suppliers.⁶

EXAMPLE: BMW environmental and social purchasing conditions

Over 95% of BMW Group’s supplier contracts contain clauses relating to the company’s sustainability requirements. For instance, UK purchasing conditions include clause 29 on environment (REACH compliance) and clause 30 on social responsibility (International Labour Organisation (ILO) principles).⁷

EXAMPLE: Disney requires pre-authorisation of all potential subcontractors

Disney’s International Labor Standards (ILS) program requires that contracts with independent licensees and vendors’ facilities and subcontractors that manufacture products or components incorporating Disney-branded products must be declared to Disney and receive prior authorisation to manufacture.^{8, 9}