Contracts against climate change
Contracts for Climate Change might sound a fairly uninspiring call to environmental action, and it is unlikely to be a slogan seen on any placards outside the COP 26 convention centre in Glasgow. But as a lawyer I would argue that binding carbon neutral practices into business relationships is just as important as global emissions targets. And the reality of climate risk for business means that waiting for governmental guidance to act is not an option.
The legal profession is being asked by its clients to make sure their businesses are protected, as far as is possible, from climate risk; and to help enforce sustainable behaviour in their industries.
Businesses cannot afford to not be seen to be adopting green practices into their contractual relationships. The UK and New Zealand became the first countries to say that compliance with the reporting requirements of the International Task Force on Climate-related Financial Disclosures (TCFD) would become mandatory and therefore we are on the verge of a new climate focussed regulatory regime for business.
It is not only pressure from regulators that companies face, there is also the growing threat of climate change litigation. The total number of climate change cases has almost doubled since 2017. Whilst the majority of litigation is against governments, the number of claims against companies is on the rise. The range of allegations is diverse: from claims of greenwashing, inadequate disclosures, product liability, nuisance and fraud claims, to human rights arguments and allegations of procedural failures.
Traditional force majeure clauses, for example, will release a party from their obligations when faced with unforeseeable events such as hurricanes, wildfires and floods, but how does that clause operate where the frequency of those events is certainly increasing. It may be that a climate contract risk-sharing clause is now more appropriate to take a structured approach to the ever more common threat of disruptive weather events.
As companies race to make pledges of carbon neutrality by a prescribed date they need to consider not only their own emissions but also emissions from indirect sources in their supply chains. Carbon footprint reduction clauses request that the supplier reduces the carbon footprint associated with the performance of the contract. There is even the termination for greener supplier clause which gives the right to switch suppliers if an existing supplier is unable to match a ‘greener’ offer.
So, what can businesses do to ensure they are not only achieving their carbon emission goals, but also protected from climate risks:
- Review contracts with suppliers; are they bound to provide relevant information and held to appropriate climate-related standards
- Provide training to directors and officers on legal issues associated with climate risks
- Review supply chains to identify potential sources of business disruption due to the physical impacts of climate change and to minimise supply chain emissions
- Consider insurance coverage issues in light of climate-related exposure
The COP26 leaders will tell us what they plan to do at the macro level to try and slow the pace of climate change, but there is already action in the private business sphere as companies seek to preserve and protect relationships through contracts for climate change.