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Risk management: navigating the complex world of international contracts

A crucial aspect of risk management for any business is effective contract management. This allows you to effectively manage and monitor different types of contracts ranging from supplier to maintenance and labor contracts. This is not only to ensure operational efficiency, but also to avoid potential legal disputes. A structured contract management process provides clear insight into the rights and obligations arising from these contracts, allowing you to take risk management to a professional level.

Does your insurance cover enough?

Let's start with a fundamental aspect of risk management: insurance. Does your insurance cover any claims from foreign parties? Does this include attorney fees in a foreign court? Especially for deliveries to customers outside the EU, it is essential to examine this carefully! Some countries, such as the US, China and Russia, may even be completely excluded or offer only partial reimbursement. Additional insurance as risk management is sometimes necessary, but this can again incur significant additional costs.

It is also a good idea to look at your customers' or suppliers' contracts and terms and conditions. These may contain claims that are not covered by your insurance. This underscores the importance of good risk management, to always research carefully under which legal system you are contracting. Outside the EU, dispute resolution is often less effective, which can make it more challenging to get your money or goods back if problems arise.

Alternative payment arrangements as risk management

It is often prudent to use alternative payment methods as risk management to mitigate the risks of international trade. One of the most common options are letters of credit. These are financial documents issued by a bank, stating that the seller will be paid once certain conditions are met, such as handing over shipping documents proving that the goods have been shipped. This offers both the buyer and the seller a degree of protection: the buyer knows he will receive the goods as agreed, and the seller knows he will be paid as long as he meets the conditions.

Another method is to use bank guarantees. In this, a bank guarantees that the seller will be paid even if the buyer is unable to pay. This can help increase trust between trading partners and reduce the likelihood of non-payment, i.e., risk management. Both methods ensure that there is a simultaneous exchange of goods and money, significantly reducing the risk of default.

But these payment methods are not without drawbacks. Using letters of credit and bank guarantees can result in high costs, such as administrative fees and bank charges. Moreover, in case of a dispute, legal costs can be high. Especially in countries such as the United States, where legal proceedings and claims are common, the cost of legal representation and potential damages can be significant. This can result in additional financial burdens for both parties, which can negate the benefits of these payment methods.

Escape

Finally, it is crucial to provide your contracts with sufficient "escapes" or force majeure provisions as risk management. These protect you from circumstances beyond your control, such as pandemics, logistical problems or geopolitical conflicts. Then be very specific in defining what constitutes force majeure in your case so that there is no ambiguity.

Take these principles of risk management very seriously! By doing so, you will enable your company to better navigate the complex world of international contracts. Through your vigilance and proactive approach, you will avoid potential pitfalls and protect your organization from unforeseen challenges.

LAW/FIRM can help with your risk management.

Would you like an extra check on a contract? Or are you about to engage with a foreign party and want someone to look with you with a legal eye? Then contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267).

LAW/FIRM introduces Pakta!

We have taken the next step in process control and follow-up: since April 1, 2024, we have been using the contract management tool Pakta.

Pakta helps us follow up on contracts we draft for our clients at the right time, whether it's a reminder, the expiration of the contract term, approaching deadlines in acquisition contracts, the reminder for a sanity check, or even whether the agreement still complies with the state of the law. Thanks to Pakta, our contract management is always completely up-to-date.

So will you soon get an email telling you that the term of an agreement we created for you several years ago is about to expire, or that it's time to revise your model contracts? Then you know we've put your agreements into Pakta to serve you even better.

Have you ever read your terms and conditions?

You know that phrase, tucked away in the footer of your letterhead: "All our deliveries are subject to our general terms and conditions filed with the Chamber of Commerce." Once upon a time, in a gray past, a lawyer drew up a set of general terms and conditions. These are stored somewhere on the server and no one actually knows exactly where.

Know your terms

For an SME entrepreneur, knowing and understanding your own general terms and conditions and how to use them in practice is very important. These terms and conditions play a role in establishing the rights and obligations of both parties in a contract. General terms and conditions are often included on the back of the letterhead, or referenced in the footnote of the letterhead. In daily practice, they don't actually play a major role. And this while often the most important things, such as limitation of liability, payment terms, warranty terms and other delivery conditions are mentioned in them. So it's worthwhile as an SME entrepreneur to delve deeper into this with your sales and purchasing team.

Industry conditions

It is common for companies to use their own general terms and conditions, but in some industries, industry terms and conditions are also widely used. For example, consider the Metaalunie conditions or the Orgalim conditions in the manufacturing industry, or the Fenex, AVC and Physical Distribution conditions in the logistics sector.

Branch terms and conditions have the advantage that they are widely accepted in the Netherlands within their own branch and do not often meet with resistance. Keep in mind that the use of branch terms and conditions in other countries is not always standard practice. So maybe the foreign contracting party refuses your terms and conditions.

Do more than just report that you have them

It is very important to realize that merely stating the terms and conditions is not enough to be legally binding. You must make it clear that you are only doing business under your terms and conditions. You must also indicate a location where the terms and conditions can be found (e.g. the Chamber of Commerce or website), so that your contracting party can easily view the terms and conditions there. Moreover, if you are doing business internationally, you should always send them along the first time you do business with each other to make them part of your contract. Otherwise, you run the risk of a judge disregarding them. The same applies if you are purchasing and want your industry terms and conditions or your general purchasing terms and conditions to apply.

Want to be sure? Then include your terms and conditions with every quotation and order confirmation. Or send your regular customers an email or letter every year, saying that also for next year your terms and conditions apply to the business you do with each other.

Does your contracting party declare its own terms and conditions applicable in its purchase order or acceptance of your offer? Do not leave that unmentioned, because otherwise you run the risk of ambiguity as to whether your terms and conditions, those of the contracting party or no terms and conditions at all apply. This is especially true if you do business with foreign customers and suppliers.

Review of your terms and conditions

Your business is constantly changing. That's why we advise you to take a close look at your terms and conditions every 4 years. Do they still fit your way of doing business? Are they still current, or has legislation changed? Are there provisions that always lead to discussions with your contracting party? Check this once every 4 years.

Training for salespeople and buyers

You can already tell from this article that the proper use of general sales terms and conditions and general purchasing terms and conditions is of great importance. LAW/FIRM regularly provides interactive training to sales teams and buyers on the proper use of general terms and conditions. The in-house training lasts 2 (or 4) hours and is customized. We get briefed in advance so we can take into account your company, products and industry. After the training, your employees will know:

  1. How they make national and international general sales conditions and general purchasing conditions part of agreements with customers and suppliers;
  2. How they can enter the discussion if the contracting party also declares its general terms and conditions applicable;
  3. In what way in the quotation and purchase order the most important issues are secured;
  4. How to recognize provisions in the contracting party's terms and conditions that are unreasonable or onerous and can suggest alternatives.

The training can be conducted separately or in conjunction with a review of your general terms and conditions, standard quotations, order confirmations, purchase orders and other sales and purchasing documentation.

Want to know more?

Do you need help drafting general terms and conditions, want to revise your current ones, or are you interested in training? That's where LAW/FIRM can help. Feel free tocontactEsther Tromp, (E: esthertromp@law-firm.international, T: +31655741267)

Update CSDDD

In a previous article, we shared good news with you about the European version of the Lieferkettengesetz, the European Corporate Sustainability Due Diligence Directive (CSDDD). On Dec. 14, the CSDDD jumped through the first hoop in Europe after the European Parliament and the European Council reached an agreement on the CSDDD. On Jan. 30, a final text was published that had until Feb. 28 to be approved. But this has been postponed. Mainly because Germany indicated it was abstaining and allegedly also because France had some objections.

This has created an impasse. The text of the CSDDD was actually scheduled to be sent to the European Parliament afterwards for consideration in April. So that will not happen now: the CSDDD text has to be renegotiated and rewritten. The danger is, that because of the European Parliament elections in June 2024, there will then be further delays.

From procrastination, hopefully for the CSDDD, comes no cancellation

We at LAW/FIRM find this extremely unfortunate, because sustainability and reducing our ecological footprint cannot go fast enough for us. It is good news for business, though, that they will have more time to prepare for legislation that, we believe, will eventually come.

Meanwhile, the German Lieferkettengesetz does come into effect and the first companies have to start reporting in August. Do you or do your (German) customers have to deal with this? Then read this article quickly to find out how we can help you become compliant in a simple, quick and least time-consuming way.

Contact

Would you like more information about this? Or could you use help or advice? Then contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267)

ESG and the Lieferkettengesetz

Do you recognize this?

In August, the first companies, which have been covered by Germany's Lieferkettengesetz since Jan. 1, 2023, will have to start reporting on the fulfillment of their obligations under that law. Next year, all companies that came within the scope of the law from Jan. 1, 2024, will follow.

Do you have an SME company in the supply chain of food, automotive and pharma? Then even more than other companies, you will have to deal with the Lieferkettengesetz, audits and other compliance requirements.

How do you become ESG compliant under the Lieferkettengesetz?

The Lieferkettengesetz requires companies to require their suppliers to become compliant under the Lieferkettengesetz.

This means, among other things, that you should start taking the following measures:

  • You must adhere to international standards in the areas of human rights, worker protection, habitat conservation and the environment;
  • Within your company, you need to train your staff on respecting human rights. This is especially important for your buyers, who need to become alert to sustainable purchasing'
  • You must require your suppliers to comply with the Lieferkettengesetz as well;
  • You will have to cooperate in audits of your client, to verify that you are compliant and what measures you are taking to prevent violations of human rights, environmental standards, etc., and avert their negative consequences;

That sounds like an impossible task for an SME. Who is going to do that within the company? How are you going to do that?

The solution of LAW/FIRM

You can spend a lot of money on specialized agencies and get bogged down in endless details. Because you can already achieve great results with relatively simple measures, we are happy to help you take things as simply as possible and appropriate to your business.

How do we do that? For this, we have a tailor-made 'Lieferkettengesetz compliance for SMEs' package for you

  • We have a simple traffic light diagram for you that you can use to check all incoming customer requests for compliance with the Lieferkettengesetz. After all, you don't want to do too little, but you certainly don't want to take on unnecessary work either.
  • Supplement your general purchasing and sales terms and conditions so that you are contractually compliant on the purchasing and sales side. That saves a lot of discussion about additional contracts.
  • An easy to read and use supplier codex for your suppliers. After all, no one is waiting for unnecessary hassle and open contracts.
  • A human rights codex for your own company and a simple staff training so that everyone is up to speed, but that it doesn't take anyone's time unnecessarily.

The solution for you?

Are you interested in completing the package for your company? Want to know more about the cost and time it will take for you and your colleagues? Contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267).

Customized ESG inventory and reporting: a must for SME entrepreneurs

Nowadays, attention to Environmental, Social, and Governance (ESG) factors is growing in society. Not only do large companies notice this, but also entrepreneurs in small and medium-sized enterprises (SMEs). Increasingly, they are being judged on their sustainability, social responsibility and good governance efforts. However, understanding and implementing these ESG requirements can be quite a challenge. But not to worry, at LAW/FIRM we have the solution! We now offer a unique service: preparing a customized ESG report specifically for your company. That way, you can get started with sustainability and corporate social responsibility without the headaches.

Why an ESG report?

ESG reports are indispensable in business today. They provide valuable information to investors, stakeholders and customers about a company's commitment to sustainability and corporate social responsibility. These reports help assess the potential environmental, social responsibility and corporate governance risks and opportunities within an organization. They also help improve a company's reputation and increase its attractiveness to potential investors. Today, the market demands convincing evidence of companies' sustainable economic model and wants to see that they are future-proofed. With the ESG customization report, you can show your clients where you are now, and where you are working on improvements. This is especially important if you do business with German companies covered by the Lieferkettengesetz .

Our service: fast, understandable and reliable

As an SME entrepreneur, you may be dreading the seemingly high demands of creating ESG reports. We are happy to take this task off your hands or help you to easily create your own reports with a customized ESG inventory and reporting template. Our trump card? Simplicity and speed! We understand that you have better things on your mind than filling in lists. But you also have to deal with tight deadlines and timely reporting is crucial. That's why our experienced professionals prepare your ESG report quickly, without compromising on quality.

Comprehensibility is our top priority. After all, what good is a report if you don't understand what it says? It is essential that ESG reports are understood not only by experts, but also by yourself and all stakeholders, such as your own staff, customers and investors. That is why we translate the complex world of sustainability factors into clear language that is accessible to everyone.

We also advise you where you can easily take the next step in your sustainability goals from a legal perspective. This will keep you compliant and an attractive business partner also in the future, for example for companies covered by the German Lieferkettengesetz (LkSG).

Staying up to date

We want to emphasize how important it is to stay abreast of the constantly changing ESG legislation so that there are no surprises. To remain compliant in the future, it is essential to keep up to date and regularly review where you can take the next step. Fortunately, you don't have to worry because we are always up to date with the latest developments in this area. That way, we can always provide you with current and relevant information that will give your company an edge.

Conclusion

ESG reports are impossible to imagine these days. They are becoming increasingly important for companies that want to thrive in the modern business world. But as an SME entrepreneur, preparing such a report can be challenging. No worries! We offer you a tailor-made ESG inventory and reporting service for SMEs that is easy to implement without unnecessary fuss and meets, among other things, the requirements of the German Lieferkettengesetz. Our team of experts ensures that your ESG report is prepared quickly and reliably, without compromising on quality. We ensure that your report is understandable to everyone and also legally appropriate to the size of your company, your business operations and the requirements set by your (German) customers, including under the German Lieferkettengesetz.

Contact Nicola Fletcher Lord, (E: nicolafletcherlord@law-firm.international T: +31611369089) to learn more about how we can help you with your ESG reporting needs. Your success is our top priority!

The role of ESG in corporate acquisitions explained

In the world of private equity and investors, choices in composition of their portfolios are largely based on how ESG- proof a company is. In today's society, unsustainable business practices affect a company's future profitability.

Sustainability is no longer an afterthought in SME mergers and acquisitions either. In fact, it has now become one of the most important factors in a business acquisition. Whether it's the choice of whether to merge companies, knockout factors in a due diligence or as a topic at the negotiating table when it comes to guarantees and indemnities.

What are the factors that ESG affects?

  • Risk management
    Dealing smartly with ESG reduces risks, for example because costs can be saved in the long run, the company is less susceptible to fraud and its supply chain is more stable. More and more investors are taking this into account.
  • Reputation
    The better a company performs on the ESG, the better its reputation. That ensures greater customer loyalty, and also makes the company more interesting to employees in times of staff shortages. Moreover, for SMEs supplying large corporations, they can only continue to serve those customers if they are ESG proof on all fronts.
  • Access to capital
    Strong ESG performance makes it easier to raise capital and also discounts capital costs. Investors rate companies that focus on sustainability and social responsibility higher, and banks also pay attention.
  • Indicator of future success
    ESG is increasingly seen as an indicator of a company's future success. Not only in large companies, but especially in SMEs. Companies that score well on ESG often have a better reputation, more stable operations, attract talented employees and are seen as reliable business partners. This leads to better operational performance, higher profits and more long-term value creation.

ESG in the different steps of corporate acquisitions

ESG plays a decisive role in corporate acquisitions at various stages of the acquisition process.

  1. Selection process and value of the company
    On the buyer's side
    Already when selecting a potential "target" - the company to be acquired - ESG plays a major role. The value of the target is increasingly determined by an answer to the question of how ESG-proof a company is. If a company leaves big stitches in the ESG field, the value of the company drops and a lower purchase price will simply be paid. After all, the new owner will then still have to make substantial investments. Think about insulation of the business premises, finding newer (more sustainable) suppliers or raw materials and correcting skewed remuneration policies.

    On the seller's side
    As an SME entrepreneur, you have spent years building your business, perhaps even over several generations. Then you certainly don't sell your company to just anyone. Moreover, you also have an obligation to your staff, to hand them over well to a buyer who will continue to take good care of them. A company that is known to treat its staff badly does not seem like a good option then. But what about a foreign company from the US or Asia that you don't otherwise know? Perhaps it is not unwise to do some research into their ESG scores anyway.

  1. Due diligence
    When conducting due diligence for a potential business acquisition, companies should consider ESG risks and opportunities. This includes assessing the environmental performance, social impact and policy structure of the target company. By including ESG factors in the due diligence process, potential environmental, social and policy risks and opportunities are identified in a timely manner. Analysis of these factors allows buyers to identify potential risks that could damage the value or reputation of the company they are targeting.

  2. Purchase price determination
    We mentioned it above. A low ESG score directly reduces the purchase price in business acquisitions. It does not mean that you have to be the best in class, but certain basic principles have to be in order. Otherwise, you run the risk of getting considerably less for your company than hoped for.
  1. Value creation
    Suppose the ESG score of the company to be acquired is lower than yours as a buyer. Then improving that score after the purchase creates immediate value. Implementation of the buyer's ESG policy, and changes in that area with the help of the buyer, can realize cost savings, allow your company to operate more efficiently from now on, bring in better customers and discover new markets. The reverse can also be true. That the buyer actually adopts the sustainability efforts of the purchased company after the business acquisition and thereby creates value for his own company, for example by adopting a revolutionary new, sustainable, more environmentally friendly production method, purchasing different raw materials, etc.

  2. Stakeholder Management
    It was pointed out earlier: companies that score high on ESG are attractive employers for young and talented employees. The young generation has a great need for meaning even when it comes to work. They want to be proud of the company they are part of. Being conscious of the environment, living conditions and human rights is part of this. Those who have satisfied employees radiate this. This has a direct influence on how customers are treated. Having an eye for your company's impact on the immediate environment ensures that you have a positive image. It also ensures that you have fewer problems when it comes to licensing or other government interference, for example, environmental and environmental permits or exceptions.

In short, ESG is of critical importance to companies and investors and plays an increasing role in assessing a company's sustainability and responsibility. In the context of M&A and corporate acquisitions, ESG helps manage risk, create value and manage stakeholders.

How does LAW/FIRM help

We believe that sustainable companies are more successful in the long run, and that is exactly what we strive for. We are aware of the importance of ESG. In our due diligence, we conduct targeted research on it as far as legal aspects are concerned and we provide targeted advice on appropriate warranties and indemnities when negotiating the purchase agreement. Within the broader context of acquisition advisory, we have a network of advisors who can advise at the operational level and help implement changes in the ESG area. If you would like to learn more about the non-legal aspects of ESG within the context of corporate acquisitions, please read this article.

Do you have questions about this? Or would you like advice on integrating ESG criteria? Please feel free to contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267)

 

Passing on commitments in own supplier chain

Has your client placed ESG obligations on you? This means they have certain environmental, social and governance expectations related to products or services they purchase from you. It is critical that you not only understand these imposed ESG obligations, but also integrate them into your own business processes, and push them on to your own suppliers. But how do you do that? In this article, we take a closer look at that.

Include in your terms and conditions

If you have your own terms and conditions, you can choose to add a provision to those terms and conditions that specifically addresses ESG obligations. This is the easiest way to ensure that all parties with whom you do business are obliged to comply with any ESG obligations that you yourself have. Of course, you then have to make sure that those terms and conditions apply to all contracts you enter into.

 

Supplementary conditions/PO/OC

Do you handle industry terms and conditions? These cannot be modified just like that. In that case, you can choose to add a separate set of conditions that apply specifically to your company. In that extra set you can also include the ESG obligations. The disadvantage is that you have to send your customer two sets of general conditions: the branch conditions and the separate extra set. Chances are that this will lead to additional discussions with your supplier, so perhaps this is the perfect time to have new purchase conditions drawn up that are specifically tailored to your company.

Framework agreement with supplier

Do you regularly purchase products or services from the same supplier? If so, it may be beneficial to enter into a framework agreement with that supplier. This is not only practical in the context of the ESG requirements, but you also regulate specific aspects such as delivery deadlines, packaging requirements, quality standards, conformity and so on. Two birds with one stone!

New contracts for suppliers

When drafting new agreements with suppliers, you have the opportunity to negotiate the inclusion of specific contract provisions. These provisions relate to obligations under the law or agreements you have made with your own customers, which you now pass on to your supplier.

Integrating such specific contract provisions is important because it ensures that your supplier is aware of and agrees to the legal or contractual obligations you have as a business owner. These range from legal standards to specific requirements your customers impose on you, such as ESG requirements, quality standards, or other requirements that affect your business processes.

Most suppliers are generally willing to cooperate with such contract provisions, as it is a way to provide a clear framework and smooth cooperation. By being transparent about your obligations and expectations, you lay a strong foundation for a long-term and constructive relationship with your supplier.

Loose appointment

You can of course also simply approach your supplier and indicate that, for the continuation of your relationship because of the ESG rules to which you are bound, it is important that additional agreements be made about cooperating with audits and possible other ESG obligations. It is good to realize that ESG legislation is designed to take into account the fact that other requirements apply in other countries. Legislation on working conditions, for example, is different in many countries and often worse. However, minimum requirements can be set for worker safety. And if your supplier does not meet even that, it is time to seriously question whether this is the right business partner.

Need help?

Need help updating your terms and conditions, your contracts or want to know how to implement ESG obligations in a specific relationship? Then contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267)

CSDDD - corporate sustainability directive

The European Parliament and the European Council agreed on the Corporate Sustainability Due Diligence Directive (CSDDD) on December 14, 2023. In Dutch, this is the directive appropriate due diligence in corporate sustainability.

The purpose of this CSDD directive is to better protect the environment and human rights both in the EU and around the world. The directive will apply to companies with more than 500 employees and 150 Mio turnover worldwide. But because the rules apply to the entire chain of these companies, i.e. both their supply chain and their sales channels, they will indirectly apply to SMEs as well.

Key elements CSDDD

The directive, as already mentioned, will apply to companies with more than 500 employees worldwide and a net turnover of more than 150 million Euros. Non-EU companies that also make a net turnover of more than 150 million in the EU 3 years after the directive comes into force will also be covered. Those companies will be published in a European Commission list. In this way, the EU is going to try to get foreign companies covered by the directive as well.

Under the directive, stricter requirements are placed on the efforts that these large companies must make to adopt more sustainable business practices and respect human rights. Among other things, this means that in their supply chain, they must also impose those duties on their suppliers and business partners. If nothing changes in the worst case scenario, the relationship with that business partner will have to be terminated.

If companies do not comply with the requirements of the directive, injured parties can go to court. That means, for example, trade unions but also environmental organizations such as Greenpeace if they find violations. Fines can also be imposed.

Impact CSDDD on SMEs

So although SMEs will not be directly affected by the CSDDD, they are indirectly affected, for example because they supply goods to a company covered by it or because they purchase goods from them. In more and more general terms and conditions of large companies you see extensive warranty clauses popping up that include that the supplier meets all ESG requirements and what the consequences are if this is not the case.

So an SME entrepreneur has to start declaring that his own chain is CSDDD proof against a company subject to the CSDDD (or German Liefferkettengesetz). That means that he must in turn pass on all those obligations imposed on him by these companies to his own supplier. So if you source components from low-wage countries, for example, you have to start thinking carefully about how you find out how working conditions, workers' rights and the environment are handled in those companies. Not an easy job!

SMEs in the automotive industry are already accustomed to extensive audits and reporting requirements that they must comply with. It is expected that monitoring of ESG obligations at these companies will also take place through audit systems.

Procurement Law

The directive is going to stipulate that public tenders can only be awarded if the new directive is met, so if you regularly compete in tenders, from the introduction of the CSDD, new elements will be added to it that you will also have to meet if you want to remain a contender.

How can LAW FIRM help you?

As an SME entrepreneur, do you need help becoming compliant or are you already dealing with buyers who impose far-reaching ESG obligations and want to know how to deal with them?

We can help you with:

  • Screening risk factors in your supply chain
  • Drafting contract provisions for suppliers
  • Assistance in completing and reviewing imposed ESG provisions and audits of buyers

Contact Esther Tromp (E: esthertromp@law-firm.international, T: +31655742167) for a customized consultation.

Sustainability and ESG for SME entrepreneurs

Sustainable business: it's a bit of a buzzword. You can't -and won't- ignore it these days. But just 10 years ago you could get away with a sentence under your email: 'think about the environment before you print this email', nowadays sustainable business has become a serious and heavy obligation for companies.

Legislation in the making

Legislation is rapidly being drafted in various countries and at the EU, all with the aim of promoting sustainability in a variety of areas Germany is leading the way with the Lieferkettengesetz, which came into force on Jan. 1, 2023. This law has already been updated : since Jan. 1, 2024, the law applies to all companies with a (branch) office in Germany and more than 1,000 employees. From Jan. 1, 2025, that limit may go even lower.

CSRD

Also in January 2023, the Corporate Sustainability Reporting Directive (CSRD) went into effect. Under this regulation, companies subject to reporting requirements must account for the achievement of their sustainability goals in their annual report. On Dec. 14, 2023, the European Council and Parliament agreed on the Corporate Sustainability Due Diligence Directive (CSDDD), the European version of the Lieferkettengesetz. The directive is intended to apply to large companies, but by requiring them to monitor their entire value chain, it thus indirectly applies to the entire business community.

With this, sustainability becomes more than just a marketing term, it becomes a serious aspect of business that has an impact in many areas. Also and especially for the SME entrepreneur. How and in what way is explained in this article, and we also give you tips on how to respond properly to this trend and what you can do legally to become ESG compliant.

What is ESG?

ESG stands for Environmental, Social and Governance. It is also summarized under the term "sustainability. In business terms, it means the sustainability of a company in all areas, from its impact on the environment to its dealings with people throughout the supply chain.

ESG legislation includes all laws and regulations on the topics of environment, people and governance, which is very broad . Basically, it covers everything about how companies treat their employees, the impact they have on the environment and how they set up their organization and run their business. As a society, we believe that this can be done more sustainably and better, and our ethical standards about this are also changing. Just think of the discussions on social media about the abuses in the fashion industry, intensive livestock farming and dumping of waste in poor countries.

The importance of ESG for SMEs

You might think, as an SME entrepreneur, that this is a faraway show. That this mainly affects large companies, companies with factories in low-wage countries, who dump their waste directly into the river, make their employees work 18 hours a day and are rapidly deforesting. Nothing could be further from the truth. Because precisely as an SME entrepreneur, you have control over which supplier you order your components from and who you have your components assembled by. You are in control of how you treat your employees and how you handle available energy and resources. Companies with a mission have an edge these days, just think of the successes of Tony's Chocolonely and Ben and Jerry's.

Obstacles

However, you cannot control how your customers deal with ESG issues while at the same time you also have to keep costs under control. Switching to another supplier that may perform better in terms of ESG but may also be considerably more expensive sounds noble, but may also just cost you customers in the short term. So what is wise? And then there is that supplier, which imposes a mandatory annual audit with all sorts of questionnaires. If you filled them all out, all your procurement channels would be on the street and that supplier wouldn't need you at all. Should you just accept that?

Audits of customers

Those who supply German companies since 2023 may have already had their first audit on ESG aspects. Or you have received an additional set of conditions on ESG compliance that you had to agree to. If you want to know more about this, be sure to read our article on the Lieferkettengesetz.

Some questionnaires or audits go pretty far: questions are asked about your entire supply chain including names and turnovers. This is business-sensitive information that should certainly not normally be shared. The question, then, is how to handle this both commercially and legally. Of course you don't want to lose the customer, but on the other hand, giving access to your trade secrets is also a risk. The customer might get information that he himself can use to request competitive quotes, or you might violate your duty of confidentiality to your own suppliers.

It's good to realize that everyone is new to this ESG legislation, some of which is even in the works. No judge has yet addressed it. At this point, many companies (and their advisers) are still taking the safe approach, preferring to overask rather than forget.

It is therefore important to know which legal obligation these companies have and which do not, so you can estimate for yourself, which part of the audit questions do not need to be answered. We at LAW/FIRM are happy to help you with that. Would you like to know more about this or are you struggling with an audit? Then contact Esther Tromp, (E: esthertromp@law-firm.international, T: +31655741267).

 

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