In today’s business landscape, the integration of Environmental, Social, and Governance (ESG) factors into sponsorship agreements is not just a trend but a necessity. As ESG regulations and reporting requirements become more stringent, due diligence in sponsorship agreements has never been more critical.
In a similar vein, companies such as Nestlé and Danone have embedded sustainability-related procurement criteria into their contracts, requiring suppliers to meet specific environmental and social standards.
This article explores the significance of due diligence, methods for businesses to ensure compliance, and strategies to mitigate related risks.
The Importance of Due Diligence
Due diligence in sponsorship agreements involves a thorough evaluation of potential partners to ensure alignment with your organisation’s values and compliance with legal and ethical standards. This process is crucial to mitigate risks that may impact the organisation and include the following:
- Reputation Management: Partnering with entities that do not adhere to ESG standards can damage your brand’s reputation. For instance, a well-known sports brand faced backlash after sponsoring an event linked to environmental degradation.
- Legal Compliance: With the rise of regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD) and its sister directive, the Corporate Sustainability Due Diligence Directive (CS3D), businesses must ensure their sponsorship agreements comply with ESG reporting standards. The CS3D, published in the Official Journal of the EU in July 2024, aims to promote sustainable and responsible corporate actions and behaviours and should be transposed into local legislation by July 2026.
- Financial Stability: Evaluating the financial stability of potential partners helps mitigate risks linked with financial instability, which can lead to unfulfilled sponsorship obligations.
- Ethical Alignment: Ensuring that your partners share your commitment to ethical practices is essential. This includes evaluating their labour practices, environmental policies, and governance structures.
- Long-term Viability: Thorough due diligence helps in identifying partners who are not only compliant but also committed to long-term sustainability goals, ensuring a more stable and fruitful partnership.
Ensuring Compliance with ESG Regulations
To navigate the complex landscape of ESG regulations, businesses should adopt the following strategies:
- Conduct Comprehensive ESG Audits: Regular audits help identify potential compliance gaps and areas for improvement. This includes assessing carbon footprints, diversity policies, and governance structures.
- Set Clear ESG Goals: Define measurable ESG objectives, such as reducing greenhouse gas emissions or achieving gender parity in leadership roles. These goals should be integrated into sponsorship agreements to ensure both parties are committed to sustainability.
- Stay Informed on Regulatory Changes: ESG regulations are continually evolving. Businesses must stay updated on changes to ensure ongoing compliance. For example, the recent amendments to the EU Taxonomy have introduced new reporting requirements.
- Engage Stakeholders: Involve key stakeholders, including investors, employees, and customers, in the ESG compliance process. Their input can provide valuable insights and help ensure that the company’s ESG initiatives are comprehensive and effective.
- Utilise Technology: Utilise technological solutions to streamline ESG data collection, reporting, and monitoring. Tools like ESG management software can assist businesses in tracking their compliance efforts and identifying areas for improvement.
- Learn from Real-Life Examples: For instance, Unilever’s sale of its spreads business in 2017 included a condition that the buyer would continue to work towards sourcing 100% sustainable palm oil.
Similarly, companies like Nestlé and Danone have integrated sustainability-related procurement requirements into their contracts, mandating suppliers to adhere to specific environmental and social standards.
Mitigating Risks in Sponsorship Agreements
Risk mitigation is a critical component of due diligence. Here are some best practices:
- Draft Clear Contracts: Make sure that sponsorship agreements explicitly define the roles, responsibilities, and expectations of both parties, including adherence to ESG standards and reporting requirements.
- Include Indemnification Clauses: These clauses protect your business from legal and financial liabilities arising from the sponsor’s actions.
- Secure Appropriate Insurance: Insurance policies should cover potential risks, including event cancellations, property damage, and legal disputes.
- Regular Monitoring and Reporting: Establish mechanisms for ongoing monitoring and reporting of ESG compliance. This ensures that both parties remain accountable, and any issues are addressed promptly.
- Engage Legal and Compliance Experts: Work with legal and compliance experts to navigate complex regulatory environments and draft strong agreements that safeguard your interests.
Due diligence in sponsorship agreements is essential for managing reputational, legal, and financial risks, especially considering increasing ESG regulations. By conducting thorough evaluations, setting clear ESG goals, and staying informed on regulatory changes, businesses can ensure compliance and foster sustainable partnerships.
How ARQ Can Help
At ARQ Group, we specialise in helping businesses navigate the complexities of ESG compliance and risk management. Our team of experts can assist you in conducting comprehensive due diligence, drafting robust contracts, and ensuring your sponsorship agreements align with the latest ESG regulations. For more information, please speak to Kai Keingunther – Senior Advisor – Risk and Compliance.
Manfred Galdes
Managing Partner
A lawyer by profession, Manfred Galdes is the managing partner at ARQ. He has spent over twenty years of experience practising in the area of regulatory and AML compliance, having held leading roles both in the private and public sector. A lawyer by profession, Manfred Galdes is the managing partner at ARQ. He has spent over twenty years of experience practising in the area of regulatory and AML compliance, having held leading roles both in the private and public sector.
