In the last decade, there has been a proliferation of Environmental, Social, and Governance (ESG) laws in the European Union, the United Kingdom and the United States, which are presenting significant opportunities and challenges for New Zealand suppliers. At the same time, large retailers and corporate buyers in these countries are increasingly imposing strict ESG requirements through their supply agreements, which sometimes go materially beyond the regulatory requirements that apply in their markets. Compliance with these evolving regulatory and contractual requirements is crucial for market access and maintaining a competitive edge. This article explores these trends, considers their implications for New Zealand suppliers, and presents strategies to help suppliers ensure that the ESG obligations they sign-up to are fair, reasonable and capable of being met.
Who should read this article and why?
This article should interest New Zealand goods and services exporters, business leaders and executives, compliance professionals, sales teams, sustainability and CSR (corporate social responsibility) managers and anyone else wanting to gain an understanding of the global evolution of ESG regulations and private standards and their implications, as well as practical strategies for compliance and negotiating appropriate contractual commitments.
Proliferating ESG regulations
In the last decade, there has been a proliferation of ESG laws in the EU, UK and US that are presenting significant opportunities and challenges for New Zealand suppliers. These laws include strict environmental regulations, social standards focusing on labour rights and community impact, and governance requirements for transparency and ethical practices. Compliance with these evolving regulatory standards is crucial for accessing these markets and maintaining competitive advantage.
An illustration of the general direction of travel is provided by a report we published recently in conjunction with Export NZ titled EU/NZ FTA: Seizing opportunities through compliance. It provides an overview of the new EU ESG laws itemised below and considers their potential implications for New Zealand suppliers:
- EU Carbon Border Adjustment Mechanism;
- EU Deforestation Regulation;
- EU Green Shipping Arrangements;
- EU Directive on Corporate Sustainability Reporting; and
- EU Human Rights and Modern Slavery Due Diligence Requirements.
The global trend of increasing ESG regulation is set to continue, driven by climate commitments, public and investor pressure, corporate accountability demands, and global supply chain standards.
Proliferating ESG private standards
At the same time, large retailers and corporate buyers in the EU, UK and US are increasingly imposing strict ESG requirements through their supply agreements. These sometimes go materially beyond the regulatory requirements that apply in their markets in order to meet end customer or investor demands. Examples of some of the more ambitious ESG clauses we have seen proposed recently appear in Figure 1 below.
Adapting to these evolving ESG private standards can enhance market competitiveness, strengthen business relationships, and help embed more sustainable and ethical practices throughout supply chains. It can also lead to improved risk mitigation, reputation enhancement, long-term value creation, and improved innovation and efficiency, among other things. At the same time, New Zealand suppliers need to ensure that the contractual obligations they sign-up to are fair, reasonable and capable of being met, and that minor non-compliance does not trigger a disproportionate response, including a termination right.
Negotiating appropriate ESG contractual commitments
In our experience, there are constructive ways in which to respond to unreasonable ESG clauses proposed by a potential customer, which can lead to modifications that satisfy all parties to a contract. In particular, we recommend that New Zealand suppliers:
- Understand the clauses: Carefully review and understand the specific ESG clauses being proposed. Identify which aspects are unreasonable or overly stringent compared to best practice, industry norms or regulatory requirements.
- Engage in dialogue: Initiate constructive discussions with the potential customer. Express concerns about the feasibility or practicality of certain clauses. Provide rationale and data to support your position, demonstrating how compliance may be challenging or costly without significant added value.
- Seek equivalence: Highlight existing ESG practices and certifications in New Zealand that are measurable and align with international standards. Show how these practices achieve similar outcomes to what the potential customer seeks, promoting equivalency rather than strict compliance.
- Negotiate reasonable terms: Propose modifications or alternatives to the clauses that are realistic for your operations. This could include phased implementation, dialogue on viability of specific targets, or alternative methods to achieve mutual sustainability goals.
- Leverage industry standards: Reference industry standards or guidelines that are widely accepted and recognised globally. This can provide a benchmark for reasonable expectations and help justify your position.
- Highlight mutual benefits: Emphasise the long-term benefits of a sustainable and mutually beneficial partnership. Showcase your commitment to sustainability and willingness to work towards shared and targeted goals, while ensuring that the terms are fair and balanced.
- Maintain Flexibility: Be open to compromise where feasible, while safeguarding core business interests and values. Flexibility in negotiations can lead to a mutually acceptable agreement that preserves the relationship.
- Consider legal review: If necessary, seek legal advice to understand your rights and obligations under international trade laws and contracts. This can provide insights into potential risks and opportunities for negotiation.
By approaching contractual negotiations with transparency, diplomacy, and a focus on mutual benefit, New Zealand suppliers can effectively respond to unreasonable ESG clauses and secure modifications that satisfy all parties to a contract.
How we can help?
MinterEllisonRuddWatts helps New Zealand exporters navigate the complexities of ESG regulations by providing regulatory guidance, compliance audits, and contract review. We routinely assist clients to negotiate reasonable and effective ESG clauses and develop risk mitigation strategies. We provide strategic advice on integrating ESG considerations into business strategies, obtaining relevant certifications, and engaging with regulators to influence regulations. We also aid in developing transparent ESG reporting frameworks and offering ongoing support as the regulatory landscape evolves. Our litigation colleagues handle disputes related to ESG compliance.
For further information, please contact Sarah Salmond, Richard Wells, Sarah Redding or Nathalie Reid.
Figure 1. Sample supply agreement ESG clauses
| Environmental clauses | Zero deforestation
|
Carbon footprint reduction
|
|
Renewable energy usage
|
|
Water stewardship
|
|
| Social clauses | Fair labour practices
|
Gender equality
|
|
Worker health and safety
|
|
| Governance clauses | Supply chain transparency
|
Anti-bribery and corruption
|
|
| Animal welfare clauses | Animal welfare certification
|
Antibiotic use
|
|
| Traceability and certification clauses | Product traceability
|
Third-party certifications
|
|
| Audit and compliance clauses | Sustainability reporting
|
Regular audits
|
|
Non-compliance
|
Key contacts
Speak with one of our experts.
