In May 2021, the Climate and ESG workstream of the GC100 (the association of general counsel and company secretaries working in FTSE 100 companies) held an event to help in-house legal teams improve their understanding of how they can help their company transition to net zero, including embedding climate considerations into the work of the in-house legal team, drawing up a climate transition action plan (CTAP), flowing greenhouse gas (GHG) emission reductions into product and supply chains, and introducing climate-aligned drafting into a company's contracts.

Important note. This note records the discussions at the event but has no official status as "guidance" or clarification by the GC100 Climate and ESG workstream.

Key points included:

The speakers at the event were:

Noting that all in-house legal teams are at a different stage in their net zero journey, Matt Gingell explained that the changes to environmental and social governance (ESG) reporting, investor pressure, shareholder climate activism and the UNFCCC's Race to Zero campaign have put the transition to net zero high on the corporate agenda (see Practice notes, Climate-related and environmental disclosures in company annual reports: key developments tracker and Climate change issues for companies: Climate governance).

Climate change will affect everyone everywhere and everyone is contributing to it (see Mike Berners-Lee: How bad are bananas?). It will result, amongst other things, in diminished food production, severe weather events and mass displacement of human populations. It represents a fundamental risk to our way of life and to businesses. It is a particularly challenging issue because it is both urgent and epic, and because its wide-ranging impacts will be felt both internationally and locally.

The UK has set a 2050 net zero target in the Climate Change Act 2008 (CCA 2008) that aims to ensure its net zero transition is aligned with the Paris Agreement target of limiting global warming to well below two degrees and, ideally, to 1.5 degrees Celsius (see Practice notes, Climate Change Act 2008: Legally binding targets: net zero reduction by 2050 and UNFCCC, the Kyoto Protocol and the Paris Agreement: Paris Agreement: key provisions).

The concept of net zero provides us with a helpful transition to avoid the worst effects of climate change. It requires emissions to be reduced as far as possible and for the remaining emissions (also called residual emissions) to be removed or captured to achieve a net balance between carbon emissions and removals. However, it is important to understand that there is insufficient land, or time, to produce the amount of carbon credits (for example, through increased woodland) needed to satisfy the likely demand for offsets. This will lead to a carbon crunch so we need to innovate and find different ways to reduce emissions and to remove CO2 from the atmosphere. Corporates should think of carbon as the currency for their net zero transition plan. Net zero will only produce the results we all need if we all aim to reach that target.

The Race to Zero campaign is the UNFCCC's big push to get cities, businesses and universities to hit their targets by 2030. To date, 30% of FTSE 100 companies have signed up to the campaign.

Matt went on to say that he has found that a helpful way for in-house lawyers to think of net zero is as a service level agreement (SLA) made with the world (that is shareholders, communities and other stakeholders). It is the in-house team’s job to cascade that SLA to operations, suppliers, customers and staff. Examples of legal and contractual issues to consider include:

Consideration of the net zero targets needs to be pervasive and needs to flow through every aspect of an organisation. Every function in an in-house legal team can make a difference to the net zero transition of a company.

The transition to net zero can present opportunities to link the in-house legal team's value to the wider business and future-proof the business. In-house teams can collaborate and innovate with their legal panel firms as well as sustainability colleagues to deliver net zero solutions. For example, recognising the carbon emissions embodied in new products, Oxygen House tries to buy second-hand products. To weave that goal into the governance structure, they have created a new products register that needs to be completed as part of the contract sign-off process. This creates a "nudge" to the employee who has to report the purchase of new equipment to remind them that they should think about buying second hand products instead.

In-house legal teams help to achieve their company's net zero targets by:

Ritva Sotamaa provided an overview of Unilever's CTAP, which was approved by 99.5% of shareholders at Unilever's AGM in May 2021 (see Reuters: Unilever says majority of shareholders voted in favour of climate action plan (5 May 2021)). She gave the following valuable insights into development of the CTAP and Unilever's decision to put the CTAP to an advisory vote by shareholders.

Drivers for Unilever. The CTAP aligns with Unilever's corporate purpose to make sustainable living commonplace. Unilever aims to be a global leader in sustainable business as this also brings better financial outcomes.

CTAP content and targets. Unilever decided to take a leadership position and set very ambitious climate targets, even if how to achieve these through a transition plan was not initially formulated. In 2020, it set a target to be net zero by 2039 across scope 1, 2 and 3 emissions and across scope 1 and 2 by 2030, with an interim 70% target against a 2015 baseline by 2025 across scope 1 and 2. Influencing consumer behaviour to help reduce the carbon footprint of Unilever's products is very challenging. For example, to reduce the emissions associated with shampoo products requires consumers to change their behaviour and have shorter showers. To reduce the carbon footprint of laundry detergent, consumers need to set lower temperature wash cycles.

Unilever's list of sustainability targets is extensive and includes both nature and social targets. The CTAP covers Unilever's emissions targets, actions across operations, value chain, brands and products and Unilever's wider influence on society as well as governance data and disclosure. Transitioning to net zero requires intervention on multiple fronts. It is not just about powering factories with renewable power.

Role of in-house legal team. Climate and sustainability are setting a new agenda for legal teams and have needed a lot of upskilling. The in-house legal team played a key role in work on the CTAP, including presenting it to the board.

Working with other stakeholders is critical. Unilever also took advice regarding the CTAP document from external legal advisors specialised in ESG advisory.

Internal approval. The CTAP was discussed in Unilever's nomination and corporate governance committee and approved by the board.

Decision to give shareholders an advisory vote. Unilever has decided to put the CTAP to an advisory vote at the AGM every three years (rather than annually). However, it will report on progress on the CTAP in its annual report. Putting the CTAP to the AGM can promote discussions with investors, who themselves are under pressure to improve their climate performance. There are different opinions as to whether shareholders should be given an advisory vote on a company's climate strategy and net zero transition. Of the proxy agencies, ISS is generally supportive and has mostly given a "for" recommendation. Glass Lewis has been more hesitant on this point, although it has been willing to discuss the issue and change a recommendation where appropriate (see Legal update, Corporate governance: Glass Lewis approach to Say on Climate votes).

Several EU companies have also put a CTAP to their AGM this year (for example, Aena S.A.) and Ritva thinks that this will continue to increase. Whether it becomes standard practice depends on how regulation develops and whether investors demand it.

It was noted that putting the climate change vote to shareholders may not be sufficient to satisfy shareholders. At Shell's AGM, the board’s resolution on climate change was approved but a separate shareholder resolution on setting absolute rather than intensity targets got almost one-third of the votes (see Practice note, Resolutions on climate change at annual general meetings of FTSE 350 companies: Royal Dutch Shell plc 2021 AGM). So the content of companies’ net zero transition plans can be as important as putting it to a shareholder vote.

The Chancery Lane Project (TCLP) aims to rewire contracts and laws to create new market norms so that every law and every contract addresses its climate risks and impacts.

TCLP brings together lawyers from across all areas of the legal profession to collaborate in innovative ways to produce climate-conscious drafting that can be added to legal precedents and agreements. It works with 53% of the top 100 UK law firms and 7% of the FTSE 100 in-house legal teams. Following a rigorous external peer review, over 71 climate clauses have been published and these are available for free for anyone to use. TCLP has also published a glossary of climate-related terms.

Attempting to introduce net zero solutions through legislative reform inevitably involves a time lag (both getting through the legislative process and then for the law to come into force) but amending contracts to introduce these solutions speeds up the net zero transition because those terms have an immediate impact.

In-house legal teams shape the transactions their companies undertake. By making amendments to their contracts, lawyers can quickly influence the uptake of net zero solutions. This can have an immediate and lasting impact and, if these solutions are widely adopted, can have both a local and global impact. By way of example, where a company wants to move to a greener supplier to improve the sustainability of its supply chain, it would take some time for legislation to be made and to take effect, to allow supply contracts to be terminated where it could be proved that a greener supplier existed. However, companies have the ability to include clauses within their supply chain agreements that allow them to terminate in these circumstances.

TCLP clauses cover a wide range of legal agreements and the various stages of a commercial transaction, including heads of terms, due diligence questionnaires, investment clauses, employment handbooks, supply chain agreements and real estate agreements. The clauses provide multiple net zero solutions, including requiring GHG monitoring and reporting, rewilding rather than liquidated damages, climate equity ratchets and a more equitable allocation of climate risk.

The impact of these clauses can be amplified if they are added to precedents as most parties will not remove clauses from a precedent. Also parties become used to seeing this wording and it becomes part of a new legal market norm. In a precedent, these clauses act as a powerful nudge to parties to adopt net zero solutions.

Actions that in-house lawyers can take to help their company's net zero transition are to:

TCLP will shortly survey participants to gauge who is using their climate clauses and this information will feed into a second impact study. Anecdotally, TCLP knows that some law firms have adopted the clauses in client agreements and some key adopters, such as Salesforce and the Environment Agency, have used clauses directly inspired by the TCLP clauses in their supply chain agreements.

As precedents, TCLP's clauses need to be tailored by the individual lawyers using them so that they are fit for the purpose in hand and aligned to the relevant organisation's net zero transition plan.