Sustainability Runs on Agreements
Build ESG clauses into contracts to achieve targets
In September 2020, the World Economic Forum’s International Business Council, in collaboration with the “Big Four” accounting firms Deloitte, EY, KPMG and PwC, announced the world’s first common reporting framework for environmental, social and governance (ESG) standards. It was a call to action urging all members to measure and disclose ESG performance in their mainstream annual reports.
Common ESG metrics
The framework defines a set of “stakeholder capitalism metrics” that solidifies commitments from 140 of the world’s largest companies to align their corporate values and strategies with the United Nations’ Sustainable Development Goals (SDGs). With less than 10 years left to achieve the SDGs, business leaders are setting increasingly ambitious sustainability targets—and are being asked to hold themselves publicly accountable.
The role of digital agreements in sustainability
Change has proved difficult for many. A report by Bain and Company finds that just 2% of sustainability programs achieve or exceed their goals, with 81% settling for dilution of value and mediocre performance. 16% fail to deliver altogether, producing less than 50% of expected results.
How to move the needle? The most crucial step is “making clear public commitments with quantitative targets”, according to the report. But this is just the beginning. In order to effect real change, sustainable organizations must hardwire sustainability into:
- Accountability systems
This means incorporating ESG metrics into investment decisions, tying them to executive compensation—and of course, writing them into agreements. An increasing number of businesses are codifying sustainability commitments in the same way they codify commercial commitments: in contracts.
The world’s largest provider of business sustainability ratings, EcoVadis, finds that 70% of buyers and 80% of suppliers have signed a contract that includes an ESG clause. 41% of the latter group raised awareness of ESG issues as a result, and another 38% implemented concrete actions. But many ‘green’ agreements still suffer from challenges of verification and enforcement.
Digitization helps close this gap. Modern systems of agreement, the technologies and processes used to prepare, sign, act on, and manage agreements, not only drive efficiency by moving operations to the cloud (agree more sustainably), they also help drive transparency and compliance across the supply chain (more sustainable agreements).
Paperless, distributed, accountable
Modern systems of agreement underpin the rise of paperless, distributed, and accountable organizations. With the recent acceleration of the shift to virtual work, modern systems of agreement increasingly power the move to the distributed enterprise. A recent U.N. roundtable noted that 14 of their 17 Sustainable Development Goals can be solved or advanced through virtual work.
What is a distributed enterprise?
Distributed enterprises connect their systems of agreement to systems of record like CRM (customer relationship management), HCM (human capital management), and ERP (enterprise resource management), and digitize not just agreements, but end-to-end processes:
- not just sales contracts, but account provisioning
- not just employment contracts, but employee onboarding
The impact of distributed enterprises go well beyond just supporting remote operations, they reduce the need for business travel, minimize required office space, on-premise data centres and customer-facing locations (often improving customer experience as banks have done with digital branches). Carbon emissions, waste, and even equal employment opportunities improve as a result. It’s estimated that remote operations can save 3.2 tons of CO2 per employee per year.
That’s agreeing more sustainably.
What about more sustainable agreements?
Modern systems of agreement give organizations the tools to uphold their sustainability agendas in contracts, and monitor – even automate – compliance, keeping buyers, suppliers, and suppliers’ suppliers accountable.
Businesses can design agreement templates, clause libraries, and AI-assisted contract reviews around sustainability goals. Automated reporting can be set to monitor connected actions in the real world; for example: carbon sensors in a building can automatically trigger a contractual penalty if CO2 levels are too high.
The goals of more sustainable agreements are clear:
- More contracts with best-practice sustainability clauses
- More sustainability objectives met
- Measurable improvements to metrics like carbon productivity
Some organizations are already ahead of the curve, building waste reduction incentives into supplier contracts and using AI to automatically track and audit obligations, as well as identify opportunities to update ESG language. Best practices like these uphold responsible sourcing and carbon offsetting to help organizations reach their target sustainability outcomes.