Supplier Agreements – updates are needed for ESG readiness

In the past year 2023, ESG and sustainability related regulatory environment has developed rapidly. Initiatives relating to sustainability work at many companies’ corporate level have been adopted and became effective or are currently in the transition period. The new ESG requirements cover all aspects of doing business, from management level to technical sustainability reporting and producing sustainability information to supply chain management, and so on.

The ESG obligations may impact the entire value chain of an organization and should therefore be carefully considered from both procedural and contractual point of view for each company. For example, the ESG requirements may impact companies value chain due diligence procedures and requirements, needs for receiving and reporting data between business partners, import/export requirements of certain products, climate and biodiversity actions etc.

In respect to supply chain management and commercial agreements within it, this means that companies must also ensure that applicable ESG requirements are implemented as contractual rights and obligations between different contracting parties.

Let’s take a narrower scope and look into sourcing agreements between a company and its suppliers, and the ESG reporting rules. Starting gradually from 2024, EU’s Corporate Sustainability Reporting Directive (CSRD) started to apply first to large stock listed companies. The rules are extended in 2025 to cover also other large companies, and gradually the scope shall be widened to include SME’s, although on a voluntary basis.

In order for a company to receive from its suppliers such information that is required under CSRD, it should have contract clauses in its sourcing agreements that create a contractual obligation for each supplier to collect and provide CSRD required information to the company. In addition, the contract clauses should be drafted to allow the company to pass such information onwards to its customers or other commercial partners that do have statutory reporting requirement under CSRD and therefore need to receive such information from their relevant supply chain partners.

If your company is directly in scope of these new sustainability reporting requirements in CSRD, it is recommended to update your supply agreements to include right for you to receive sustainability and ESG related information from your suppliers for statutory reporting purposes. Also, if your company is not directly in the scope of the new rules, but e.g. a customer company in your value chain is required to report on their sustainability under the CSRD, then in similar way; adding relevant contract clauses is needed to ensure such customer company is able to receive statutory information through your company. Creating a contractual obligation for suppliers to provide the necessary reporting related information enables your company to comply with the statutory reporting requirements, as applicable.

Updating supplier agreement is one of the practical actions to take and a tool to ensure commercial partners in your company’s value chain are able to comply with the ESG reporting requirements.

Now is a great time to make an assessment about your company’s commercial agreements contents and ensure those are updated to include what is needed from EU’s ESG regulations point of view. This limits risks of not complying with the ESG requirements that are applicable to your company or to your clients or business partners.

Fondia’s team of ESG and commercial contracts expertized lawyers are happy to map out necessary contract updates and actions that are relevant for your business in building ESG readiness.