Going Green to Save Green: Ensuring ESG Compliance with CLM

By Evangelos Apostolou, General Counsel, Sirion 

Evangelos Apostolou

ESG-tagged assets are increasing year over year and are set to account for more than $50trn globally by 2025. In parallel, greenwashing continues to grow as a key focus for regulators worldwide.  

Non-compliance with ESG regulations stopped being a largely PR problem some time ago, and fines are getting heavier. Last year, US businesses paid $4.2B in SEC fines for ESG-related violations.   

Beyond bottom line considerations, ESG regulations are attracting increasing public interest and scrutiny. Although only a small fraction of ESG’s broad scope, climate change arguably has the highest profile amongst the more visible areas of focus and continues to secure one in three investment dollars.  

The United Nations’ latest climate report estimates that as many as 3.6 billion people are highly vulnerable to the extreme weather consequences of human-caused climate change, with a disproportionate impact on those populations who have contributed the least to the change. Related ESG regulations aimed at reducing greenhouse emissions are on the rise and are subject to ever more stringent enforcement.   

The connected challenges for enterprises seeking compliance with their ESG obligations are significant and are unlikely to have a simple answer. For some, implementing an AI-driven Contract Lifecycle Management solution will provide a strong part of what is needed to secure and maintain ESG compliance.   

Solving the Challenges of ESG Compliance   

As ESG importance continues to grow, enterprises are recognizing the need to address gaps in their ESG landscape. Commonly encountered obstacles to doing so include:    

  • A lack of standardization across reporting frameworks makes comparing and analyzing ESG reports problematic.   
  • Practical difficulties in conducting in-depth analyses of disparately held ESG data.  
  •  A lack of consistency in supplier certifications unsupported by the application of common thresholds and standards.  
  • A fragmented approach to ESG compliance across departments, functions, and geographies prevents efficient internal communication and cross-functional understanding.   

To address these challenges, enterprises must continually evaluate their ESG landscape to identify areas of improvement. A vital factor in developing a comprehensive ESG strategy is clearly understanding ESG materiality criteria. These criteria determine who holds responsibility for ESG compliance under three categories: enterprises with complete control, those with partial control, and those with no control over their ESG obligations. With reliance on often complex supply chains, there has been a significant—and alarming—rise in enterprises falling within the latter two categories of materiality.   

Materiality is also a particular concern for enterprises in the technology, healthcare, and retail industries, where more than 85% of ESG compliance can depend on their supply chains. In such cases, it becomes imperative for enterprises to assess their supply chain’s ESG standing.   

An AI-driven Contract Management Solution to ESG Compliance     

Once an enterprise identifies where it falls within ESG materiality and assesses its supply chain standing, it can adapt its contracting processes to support compliance. An ESG-aligned contracting process effectively addresses the challenges of standardization, repeatability, and fragmentation, enabling enterprises to improve their overall ESG landscape and, as a critical example, ensure that suppliers are onboarded and integrated with ESG requirements from day one.   

AI-driven CLM solutions empower ESG compliance across the entire lifecycle of every contract in an enterprise’s portfolio—and will also automatically monitor vendor performance relative to ESG performance criteria and requirements.   

To effectively implement CLM for ESG, there are four essential steps for enterprises to follow:   

  1. Digitize External Contracts: This includes contracts with third-party suppliers throughout the supply chain with a clear line of sight into detailed reporting on provisions that govern collection, supplier data storage and processing, audit, expiry/renewal, and contract termination in case of breach or false data.   
  2. CLM Technology for Contract Remediation: With the help of advanced CLM technology, enterprises can automatically scan and review existing contracts for incomplete/misdescribed ESG standards. Built-in CLM Generative AI capability can then assist in drafting amendments and variations to help remedy identified gaps.   
  3. Institutionalize ESG: Once remediation is complete, enterprises can move to incorporate consistent ESG terms into new contracts and ensure that all contract templates and counterparty negotiations include the ESG terms. CLM Generative AI can be used to create custom templates and clauses to drive significant efficiencies.   
  4. Improve Inter-Departmental Cohesion: ESG compliance and reporting is an enterprise-wide initiative. A CLM solution enables cultural shift to the point that departments and functions are united in achieving individual and collective ESG goals.   

Managing ESG Requirements as a Force for Good  As ESG regulations continue to tighten, enterprises face increasing contractual obligations tied to ESG requirements. Keeping track and actively managing ESG compliance manually is an overwhelming and unstainable task for larger enterprises. A modern, AI-based CLM solution is one of the keys to unlocking an enterprise’s ability to actively and positively manage its ESG risks as a force for good.  

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