The Integral Role of Obligation Management in Boosting ESG Compliance with CLM

The value of adhering to environmental, social, and governance (ESG) factors in the current corporate landscape cannot be overstated. These elements are pivotal for the long-term sustainability and success of businesses. Stakeholders are increasingly prioritizing ESG considerations, influencing companies' operational methodologies. 

ESG Compliance and the Bottom Line

They also impact how companies do business with third parties: Recognizing who they buy from, who they sell to, and how they conduct this business is critical to their own ESG adherence. Companies are writing ESG requirements directly into their contracts. Failure to uphold ESG standards risks putting a company in breach of contract, meaning lost revenue, cost leakages, or worse.

Within this context, obligation management is crucial in contract lifecycle management (CLM). Properly managing contractual obligations ensures that enterprises abide by their ESG commitments, thereby maintaining compliance and enhancing their reputation.

Understanding ESG Obligations in Contracts

Often thought of as transactional documents, contracts today encapsulate a broad spectrum of ESG-related obligations, ranging from ethical governance to social responsibility and environmental sustainability. 

Let’s take environmental clauses as an example. Many companies are pledging to phase out carbon emissions by 2050 or sooner. By most reporting standards, though, they are responsible not only for their own emissions but also those of their suppliers. This means they need a vehicle to flow their own commitments down their supply chain. This is where contracts come in: Companies can mandate their suppliers to commit to a certain amount of renewable energy in their processes, which then flows into their own reporting.

Sourcing clean energy becomes an “obligation,” thus making close tracking of the contract obligation critical for both the buyer and the suppliers.

The same dynamic applies to social responsibilities outlined in contracts, including practices aimed at avoiding the use of “conflict minerals” and governance aspects such as anti-bribery provisions.

Yet as powerful as contracts can be for operationalizing ESG goals, the typical enterprise has tens of thousands, or even hundreds of thousands, of contracts active across the business.

Integrating ESG Criteria into the Obligation Management Processes

For efficient management of ESG obligations, companies must integrate these criteria into a standardized, repeatable contract lifecycle management process—aided by technology-driven process automation.

CLM technology streamlines the inclusion of ESG clauses in contracts through a suite of features. Template libraries offer vetted ESG clauses for consistency across contracts. Performance tracking informs future clause drafting by analyzing past contract data. AI and analytics ensure the relevance of ESG clauses to each contract, while dashboards and reporting tools monitor real-time ESG compliance, aiding in the effective management and enforcement of ESG commitments.

Imagine a business committed to reducing carbon emissions by 20% over the next five years.

• To ensure this commitment is met, the company includes specific carbon reduction clauses in its supplier contracts, managed through a CLM system. 
• The CLM software is programmed to send automated reminders to suppliers six months before their contract renewal, prompting them to report on their carbon reduction efforts. 
• The CLM dashboard also provides insights into each supplier's progress, displaying data on emission reductions and flagging any that are off-track. This enables the business to help suppliers meet their obligations proactively. 
• Finally, the CLM analytics reports can help assess the company's ESG initiative's overall impact and guide future sustainability strategies.

Conclusion

Integrating ESG considerations into obligation management within CLM is crucial for upholding compliance and fostering sustainable business practices. Effective obligation management enables enterprises to track and fulfill their ESG commitments, mitigating risks and strengthening their reputations. By embedding explicit ESG criteria into contracts, leveraging technological advancements, and adhering to best practices, businesses can meet and surpass their ESG objectives. As the focus on ESG intensifies, enterprises that excel in ESG compliance management are poised for success and profitability.