Building Resilience: How Green Drafting Can Shape Legal Contracts
Green drafting can allow businesses to stay ahead of competitors and comply with ESG obligations. But what is it and how can it shape contracts?
Key Contact: Declan Goodwin
Author: Courtney Wilbor
From start-ups to established companies, the ESG landscape is changing in a way that means mandatory reporting and mitigation of climate-related risks will soon be the norm for all businesses.
The Government’s Sustainability Reporting Guidance for 2022-23 emphasises transparency when considering climate-related risks, highlighting the inevitable shift that it is not only larger companies with 500+ employees or a turnover of £500 million that must proactively monitor and mitigate these risks.
What is Green Drafting?
In its simplest form, so-called “green drafting” involves embedding express sustainability obligations in written contracts. It allows those drafting and negotiating contracts to identify the right climate causes and sustainability solutions for the specific requirements of that contractual relationship or project, reducing the need for renegotiation later. Examples of green drafting include:
• Placing obligations on suppliers to procure energy from renewable sources in manufacturing and supply agreements;
• Repair and alteration covenants, rent review assumptions and covenants for the protection of energy and sustainability ratings in property leases;
• Carbon budget adjustment clauses in completion accounts in share purchase agreements; and
• Requiring the management of a dispute in a way that minimises its environmental impact in construction contracts.
How can green drafting assist?
The duty to mitigate climate-related risks should be shared with suppliers, manufacturers, and customers alike.
The uptake in green drafting has been slow, largely due to a lack of awareness about how businesses can impose climate-related obligations and caution around potential impacts on profits and relationships.
Yet, a data protection clause would not be omitted if a business were sharing personal data, so why should climate-related clauses be treated differently? A breach of either can result in reputational damage. Given the prominence attributed to climate change and sustainability, perceived neglect of these key issues could be particularly harmful for a business from both a reputational and compliance perspective.
Where to start?
Engaging in meaningful dialogue about your business’ expectations from the outset of contractual negotiations will assist in the incorporation of these clauses.
All our teams at Acuity are always happy to steer our clients through the ever-changing and complex ESG landscape, including advising them on how they can adapt their commercial contracts in order to achieve their sustainability objectives and support the fight against climate change.
Our dedicated Acuity Law ESG team helps to both manage risk and harness the opportunities that arise from getting ESG right. For further assistance on any ESG queries, please get in touch.