Integrating ESG and Responsible Business Clauses

Lesson 6: Responsible Business Clauses

6.1 ESG in Contracts

Why Include ESG Clauses?

Investors and buyers demand them; they protect the brand, ensure compliance with regulatory law, and follow OECD/UNGP recommendations.

Risk-Based Due Diligence

Due diligence must be based on risk. It involves identifying, preventing, and mitigating ESG risks in supply chains and operations (activities).

CISG Compliance

Include these in Article 35 quality standards; if the party does not comply with ESG, HRDD, or ABC standards, they are considered non-conforming. You must specify these clearly, ensuring they are measurable and auditable. They also need to be foreseeable under Article 74.

UNIDROIT Principles

These principles help clarify and execute contracts correctly:

1. Article 1.7: Good faith and fair dealing; parties must cooperate with these requirements.
2. Article 5.1.3: Duty of cooperation; determine the specific type of obligation.
3. Articles 6.2.2-6.2.3: Situations that make compliance difficult or excessively expensive, necessitating contract renegotiation or adaptation.
4. Article 7.2.2: Specific performance; include these requirements here.
5. UNIDROIT principles suggest balancing audit rights and confidentiality.

HRDD and ESG Clause Components

• Define standards and in-scope tiers (specifying where in the supply chain they are included) and the Code of Conduct.
• Define the type of obligation.
• Monitoring: Supervision of documents, auditing rights, and third-party verification.
• Non-compliance handling: Remedies (under the 4 CISG categories), mitigation (Article 77), and foreseeability.
• Flow-down: Ensuring suppliers and subcontractors apply these standards.

6.2 Human Rights Due Diligence (HRDD)

Definition: Due diligence that accounts for the impact on people, ordered by risk levels across different tiers.

CISG Compliance

Same as ESG, but add that it is part of the contract and breaching it triggers CISG remedies.

UNIDROIT Principles

The application is the same as with ESG clauses, helping to ensure clear execution.

HRDD and ESG Clauses

The structure is the same as ESG, but you must add the following to the remedies:

• CAP: Corrective Action Plan.
• Price reduction: If there is only partial utility.
• Avoidance: Contract termination.
• Damages: Financial compensation.

6.3 Anti-Corruption and Bribery (ABC) Clauses

These issues affect reputation, finance, legal standing, operations, and transactions.

CISG Compliance

Anti-corruption becomes part of conformity; the 4 remedies and mitigation are applicable.

Clauses to Add for Anti-Corruption

• Compliance warranty: Warranting that such practices do not exist.
• Third-party control: Approval of providers working with them.
• Gifts and hospitality: Setting strict limits.
• Audit cooperation: Ensuring transparency.
• Remedies: Temporary suspension, termination, agreed sum, and finally indemnity (fines) if lawful.