With COP27, the United Nations' 27th Climate Change Conference, underway in Egypt, the spotlight falls on businesses' efforts to meet their ambitious carbon reduction targets.
Already in the UK, the largest UK-registered companies and financial institutions must disclose their climate-related financial information on a mandatory basis. This includes many of the UK's largest public companies, and private companies with over 500 employees and £500 million in turnover. In the next few years mandatory reporting will also be introduced in the EU, India, New Zealand, Switzerland, Canada and South Korea.
However most private companies in the UK are exempt from public disclosures, a fact which a recent study from Net Zero Tracker highlighted.
The study compared the world's 100 largest (by annual revenue) listed companies, and the world's largest private companies, and compared their attitudes and actions towards net zero. The study found that private companies are less than half as likely as their publicly traded counterparts to have set a net zero target, and where a target has been drafted, very few (13%) private organisations have a published plan to deliver it.
The UK Government's roadmap towards mandatory climate-related disclosures anticipated implementation measures would be introduced incrementally, and there remains scope for broader sects of businesses to be required to disclose.
Getting ahead of the curve by incorporating environmental, social and corporate governance ("ESG") strategies into their operations presents a real opportunity for private companies in the UK to encourage and promote sustainability within their own organisation and supply chain.
Achieving Net Zero
A fifth of the world's largest companies have now committed to net zero targets, demonstrating a seismic shift towards recognising the importance of ESG. More generally, businesses are also becoming increasingly concerned with the sustainability of their wider supply chain, often making carbon reduction a prerequisite in procurement.
Organisations should consider, firstly, whether their operational set up meets the required standard, as well as where they might be able to go further, and evidence additional steps taken to reduce their carbon output. Switching offices to 100% renewable energy, transitioning to electric vehicles, and ensuring buildings are altered to encourage net zero aligned practices (by incorporating digital capabilities via "smart" technologies) are all ways in which companies may be able to promote and evidence sustainability within their organisation.
Having worked to bring their own operations in line with their net zero targets, many businesses are beginning to turn their attention towards the carbon impact of their supply chain. For an organisation to understand its overall carbon impact and greenhouse gas emissions and hit targets, it needs to understand what is happening in its supply chain.
As a result, companies have started to place additional contractual obligations on their suppliers, requiring them to demonstrate a more sustainable means of service delivery. Suppliers, as members of a client's supply chain, must therefore learn to adapt and manage how they deploy their services under their contract, so as to facilitate their client's (as well as their own) net zero targets.
It is, therefore, worth investigating the extent to which these obligations are capable of being measured and evidenced, as well as the standards set under the contract and the effectiveness of the measures proposed to meet them. Consider also what remedies should apply if the supplier fails to achieve its obligations.
A key consideration is to what extent suppliers can seek to deliver and evidence those targets by managing their own supply chain.
Priority should be given to carrying out supplier due diligence and requiring that net zero targets be reflected in supplier policies.
Where existing supplier contracts are already in place, consider whether it might be possible to review those agreements and renegotiate additional contractual provisions, for example by including obligations on the supplier to explore more sustainable alternatives to currently provided goods and services.
Additional obligations, such as requiring service providers to audit and report on their manufacturing and distribution processes, as well as the carbon impact of their own supply chain, may also facilitate and encourage a move towards more a sustainable practice.
You do not need to reinvent the wheel on this. We recently covered climate and net zero clauses in a previous blog which provides some further useful information on the use of such contractual controls.
Negotiating contracts is always tricky, especially re-negotiating existing contracts already in place, so it is important to emphasise the mutual benefits in working together towards net zero, as well as seeking to build a relationship around that journey.
Operations & Helping to Deliver Targets
A lack of understanding of where energy is used and wasted poses a significant challenge to businesses, but emerging monitoring and predictive technologies increasingly allow organisations to monitor real time energy consumption by tracking actual demand, creating a living picture of a building's energy needs and output.
In our previous blog we discussed some of the additional smart measures being deployed by organisations, such as the introduction of robots designed to collaborate with humans in shared spaces ("cobots") and the benefits they can bring in both user experience and sustainability.
Utilising real-time data captured via smart technologies, where combined with building management systems, will, in turn, lead to tangible cost savings and sustainability benefits over both the short and long term.
Given the fast moving and everchanging nature of the journey toward net zero, regular contract reviews should be carried out to capture emerging implications designed to promote sustainability and curb climate emissions, such as the introduction or amendment of legislation, increased regulatory oversight, or tougher tax controls.
Regular reviews should also consider whether statutory or regulatory changes are covered by existing defined terms, or require to be carved out, and to understand the impact on parties' the obligations to comply with applicable laws or under any continuous improvement provisions.
Emerging technologies, along with the need to continually improve and develop more efficient working practices means that contracts must match pace, accurately reflecting the rights and responsibilities of the parties at each stage of the journey.
Consider also, the robustness of current change of control provisions, as it may be necessary to ensure that appropriate measures are in place to control the wider impact of the proposed changes. Another consideration may be whether any restrictions are necessary to control the acquisition of contract parties by entities with a poor track record on carbon control and GHG emissions.
How can we help?
If your organisation needs advice on the commercial, contractual or other legal matters involved in achieving net zero, please do not hesitate to contact one of us, or your usual Brodies contact.