Comment: How contracts and AI can help companies tackle climate change in their supply chains

August 23 – Governments globally continue to introduce new regulations in an effort to motivate companies to decarbonise their supply chains. In 2019 the UK became the first G7 economy to pass legislation in support of reaching net zero emissions by 2050, and in January of this year, the EU’s Corporate Sustainability Reporting Directives (CSRD) came into force, ushering in ambitious sustainability strategies and increased transparency. Meanwhile, the UK’s Sustainable Disclosure Requirements (SDR), mooted for this year, will also seek to make it unviable for businesses to leave carbon footprints hidden in their supply chains.

As these regulations take effect, companies will have more incentive than ever before to ensure that their supply chains are compliant with net zero pledges. Enterprises that do business in the European Union will have to apply CSRD rules for the first time in 2024 as they are mandated to show their impact on the climate and society, both in their immediate operations but also through their customers and commercial relationships. New reporting requirements will mean that indirect implications across supply chains, known as Scope 3 emissions, can no longer be left out of sight and out of mind. They will need to be addressed head on if companies want to avoid substantial penalties, including hefty fines and reputational damage from “name and shame” regimes.

In counter to this growing call for transparency, it has never been more challenging for a company to map the full extent of its downstream impact on the environment, particularly for global enterprises that manage large ecosystems of business relationships. According to McKinsey, 90% of a company’s environmental impact is found in its supply chain, making cutting Scope 3 emissions a priority. However, modern supply chains consist of hundreds of suppliers across a range of geographies, working together to meet increasingly complex customer orders.

This leaves companies grappling with the question of how to quantify the environmental effects of their supply chain partners, and then influence those partners to reduce emissions.

As the co-founder of Icertis, a provider of AI-powered contract management solutions, I believe contracts offer one of the most convincing solutions. At their essence, contracts are the commitments that companies make to one another. The growing consensus is that they offer the first pragmatic and critical steps for helping companies adhere to shared climate goals, on a path to net zero.

For a few years now, a group of legal professionals called The Chancery Lane Project (CLP) have been championing this cause, seeking to create a “world where every contract enables solutions to climate change”. If a business can add sustainability clauses like the ones proposed by the CLP, they can commit themselves and their partners to a common set of sustainability goals calculated to move the dial on climate change. For example, they may include contract language stipulating that their partners must not support suppliers known for unsustainable practices.

Indeed, a recent Economist Impact survey, which Icertis sponsored, found that 70% of companies consider contract language an effective tool in enforcing environmental, social and governance (ESG) standards, including around climate commitments. However, these beliefs have yet to fully translate to tangible measures. Only around 30% of companies currently embed ESG language in their contracts.

This disconnect points to one critical solution: emerging technology. Enterprises and their supply chains are sprawling and deeply complex, requiring thousands or even millions of contracts to define their operations. It would take an army of lawyers and procurement professionals to manually track what environmental commitments partners have made and enforce them in practice. But technologies have emerged that position businesses to fulfil ESG requirements without straining resources, and 43% of UK CEOs say they are investing in technology to support their ESG efforts, according to PwC.

Advances in AI provide today’s companies with near limitless powers of analysis and oversight at their fingertips. With AI, businesses can automate the tracking of contracts – and the critical data they contain – across even the most multiplex of supply chains, ensuring that the full intent of any ESG clauses are realised.

Digitising contracts and automating contract-driven processes makes negotiating and maintaining agreements that ensure all parties meet their net zero goals more manageable. Generative AI and large language models (LLMs) diminish the need for legal teams to conduct expensive review cycles that slow the pace of business or outsource ESG compliance deliverables to third-party resources. Now, when a contract has been signed, it doesn’t become forgotten in a desk draw or as an unopened PDF. Instead, it becomes a living data source to ensure compliance with the required terms and sustainability outputs. Errors are limited and the obligations inside the contract are summarised and demystified for stakeholders across a business.

In this way, rapid developments in generative AI and natural language capabilities are clearing the way for contracts to transform how business partners combine efforts on shared ESG goals. The way in which AI can help negotiate, analyse, track and act upon contracts to create value – long after contracts are signed – is the only way that companies will be able to meet compliance requirements across their whole supply chain. AI-powered contract management systems ensure that agreements meet the necessary standards and have the agility to adapt in line with continued shifts in the regulatory environment.

The effects of climate change represent one of the most urgent tests of humanity’s ability to set aside differences and work together towards a common goal. Contracts are the best way to enshrine these commitments in a way that is fair, transparent and intentional. AI innovation has catalysed just at the right time to ensure that commercial agreements are properly fulfilled and observed in contract intelligence systems that extend beyond traditional lifecycle management. Contracts, and the intelligence they provide when married with AI, send all parties in the direction of better ESG credentials and eventually net zero emissions.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias. Ethical Corporation Magazine, a part of Reuters Professional, is owned by Thomson Reuters and operates independently of Reuters News.