Reproduced with permission. Bloomberg Law, Copyright 2022 by The Bureau of National Affairs, Inc. (800-372-1033) http://www.bloombergindustry.com For further use, please contact permissions@bloombergindustry.com
Net-zero transitions are high on the corporate agenda with increasing pressure on businesses to acknowledge their responsibilities to the environment. Those who don't have a robust environment, social, and governance (ESG) strategy are finding it increasingly difficult to find partners in this business environment. The concept of net-zero transition plans requires emissions of an organization to be reduced as much as possible and the remaining emissions to be captured from the atmosphere to achieve a net balance.
The challenge for companies is to find sufficient land, time, and resources to produce the carbon credits—let's say, through increased planting—needed to satisfy the demand for offsets.
To avert this carbon crunch, there is a need to innovate and find different ways to both reduce emissions and capture carbon from the atmosphere. This is what makes it difficult for companies to follow through on their targets and enforce their action plans.
Why Legal?
Net-zero is not required by law, but in-house lawyers are still expected to play a key leadership role. So how does legal expertise support the transition?
In-house lawyers are the conscience of their companies, and are uniquely placed to influence the executive board and spearhead strategic change. Therefore, a subject like net-zero, defined by social conscience, needs the in-house lawyer's influence as well as skills to carry out the practical aspects of embedding policy.
Legal professionals touch so many parts of an organization that they are among the few that have the ability to connect the dots and ensure their business follows a consistent approach. They have the power to measure and enforce the steps required to achieve the ambitious net-zero targets of organizations.
Take contracts for example—these are bespoke documents with obligations and specific terms that can break down the humongous puzzle of achieving net-zero into enforceable pieces, such as Corporate Social Responsibility (CSR) policy clauses or mandatory green reporting by suppliers and other stakeholders.
When you put requirements into a contract, it is reviewed by multiple parties and priced in. The next step is to ensure effective post-execution management of contracts so those obligations are not overlooked. Legal can take the lead to ensure these terms and obligations cascade to operations, suppliers, customers, and other stakeholders.
Another important aspect of the role of legal counsel in the transition to net-zero is being able to present opportunities to better align the in-house legal team to the wider commercial strategy and future-proof the organization.
A case in point is aligning progress on climate change and other ethical issues like inequality to the commercial strategy. The legal function's role becomes much more holistic in this context. Businesses need help from their legal teams to put in place requisite risk management systems, practices, and procedures. The role is to provide foresight about unwanted risk by ensuring that current net-zero and other ESG strategies are aligned with the direction of the current, evolving, and future regulations in a way that benefits society and shareholders.
Playing the Part
In-house lawyers should start by helping to develop the right net-zero path for their company and consider their part in achieving the relevant targets. They need to be able to react incredibly quickly with a refreshed vocabulary around climate- related threats to business and put changing business priorities in their immediate focus.
“Playing the part” for legal counsel may—and often will—vary from organization to organization based on a range of factors including jurisdiction, regulation, industry, and more. But here are some points that can guide legal departments to tailor their framework to align to the organization's net-zero transition plan.
Steer Clear of ‘Greenwashing’
Undoubtedly, it is important to seek opportunities to promote the good work that the company is doing to increase the company's trustworthiness and foster a positive overall public opinion of its efforts. But it is all the more important to beware of the “say-do” gap as it increasingly has the potential to inflict reputational, commercial, or financial damage to companies.
There have been many reports of regulatory and shareholder blowback on companies that fail to take serious action to achieve their self-established ESG commitments. Concerns over greenwashing of in-demand “green” financial products have also drawn the attention of the U.K.’s Financial Conduct Authority (FCA). In July 2021, a “Dear Chair” letter was published by the FCA to set out guiding principles for interpretation of current rules on the design, delivery, and disclosure in respect to ESG and sustainable investment funds to stem greenwashing.
In the coming years, regulatory scrutiny and enforcement risk are only going to increase along with shareholder activism that can quickly turn into mis-selling—or fraud—claims over misleading promotion of the positive environmental impact. The aim is for in-house legal teams to be able to accurately report that their operations are helping, or at least not harming, the environment.
Embedding Climate Considerations Into the Day-to-Day
The legal function can also feed back into growth initiatives by identifying the ESG areas that responsible stakeholders seek in their due diligence questions and RFPs. In addition, it's important to consider how legal teams or external lawyers take ESG risks and opportunities to account during internal due diligence. Empowered with better visibility, they can flag these issues for the executive board and help frame appropriate risk management strategies.
Besides, legal departments can use their spending power to prioritize sustainability in the legal services they procure by mandating that service providers they work with have robust and verifiable environmental pledges. It will need legal departments to stretch beyond the traditional objectives to minimize costs and be ready to back more strategic aims.
Climate-Conscious Contracting
In-house lawyers can adopt climate-aligned drafting, such as that of The Chancery Lane Project (TCLP), to ensure all legal agreements signed by their organization address the climate risks and impacts of the underlying transactions.
Contracts are powerful tools with the ability to create and drive opportunity. As discussed above, they can be incredibly useful to implement ESG strategies, goals, and targets without undermining the commercial goals.
Climate conscious contracting is being supported by numerous organizations with free-to-use content and thousands of participating legal professionals.
However, drafting is the first step and it's important to ensure that the strategy flows across the organization. It can be done by aiming for net-zero supply chains, which is touted as the next big opportunity for business and a key area of ESG focus. Individuals should also be made accountable for taking specific clauses forward to ensure a linked and consistent execution.
One Step Ahead of Legislation
There is, and will be, a time lag in legislative reform attempting to reduce environmental harm as the threat is constantly evolving. But there will certainly be legislative reforms and those not prepared could face significant disruption.
Historically, legal counsel has reacted to legislation with a somewhat defensive approach. But with net-zero, there's a real opportunity and incentive to be on the front foot and taking part in shaping legislation. For example, it would take significant time to establish standard ESG reporting targets by the way of legislation that can help increase transparency into complex supply chains. However, companies have the ability to immediately include enforceable clauses that encourage vendors to reduce and report emissions.
The transactions a company undertakes is shaped by legal counsel, which is therefore well-positioned to influence a net-zero strategy that can have an immediate and lasting impact.
ABOUT THE AUTHORS
Amit Garg is the Founder and Principal Architect of smartContract (https://www.smartContractCLM.com) - an Enterprise Contract Lifecycle Management Solution that applies the latest Legal Tech to open up enticing possibilities for companies to get maximum value from their contracts. Amit is a serial entrepreneur and with a deep passion for innovation has spearheaded multiple successful enterprise products that solve the most complex business problems and streamline the processes with a focus on productivity and unparalleled visibility.
Nancy Nelson is the President and Senior Consultant for ABiz Corporation, an innovative contract management services company (https://www.abizcon.com/). She is a highly driven and seasoned global business executive with over 30 years of experience aligning international contract and subcontract management initiatives, contracts shared services operations and offshoring programs with corporate objectives. She is an effective problem solver with significant achievements and a passion for new challenges. Her specialties include consulting, strategic analysis and implementation, negotiations, contract formation and drafting, international contract management, client relations, contracts due diligence and transition, staff development, mentoring, offshoring, outsourcing.