Companies across industries are increasingly under scrutiny for alleged greenwashing. It’s estimated that 40% of businesses’ green claims could be classed as unsubstantiated or misleading. In Britain alone, 70% of British consumers dismiss green claims as false or deceptive.
While enterprises are most commonly the target of greenwashing claims, we’re seeing that even the most iconic events are finding themselves in the hot seat. The 2024 Olympics is currently facing criticism for inflating its sustainability efforts.
The consequences of greenwashing can have far-reaching impacts on an organisation, including loss of customer trust, declining sales, and even litigation. Beyond these direct impacts, companies are now facing the threat of severed business relationships, deterring investors, and limiting potential partnerships due to the risk of reputational damage by association.
Commenters have deemed the new Sustainability Disclosure Requirements, introduced by The Financial Conduct Authority (FCA) earlier this year, to be the “most significant single piece of UK sustainable finance regulation to date.” It mandates that all regulated firms stop greenwashing or making climate-friendly false claims. As a result, smart businesses are re-evaluating how they track ESG activities to ensure their claims are truthful, transparent, and compliant with FCA requirements.
Responding to the New Regulatory Landscape through Contracts
Contracts are foundational to commerce governing every dollar in and out of an enterprise. They act as a single source of truth for business relationships to ensure that the company and its suppliers are following ESG regulations and delivering on promises like net zero pledges. According to a recent survey that studied what defines trust in business relationships and what companies can do to build the necessary trust to achieve their goals, 70% of executives said they view contract language as an effective tool to enforce ESG standards and commitments. These contract clauses are wide-ranging and could include provisions aimed at promoting biodiversity, net-zero targets, and the prevention of land contamination.
Despite the rise in demand for more standardised ESG clauses, only 30% of organisations are actively embedding ESG language into their contracts. When business leaders begin to develop ESG contract language, they often find they have limited visibility into existing contracts and the current requirements for global suppliers. Add on the challenge of traditional contract management systems that consist of manually stored PDF documents, and you’ve now created a black hole with no clear path forward. Contract mismanagement can mean these ESG clauses are not properly tracked or enforced. This results in potential legal risk and reputational damage that could harm an organisation’s bottom line.
The Role of AI in Formulating ESG Clauses
AI has enabled organisations to overcome these challenges by providing visibility into existing contracts, promoting standardisation, and ensuring accountability.
Contract data presents one of the most valuable untapped assets in the enterprise and a prime resource to fuel innovation with AI. While contract intelligence equips companies with the visibility, automation, and insights to efficiently track and report on ESG obligations, AI enhances efficiency to empower customers to unlock the full potential of their commercial agreements – for example, determining whether ESG obligations are included and adhered to. Essentially, AI-powered contracting serves as a partner for legal teams, alleviating the burden of managing large volumes of contracts. This is critical because it helps avoid compliance threats, reputational risk, financial penalties, and sanctions, or even the inability to quickly respond to regulatory changes.
ESG Regulations and Supply Chain Compliance
AI-powered contract intelligence is empowering organisations to more accurately monitor ESG compliance within supply chains. Take, for example, the war in Ukraine.
At the time of Russia’s invasion, government regulations around the world halted any business conducted with Russian-based companies. Supply chains around the world needed to respond immediately. However, not everyone had the infrastructure in place to quickly identify at-risk suppliers. The result was a month-long supply chain disruption.
By harnessing AI-powered contract intelligence, businesses are able to understand their risk profile concerning sanctions and implement changes that would ensure compliance.
This is just one example of how AI-powered contract intelligence can enable enterprises to thrive despite macroeconomic challenges. The same holds true for organisations looking to track their supplier’s environmental impacts or even identify areas where there’s an opportunity to reduce their carbon footprint.
By connecting millions of contracts and infusing their data into core enterprise systems, enterprises can create rich pools of AI-powered insights to inform better decision-making around ESG commitments and complex regulations.
The Future of Company Contracts and ESG Practices
In the eye of public opinion, ESG commitments are not optional. Gone are the days when ESG commitments were a ‘nice-to-have;’ they’re now an absolute imperative for any organisation that conducts business.
Businesses will need to digitally transform their contracting systems to ensure they adhere to FCA greenwashing regulations, as well as to avoid the loss of shareholder, investor, and customer trust.
Investment in AI will play an increasingly important role in guaranteeing standardisation and visibility. This ensures that organisations throughout the supply chain adhere to the ESG clauses in their contracts. This, in turn, will combat the challenges that prevent organisations from meeting their sustainability goals.
By deploying the right software, businesses can not only address these specific challenges, but also increase revenue, reduce costs, and mitigate risks – outcomes that are vital in the current business environment. It’s all about structuring and connecting contract data across the enterprise to deliver speed and scale, and applying AI to ensure the intent of every business relationship is correctly captured and fully realised.
- AI in Supply Chain
- Sustainability
