Contractualising ESG: tools for strategic compliance in the life sciences sector

Christoph von Burgsdorff
Luther Lawfirm, Hamburg
christoph.von.burgsdorff@luther-lawfirm.com

Luisa Kramer
Luther Lawfirm, Hamburg
luisa.kramer@luther-lawfirm.com

Environmental, social and governance (ESG) factors are no longer peripheral concerns in the healthcare and life sciences industry. Amid intensifying regulatory developments and heightened stakeholder scrutiny, ESG has become a core component of legal risk management and corporate governance.

For pharmaceutical companies, biotechnology firms and medical device manufacturers – sectors marked by globalised supply chains, high energy consumption and sensitive product lifecycles – compliance with ESG obligations is rapidly evolving into a legal imperative.

This transformation is particularly evident in the European Union and Germany. The German Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz or LkSG), which has been in force since 2023, and the EU Corporate Sustainability Due Diligence Directive (CSDDD) are significantly raising expectations regarding ESG due diligence. Germany is currently drafting legislation to implement the CSDDD, aiming to transpose the directive into national law through a streamlined and enforceable framework.

ESG clauses in life sciences contracts: from policy to practice

In this regulatory landscape, ESG clauses in commercial agreements have emerged as critical tools for implementing compliance obligations. These provisions are no longer just wishful thinking but allocate risks, define responsibilities and provide mechanisms for monitoring and enforcement throughout the contractual lifecycle.

Within German legal practice, ESG-related clauses are increasingly embedded in supply, distribution, research and development, and licensing agreements across the life sciences supply chain. Key clause types include:

Code of conduct clauses

These provisions require counterparties to adhere to the company’s internal code of conduct or to internationally recognised ESG frameworks – such as the EU Taxonomy, which obliges companies operating within the EU to disclose specific ESG criteria, particularly with regard to their climate goals and the environmental impact of their business activities, or the OECD Guidelines for Multinational Enterprises. Although the OECD Guidelines are not legally binding per se, they set out essential standards and often serve as interpretative tools for national regulatory authorities and courts.

Audit and reporting rights

Audit and reporting clauses are central to contract-based ESG compliance. They provide transparency, allow for ongoing monitoring and create formal mechanisms to assess the fulfilment of ESG commitments. These clauses are especially critical in mitigating legal and reputational risks stemming from supply chain activities in high-risk jurisdictions.

Flow-down obligations

To ensure ESG compliance throughout the supply chain, primary contractors increasingly impose flow-down obligations on their suppliers and subcontractors. These provisions require lower-tier actors to observe the same ESG standards and replicate corresponding obligations in their own contracts, thus creating a cascade of due diligence along the chain.

Remediation and corrective measures

Rather than resorting immediately to termination or litigation, remediation and corrective measure clauses establish defined processes and timeframes for curing ESG breaches, such as environmental harm or labour rights violations. They align with LkSG’s emphasis on preventive and corrective measures and support the principle of proportionality under German contract law.

Termination rights for ESG breaches

Where compliance failures persist despite remedial efforts, ESG termination clauses provide companies with enforceable exit options.

These provisions serve as leverage to promote ongoing adherence to ESG obligations and preserve the company’s reputation, legal compliance and alignment with investor expectations.

Legal effectiveness under German law

The most sophisticated clause formulations are of no use if the clauses cannot be enforced in everyday business practice vis-à-vis the contractual partner.

Under German contract law (German Civil Code/Bürgerliches Gesetzbuch or BGB), pre-formulated contract clauses in a large number of contracts are generally considered to be general terms and conditions (GTC). The enforceability of ESG clauses in German contracts is therefore subject to scrutiny under the rules governing GTC as set out in Sections 305 et seq of BGB. Pre-formulated clauses used in standardised contracts must satisfy principles of transparency, reasonableness and proportionality to avoid invalidity.

For instance, overly broad termination rights or disproportionate obligations that impose an unreasonable disadvantage on the counterparty may be declared invalid. Careful contract drafting, tailored to the specific transaction and negotiated terms where possible, is essential to preserve enforceability.

Moreover, companies must reconcile freedom of contract with compliance requirements. For example, Section 3, paragraph 1, sentence 2 no 5 in conjunction with Section 6, paragraph 4 of LkSG expressly requires preventive measures not only internally but also with respect to direct suppliers. Contracts must therefore reflect these obligations to fulfil regulatory expectations.

In the near future, the German legislature will not only amend LkSG to include the human rights and environmental due diligence obligations contained in the CSDDD, but will also seamlessly replace it with a law on international corporate responsibility that transposes the CSDDD into national law. However, the new Act on Corporate Due Diligence Obligations in Supply Chains is expected to closely follow the current Act on important points.

This shows once again how important it is for companies to carefully examine the European and German ESG clauses in order to participate in the market in a legally compliant manner.

Strategic benefits

Robust ESG clauses not only improve legal compliance but also serve strategic business objectives. They provide verifiable documentation of companies’ due diligence obligations, thereby limiting potential liability in administrative and civil proceedings. Institutional investors apply ESG benchmarks when evaluating corporate governance. ESG-conscious contract management may also improve access to capital and valuation. Public and private procurement frameworks are increasingly requiring verifiable ESG compliance. Well-drafted contracts therefore provide the necessary transparency and responsiveness.

Practical challenges

Despite their usefulness, ESG contract provisions present challenges. Smaller suppliers may lack the infrastructure to meet ESG demands or resist increased compliance burden, leading to different negotiation dynamics. Enforcement and oversight in third countries, particularly in low-regulation environments, may be limited. Monitoring ESG provisions across different jurisdictions can therefore be difficult. Without substantive implementation, ESG clauses may be perceived as mere formality, exposing companies to reputational and legal consequences, known as greenwashing.

Conclusion: contract law as a pillar of ESG compliance

For the life sciences sector, ESG clauses are rapidly transitioning from a best practice into a legal and strategic necessity. With the future development of legal frameworks such as CSDDD and LkSG, contractual governance will become a key mechanism for implementing ESG obligations, managing risks and demonstrating compliance.

German and European companies operating in the life sciences industry should act now to review, revise and reinforce their contractual frameworks. By doing so, they not only ensure legal alignment but position themselves competitively in a market where ESG compliance is becoming a core criterion for investment, procurement and partnership decisions.

Industry-specific soft law standards are also gaining traction as benchmarks for contractual drafting. Given the highly regulated and international nature of the life sciences sector, it is poised to become a proving ground for ESG contractual enforcement and governance.