Climate conscious clauses are beginning to appear in the contracts of larger or listed companies.
This is because such companies will soon be required to account for the green credentials of contractors and suppliers in order to comply with new regulatory requirements. The UK and the European Commission have both adopted proposals obliging large or listed companies to report as part of their financial statements, their assessment and mitigation of climate-related risks and opportunities. In the UK, this will apply for financial years ending after 6 April 2022.
As such, and with additional pressure from both investors and consumers, companies are publishing decarbonisation and net zero plans. These generally include their emissions that fall under three ‘Scopes’:
- Scope 1 – direct emissions that come from an organisation’s operations and are under their control;
- Scope 2 – indirect emissions generated by the purchase of electricity, e.g., steam; and
- Scope 3 – indirect emissions occurring in a company’s value chain, including both upstream and downstream emissions such as purchased goods and services; business travel; employee commuting; waste disposal, transportation and distribution, investments, leased assets and franchises and use of sold products.
Scope 1 and 2 emissions are already frequently reported upon. Scope 3 reporting can be more challenging due to the multitude of different sources that must be considered and the difficulties of obtaining reliable support data. However, Scope 3 emissions can account for the majority of an organisation’s emissions. To assist with Scope 3 reporting, companies will be trying to get contractors and suppliers to align with their stated net zero pathway. To aid that entails having suitable ‘climate conscious’ clauses in their contracts.
The Chancery Lane Project (TCLP) is a collaborative pro-bono initiative by global legal professionals whose vision is a world where every contract enables solutions to climate change. It has produced a ‘Net Zero Toolkit’, a set of practical tools to help professionals implement climate-conscious clauses in their organisation. This includes model clauses and policies spanning a wide range of areas, including commercial transactions, construction, dispute resolution, intellectual property and insurance.
Companies are encouraged to either adopt the clauses in full or make suitable adaptions to their pre-existing clauses in supply chain contracts. Such considerations may involve some or all of the following:
- Updated force majeure clauses, with an environmentally-friendly focus as to performance interruption. For example, avoiding dumping stock which gets stuck in transit due to a force majeure event.
- Warranties where a contractor is obliged to comply with specified steps to reduce environmental harm or achieve net zero; or is required to adopt a net zero performance target and a roadmap how to achieve it. These might include regular monitoring, reporting obligations and audit rights.
- Potentially, clauses enabling one party to terminate for the other party’s failure to achieve specified net zero targets. TCLP’s “Termination for Greener Supplier” clause permits a supply contract to be terminated in favour of an alternative supplier if the current supplier is unable to match the alternative supplier’s ‘greener’ offer.
- Also, part of the TCLP Toolkit is a climate conscious whistle blowing policy, which provides wording for use within whistleblowing policies to ensure inclusion of disclosure of climate issues and any non-adherence to the climate or sustainability policies of the business.
Relative negotiating power and how reactive companies are to the need to tackle Scope 3 emissions (and the risks if they do not) will dictate the adoption speed of such clauses, but in any event as a business of any size, especially one contracting with larger entities to supply or serve them, you should be aware of climate conscious clauses and any prospective impact of them.