Contract management is at the heart of ESG compliance and trust

Contract management is at the heart of ESG compliance and trust

14 October 2021 By Lauren Croft
Bernadette Bulacan

As contracts become increasingly complex, the most innovative companies are leveraging technology to fulfil obligations, writes Bernadette Bulacan.

Looking back over the past year or two, some of the most interesting conversations in legal circles have focused on the growing momentum around Environmental, Social and Governance (ESG) commitments in the world of business.

ESG is being thrust to the top of the corporate agenda, requiring companies to consider customer value, employee wellbeing, fair and ethical supplier relationships, and care for the community and environment as part of the purpose and responsibility of a business.

In his annual letter to fellow CEOs, BlackRock chief executive Larry Fink argued that sustainability goals are now a requisite for corporations:

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“We believe that all investors, along with regulators, insurers, and the public, need a clearer picture of how companies are managing sustainability-related questions,” Mr Fink wrote. 

“This data should extend beyond climate [change] to questions around how each company serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data. Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders.”

Of course, a healthy dose of scepticism always meets these pronouncements: When it comes to high-minded goals, how do you know companies are more than just talk?

Well, one way is with relationships and the embodiments of those relationships: contracts. And, in fact, some of the most innovative companies in the world are turning to their contracts to put ESG commitments into writing with suppliers and customers and leveraging cutting edge technology like blockchain to enforce those commitments.

But before we turn to the tech, let’s talk about contracts themselves as they pertain to ESG.

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Why contracts are foundational to ESG goals

We’ve come a long way from the time when business was built on handshakes. Today, contracts represent the rules and parameters of business relationships. As the business world has become more complex, so have contracts, with more and more language added to address different contingencies.

As contracts become more complex, the risk of non-compliance increases. Non-compliance exposes businesses to substantial risks – including reputational damage and soured partner relationships. If you’re not fulfilling the obligations in your contracts, you’re not a good corporate citizen.

Given the scope, scale and complexity of contracts in today’s enterprises, better contract obligation management won’t happen with the snap of a finger. Companies need to put processes in place that systematically extract contract obligations so they can be tracked, managed and ultimately fulfilled.

Obligation visibility breeds compliance. Compliance breeds trust. Trust breeds better business.

How to manage your contracts

Manually extracting these obligations, which are often hidden in dense legal language, can be error-prone and labour-intensive.

Thankfully, contract management software now exists that can leverage AI to identify and extract obligations at scale. Those obligations are automatically routed to the business owner ultimately responsible for fulfilling the obligation – even when they sit on the other side of the globe and in a different department. Enterprise contract management makes compliance the bedrock of a business, allowing companies to achieve their governance objectives.

Beyond making sure they are fulfilling their own commitments, innovative companies are also using new technology to ensure their customers and suppliers are fulfilling their commitments as well, ensuring their entire value chains comply with ESG goals.

By leveraging blockchain technology, companies can gain insights into multi-tier supply chains to ensure that all members of the chain include required clauses in their contracts without forcing suppliers to divulge commercially sensitive information.

For example, a carmaker can require all members of its supply chain to upload their contracts to a consortium blockchain, which can verify the presence of compliant anti-child-labour language in the contracts while keeping commercial terms and supplier names hidden.

Using a simple dashboard view, the carmaker can instantly identify suppliers that are out of compliance and use this valuable data to inform future sourcing decisions. Suppliers that “play by the rules” can expect to benefit from repeat business in the future, while those out of compliance risk missing out on the long-term benefits of working with the manufacturer.

Whether your company’s promises are made over a handshake, in a contract, or because of corporate ESG commitments, fulfilling those promises is the cornerstone of establishing trust with customers, suppliers, and partners. The complexities of business are no excuse for missed obligations; rather, they only increase the risk that comes with them.

Bernadette Bulacan is the vice president and lead global evangelist at Icertis.

Contract management is at the heart of ESG compliance and trust
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