In response to new regulatory requirements, companies will be required to account for the green credentials of contractors and suppliers, according to Richard Power, a partner at law firm Clyde & Co in London.
The UK and the European Commission have both adopted proposals obliging large or listed companies to report in their financial statements their assessment and mitigation of climate-related risks and opportunities. In the UK, this will likely apply for financial years ending after 6 April 2022.
In response to this, and pressure from investors and consumers, companies are publishing decarbonisation and net zero plans, which generally include “Scope 3 emissions”, ie indirect emissions occurring in a company’s value chain, including both upstream and downstream emissions. That requires a company to try to get contractors and suppliers to align with its stated net zero pathway.
This will give rise to the increasing adoption of climate-conscious clauses in supply chain contracts. These could involve some or all of the following types of clause:
- Updated force majeure clauses, with an environmentally-friendly approach to performance interruption – eg avoiding dumping stock which gets “stuck” halfway in transit due to a force majeure event.
- Warranties by which a contractor is obliged to comply with specified steps to reduce environmental harm or achieve net zero; or requiring the contractor to adopt a net zero performance target and a roadmap how to achieve it. These could include regular monitoring and reporting obligations, and audit rights.
- Potentially, clauses enabling one party to terminate for the other party’s failure to achieve specified net zero targets. A variation is the “Termination for Greener Supplier” clause which permits a supply contract to be terminated in favour of a competitor supplier if the existing supplier is unable to match a ‘greener’ offer.
How quickly such clauses are adopted will depend upon relative negotiating power and how quickly large companies become aware of the need to take concrete actions to tackle Scope 3 emissions (and the risks of not doing so). But they are on their way.