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Trakti ESG Strategy & Climate clauses: Why they are a must-have Photo by Markus Spiske from Pexels

How to embed ESG Strategy & Climate clauses in your contracts and why they are a must-have

on December 2, 2021

Reading time: 3 minutes. Photo by Markus Spiske from Pexels.

Even though COP26‘s outcome was not perfect, it is clear that we all have a responsibility towards our planet. And now is the time to act.

Individual citizens aside, the first ones that are able to make an impact in this area are companies, especially the ones that depend on a global supply chain network (for example) or a large ecosystem of suppliers and partners.

A clear and effective strategy for ESG has become a “must-have” for businesses. 

The benefits of implementing sustainable business, climate clauses and obtaining green credentials are manifold in terms of: 

  1. Energy cost savings
    • Eco-friendly practices such as recycling, installing water-saving devices naturally, reducing waste, lead to cut costs and increase savings.
  2. Tax breaks, government subsidies
  3. Reducing the risk of supply chain disruption
  4. Facilitating access to capital and appealing to investors
  5. Increasing sales

As supply chains fall outside of a company’s core operations, they expose them to hidden and uncontrollable risks typically driven by ESG factors, such as natural resource depletion, human rights abuses and corruption.

ESG serves as guidelines by which supply chain management strategies should be built from bottom-line to top.

Even in the case of a complete lack of interest in the planet’s situation, it is undeniable that implementing and following a good ESG strategy is an opportunity no one can ignore.

In fact, energy cost savings, tax breaks, government subsidies, and supply chain disruption risk reduction seem already like a pretty good deal for any kind of strategy. Even better if it preserves the planet we live on.

But even if you are not fully convinced by those, you can be motivated by the Access to capital and Increased sales opportunity that the market will force you to take!

In this article, we focus on the benefits connected to the last two points. Let’s check them out.

Facilitating access to capital and appealing to investors

As well explained here the OECD’s paper (Responsible Business Conduct for Institutional Investors) clarifies expectations of responsible business conduct for institutional investors under the OECD Guidelines for Multinational Enterprises.  

As a result, investors are expected to undertake ESG risk-based due diligence and consider ESG risks in their investment processes. For LPs, this starts with including ESG risk in due diligence on the GP before making a commitment to the fund and including these risks in ongoing monitoring of the GP. For GPs and direct investors, this requires identifying ESG risks before the investment and monitoring them during the holding period. Investors are then expected to use their leverage with companies to influence them to prevent or mitigate adverse impacts. This is fuelling a global reallocation of capital towards more sustainable companies. 

.

adssdasdasdasddsadasdsadStrong ESG proposition (examples) Weak ESG proposition (examples) 
Top-line  
growth 
Attract B2B and B2C customers 
with more sustainable product 
Lose customers through poor sustainability  
practices (eg, human rights, supply chain) or a  
perception of unsustainable/unsafe products 
Achieve better access to resources  
through stronger community and  
government relations
Lose access to resources (including from  
operational shutdowns) as a result of poor  
community and labour relations
Cost  
reductions 
Lower energy consumption Generate unnecessary waste and pay  
correspondingly higher waste-disposal costs 
Reduce water intakeExpend more in packaging costs
Regulatory  
and legal  
interventions 
Achieve greater strategic freedom  
through deregulation 
Suffer restrictions on advertising 
and point of sale 
Earn subsidies and government 
support
Incur in fines, penalties, and  
enforcement actions
Productivity  
uplift 
Boost employee motivation Deal with “social stigma,” which restricts  
talent pool 
Attract talent through greater  
social credibility
Lose talent as a result of weak purpose
Investment  
and asset  
optimization 
Enhance investment returns by  
better allocating capital for the  
long term (eg, more sustainable 
plant and equipment) 
Suffer stranded assets as a result of  
premature write-downs 
Avoid investments that may not  
pay off because of longer-term  
environmental issues
Fall behind competitors that have invested  
to be less “energy-hungry”

Source: mckinsey.com 

.

Increasing sales

Green companies are more appealing to customers: they are increasingly demanding natural products and social responsibility from vendors and suppliers.   

ESG credentials are not just something that is “nice to have”, and wherever your company might be on its ESG journey, there are several means and ways to get them. 

This pressing topic can be solved by cutting edge technology like blockchain, artificial intelligence, drones and smart sensors.  

Blockchain-based solutions create a distributed network that enhances transparency and reduces information asymmetries among heterogeneous climate actors.  

In particular, within the supply chain, blockchain can address sustainability and visibility challenges; it can control and ensure global sourcing and contracting practices adhere to strict requirements for working conditions, human rights, environmental protection, safety, business ethics and compliance. 

With blockchain’s consensus mechanism and crucial immutability feature, it can significantly enhance measurement, reporting and verification (MRV) issues, driving trust in climate funding that goes to carbon assets management/trading, biodiversity conservation, community renewable energy projects, etc. 

Moreover, companies obtain, through blockchain, a green certification to demonstrate the business’s focus on green business.  

This makes it easier for entrepreneurs to see where their sustainability efforts are today and identify areas to focus on to become even greener. 

Companies that get certified are able to show their certification on corporate websites, printed on collateral, and shared with the community to demonstrate the company’s focus on green business. This can provide another avenue for marketing and promotions, attracting more customers interested in sustainability. 

Ready to boost your company?

traktiHow to embed ESG Strategy & Climate clauses in your contracts and why they are a must-have

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