How to integrate ESG standards into your contract management

Sustainability and ESG have long since ceased to be trends that companies should merely pay attention to. Rather, corporations and companies should orient themselves to the three ESG sustainability dimensions of environment, social affairs and corporate governance. Those who pursue a clear sustainability strategy sharpen their brand core and can thus distinguish themselves from competitors.

However, as sustainability initiatives often remain mere pronouncements or announcements, the issue of contract design comes into focus in this context. Contracts can set out binding ESG targets and agreements with suppliers and customers. Our white paper "Accountability for Sustainability: Weaving ESG into the Fabric of Contract Management" highlights this topic and shows possible solutions and approaches how companies can link ESG strategies with contract lifecycle management (CLM) systems. The white paper clearly shows that digital and holistic contract management is essential in operationalising an ESG strategy.

By digitising contract management, companies save costs and time in processing their contracts and benefit from positive side effects such as the reduction of paper waste, which helps to achieve ESG standards faster. The only way to achieve holistic and digital contract management is to have a sufficient database. It is necessary to be able to develop, structure and prepare ESG goals.

The white paper shows that incorporating ESG standards into contracts and CLM processes along the supply chain is necessary to reduce the level of risk and increase the resilience of the whole process. With defined and contracted standards, a certain level of quality in the supply chain can be ensured, which also helps to justify the higher prices in the market due to the cost of ESG investments. And clear ESG standards make sense as they save costs by increasing efficiency in the supply chain through investments in recycling methods and waste prevention. In addition, contractual assurances of ESG compliance provide better protection against reputational damage in the event of non-compliance by third parties. By improving ESG standards, companies can achieve an image improvement that leads to higher satisfaction among employees and makes the company a more attractive employer.

We show how companies can succeed in integrating ESG into contract management using four development stages.

Digitising contracts makes it easier for you to audit suppliers and terminate contracts if ESG guidelines are breached. It also allows you to create dashboards of missing clauses. This allows you to identify gaps in contracts more quickly and reduce risks faster.

Start by addressing the deficiencies you identified in stage 1. This can be done, for example, by sending supplementary contracts with adapted ESG specifications to suppliers. It can also be useful to review contracts when they are about to be renewed.

Once the remediation and troubleshooting of existing contracts is complete, you can start including ESG provisions in new contracts. This will ensure that the templates for all contracts contain ESG clauses.

Often ESG is still purely a boardroom issue. However, it is important to understand it as a company-wide commitment. This includes all departments, from risk and compliance to legal, purchasing, human resources, supplier management and IT. This also helps to build trust between departments and blur organisational boundaries