Climate accountability of companies and their boards

With this year’s COP27 conference calling for robust transition plans from member states and the government’s Transition Plan Taskforce launching its ‘gold standard’ framework for climate transition plans by companies, the race to achieve a 100% reduction in greenhouse gas (GHG) emissions by 2050 (net zero) is more pressing than ever before.

Businesses are not only having to navigate an ever-changing, complex, legislative & regulatory climate change framework but are also facing increasing pressure from external stakeholders to reduce their carbon footprint. Companies choosing not to take decisive action could risk exposing themselves to climate change litigation and significant reputational damage.

We set out below some key considerations and steps companies can take to help them on their way to achieving net zero.

Undertaking value chain environmental due diligence to reduce supply chain emissions

Customers, employees and investors are looking at companies with increased scrutiny in search of tangible evidence of their commitment to fighting the climate crisis. Companies are therefore being made to not only reflect upon their own direct carbon footprint but to also take active steps in ensuring businesses within their supply chain also deploy climate friendly practices.

The total GHG ‘scope 3’ emissions of a company are made up of the total emissions generated throughout its value chain. This incorporates the emissions flowing from any goods or services purchased by a company. Securing a reduction of emissions by businesses within a company’s supply chain therefore contributes to it achieving its own reduction targets.

Climate conscious commercial contract drafting

Climate conscious commercial contract drafting plays a pivotal role in the fight against climate change by helping companies to incorporate bespoke climate & environmental centric clauses into contracts in an effort to help reduce the parties’ detrimental environmental impacts.

Examples include:

• Clauses requiring suppliers to set commercially realistic GHG reduction targets.
• To have climate change policies in place.
• To exhibit compliance with specific environmental laws.
• To report on their own GHG emissions.
• To provide environmental assurances about their own supply chains.

Clauses setting out the consequences of non-compliance such as price-adjustments or termination may also be included to incentivise climate compliance.

Kennedys’ lawyers have experience with drafting climate conscious contract clauses and have been working in partnership with The Chancery Lane Project (TCLP) to help raise awareness of the subject.

Directors’ duties

Section 172 of the Companies Act 2006 places a duty on directors to act in good faith to promote the success of the company for the members as a whole. The duty requires directors to have regard to a number of factors including “the impact of the company’s operations on the community and environment” and the “likely consequences of any decision in the long term”. Section 174 further calls for directors to “exercise reasonable care, skill and diligence”.

The rise in mandatory climate related disclosure & reporting requirements, and publication of the same, have further served to make the inner workings of a company’s board more transparent, exposing their actions & declarations, to greater criticism. Directors are therefore now more likely to be held accountable for failing to take environmental considerations and climate risks into account when making company decisions.

Below are some steps that can be taken to limit the risk of breaching directors’ duties:

• Having a diverse board of directors from different backgrounds with a mix of knowledge and skills to enable the board to take better informed decisions.
• Having directors with an understanding of climate related risks, obligations and opportunities.
• To ensure that directors keep themselves informed and up to date on climate change developments before taking key company decisions.
• To give appropriate consideration to climate risks during the decision-making process.
• To ensure that board meeting minutes evidence consideration of climate related risks by the directors.
• To disclose any climate change risk and impacts to stakeholders and regulators.
• Try, where possible, to limit the company’s exposure to climate change risks and maximise opportunities which allow the company to meet its net zero obligations.
• The board should maintain a dialogue with stakeholders, regulators and policymakers to ensure they remain up to date on the most recent climate risks, requirements and opportunities.

Comment

Although this is still a developing area of law, it is evident that environmental considerations should form a key part of a company’s decision-making process. A more proactive approach is being demanded from company boards in addressing climate risk and reaching the net zero target. Paying mere lip service is not enough and may expose companies to greenwashing claims. It is however noted that overcomplex or lack of clear and consistent regulation in relation to meeting net-zero targets can place undue burdens on businesses.

Kennedys has responded to the BEIS Net Zero Review call for evidence by suggesting ways in which the government can do more to support businesses to decarbonise, highlighting the challenges and barriers being faced and the impacts decarbonisation is having on businesses.

It is anticipated that the outcome of the review will serve to develop a clearer and more navigable climate regulatory framework which companies will be able to implement without incurring additional time, financial and business costs.

Our corporate & commercial lawyers advise companies and their boards on ways in which they can ensure that they are meeting their climate change obligations.

Please get in touch with us if you require any further information.

Related items: 

• Kennedys responds to BEIS’ call for evidence on net-zero transition review
• Rewriting the risk: Addressing the challenge of climate change
• A push for sustainability
• ESG: climate related disclosures – a step towards transparency and consistency
• Exploring the future: the results of the Bank of England’s Climate Biennial Exploratory Scenario
• FCA Policy Statement PS22/3 – ‘Diversity and inclusion on company boards and executive management’