Sustainable Sponsorships – How ESG Impacts Sponsorship Agreements

Europe is moving fast towards a sustainable future. ESG (Environmental, Social, Governance) or “the three pillars of sustainability: environmental, social, governance will drive a fundamental change in all areas, both for businesses and non-profit organizations (NGOs). And to achieve sustainability goals, collaboration between business and NGOs plays an important role.

For companies to achieve sustainability the principles of corporate social responsibility (CSR) must be reflected in corporate governance policies. In brief, social responsibility is how a company addresses its economic, social, and environmental impact in the community in which it operates.

Why would a company choose to embrace the principles of social responsibility, with all the extra effort and costs that this entails?

Research shows that integrating social responsibility into corporate policies leads to several key benefits for a company:

• improved competitive advantage by winning and retaining customers and partners;
• increased business value;
• image enhancement and reduced reputational risks, resulting in a better brand image;
• recruiting, retaining and motivating employees;
• promoting a corporate culture and set of values that bring uniqueness and value to the brand.

NGOs are becoming increasingly aware of the role they play in the transition to a green economy and a sustainable lifestyle and business.

Sponsorship is one of the most widely used legal tools to foster the relationship between companies and NGOs. The sponsorship agreement thus becomes a powerful tool that needs to be adapted and updated to reflect the reality of the market, where companies bring capital and NGOs bring know-how, experience and connections.

Sponsorship agreements

The scope of a sponsorship agreement, as defined by Law No 32/1994 on sponsorship, is the transfer of ownership of goods or financial means from the sponsor to any brand, event or individual for the purpose of supporting non-profit activities. In recent years we have seen that investors, shareholders, funds, banks are choosing more carefully which projects will be sponsored and receive financial support, with ESG criteria being increasingly considered and applied.

ESG due diligence

More and more companies are carrying out ESG due diligence before getting involved in a project, no matter if a business or an NGO. NGOs will have to comply with the requirements of the sponsors’ ESG policies to access sponsorship benefits. NGOs, having their own (recommended) ESG policies, should also consider negotiating contractual clauses to comply with the ESG policies of the parties involved or agree to express exemptions.

The conclusion of sponsorship agreements

will require a double analysis: both from the perspective of ESG risks and from the perspective of the correlation of the rights and obligations of each contracting party so that, in the execution of the agreement, there is no doubt as to how each party’s ESG compliance rules are interpreted and applied in the contractual relationship. ESG due diligence requirements should also be considered in the execution of the sponsorship agreement, and it is very important that the parties include concrete, quantifiable and transparent rights and obligations with regard to sustainability, in line with applicable law and their own policies.

Risk management

Depending on the sponsored project, specific social, environmental or governance risks should also be considered. Based on the identified risks, obligations to prevent risks and achieve ESG objectives should be included in the sponsorship agreement. For example, in case of a company acting in the environmental field, we think of sponsorship activities that have an impact on natural resources or emissions of pollutants, but that affect the governance factor. In the area of social projects, sponsored activities may have a positive impact on local communities, but may have a negative effect on pollution or biodiversity. Therefore, it is important that NGOs take a holistic approach to ESG risk and compliance analysis in their programs, and sponsors have an increased level of awareness to make the most sustainable decision.

Last, but not least, anti-fraud policies applicable to companies and NGOs should also be considered, including ESG compliance.

ESG will have a strong impact on the partnership between civil society and companies. For the first time, long term sustainable objectives and targets become a real point of discussion. ESG will certainly be included as a key criterion in all business segments and the legal provisions will reflect this. Contractually, however, parties are already free to anticipate and introduce ESG-friendly clauses, which will increase investor confidence, the quality of the activities carried out and the satisfaction of the final beneficiaries.