How IT contract terms might be reinterpreted to address the ESG agenda

The need to develop and deliver against an ESG strategy that has net zero carbon goals at its heart is rightly an ever-increasing priority; however, whilst the drivers for change are clear, various issues can stall progress. These include: evolving internal strategy and associated policies; absence of science-based targets; inadequate or non-existent emissions data; the need to avoid any suggestion of greenwashing; competing legal, commercial and technical priorities; and wider market and economic pressures diverting management attention elsewhere.

When operating in the context of a new procurement project, those issues are challenging enough. However, a large proportion of value chain emissions result from existing supply arrangements that are governed by long term contracts and which, due to their complexity and often interwoven fee arrangements, tend to be extended through the conduct of some form of savings challenge, rather than being put out for full re-procurement. In those situations, procurement and legal teams face a dilemma as to how to upgrade existing contracts when there is no appetite to open up the broader terms of a key supplier relationship.

One area that should be given further consideration in those circumstances is the potential to use or reinterpret existing contractual obligations as a means of developing additional mechanisms focussed on the recording of emissions data, the submission of reports and the assessment of performance against agreed key performance indicators. 

Whilst the concept of emissions controls and associated governance processes are perhaps unlikely to have been enshrined in many longstanding IT contracts, it is likely that a number of mechanisms found within those types of contract could be repurposed or reinterpreted to increase the value of the contract from a supply chain emission reduction perspective, without the need for a full renegotiation.

The types of contractual provision or mechanism that could be suitable for this purpose include:

• innovation commitments potentially linked to specific service requirements, service efficiencies and cost savings which may also include a ringfenced innovation budget or a broader change control procedure – there is an opportunity to refocus the innovation agenda to include the reduction of carbon emissions;
• ·obligations to comply with applicable laws, regulatory regimes, recognised standards (ISO or similar) or best/good industry practice – the frameworks created by these types of requirements increasingly recognise the importance of carbon emission reduction commitments and the need for suppliers and customers to implement appropriate targets and reporting mechanisms;
• governance and reporting procedures, potentially structured around a number of boards – these provide the opportunity to expand the remit of the most appropriate grouping to include oversight of emission reduction targets and reporting mechanisms;
• general service levels, potentially coupled with a mechanism that recognises the need for service levels and key performance indicators to evolve in line with business priorities and legal obligations – these provide the opportunity to incorporate suitable targets and reporting obligations; and
• benchmarking or market testing rights where there is a formal process already enshrined in the contract to help assess the extent to which the services, performance levels and fees attributable to a given arrangement align with the current market – these provisions provide an opportunity to extend relevant assessment criteria to include carbon efficiency and reduction strategy.