Sustainability reporting and ESG in business contracts: What do SMEs need to know?

Integrating ESG principles into contracts

Taking sustainability into account helps to build trust among investors, clients and business partners. Additionally, the number of ESG-related considerations has increased significantly in public sector procurement, and tenders often include the requirement for compliance with ESG obligations. Practical efforts related to sustainability require company’s management to first consider how, in practice, sustainability should be taken into account at the core of the business, and to which aspects of it the company can commit.

Once the first stage review of ESG principles has been made, sustainability considerations can be integrated into practical agreements, or for example to a Code of Conduct document to ensure that internal and external stakeholders are also committed to the ESG standards set by the company. In some cases, it may not even be necessary to include ESG principles in contracts, as ESG obligations in Finland are already quite comprehensively regulated by law, meaning that companies often simply need to comply with the law to fulfil such obligations. In any case, compliance with ESG principles is recommended to be checked both in internal contracts, such as shareholder agreements and employment contracts, and in external contracts, such as collaborative agreements and supply agreements.

Internal company objectives relating to ESG can be included in shareholders’ agreements, among other things. The company’s articles of association may include sustainability-related clauses, such as targets for management and/or shareholders to promote socially beneficial environmental impacts in the operations and decision-making of the company. An ESG targets can also be implemented effectively through a bonus system linked to ESG or sustainability goals. Similarly, the diversity and independence of management, as well as the sustainability of the company’s operations can also be guaranteed by these arrangements.

From the perspective of employers’ obligations, the social responsibility aspect of ESG is at the core. Compliance with labour law and potentially binding collective agreements, as well as mandatory safety obligations is the starting point for compliance with ESG obligations. The CSRD sets requirements for, among other things, to respect equality, diversity, non- discrimination, accessibility and human rights. It should be noted that the ESG data must also cover the company’s impact on people.

The companies may not be able to influence the activities of other parties, such as business partners, afterwards, which is why it may be easier to integrate sustainability considerations into the cooperation through prior agreements or pre-selection of with whom to cooperate. In practice, often the agreements are designed to primarily protect a company’s own interests, but at the same time they may impose sustainability-related conditions on the activities of the business partners. As a principle, the more precisely the terms and expectations of responsible business conduct are agreed between parties, the easier it will be to ensure and monitor compliance with ESG principles later on. The Agreements may include expectations regarding the level of certain ESG standards, reporting or monitoring, as well as grounds for termination of agreements for non-compliance with such agreed sustainability requirements.