Climate-change conscious clauses will start to appear in supply contracts

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.

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