Maryam Abu Hussein

Maryam Abu Hussein


March 13, 2023

Mitigate environmental risks with climate clauses

How climate clauses can be inserted into businesses’ contractual agreements, facilitating the adoption of environmentally sound business practices. 

Mitigate environmental risks with climate clauses

The effects of climate change around the world are becoming increasingly visible. Unprecedented wildfires, flooding and heat waves are putting communities at risk and disrupting everyday life. It is against this backdrop that the international community is beginning to take action against climate change. Companies’ stances on environmental issues are under intense scrutiny, and it is likely that the way business is done around the world will undergo marked change as the world transitions towards net zero. This article provides an overview of climate clauses, which can be inserted into businesses’ contractual agreements to facilitate the adoption of environmentally sound business practices

Net Zero: international action against climate change

Climate change-related issues have firmly established themselves at the top of the agendas of governments and international organisations. They are also increasingly appearing on the commercial agendas of businesses. 

Currently, the European Union and thirty-three countries around the world have set net zero (by 2050) targets, and over a hundred countries are actively considering setting a net zero target in order to combat the climate crisis. In the future, it is likely that net zero policies will become widely adopted and that climate-related legislation will have a direct impact on the way companies do business. 

Simply put, the net zero target will be met when the amount of greenhouse gas emissions pumped into the earth’s atmosphere is equivalent to the amount that is removed from the atmosphere. Cutting carbon emissions, carbon offsetting, recourse to renewable power and making sustainable lifestyle choices all contribute towards achieving net zero objectives. 

Climate-related legislation is becoming widely adopted and means that companies have to have increased regard to the impact of their operations on the climate. The United Kingdom has a net zero target set in law and while its legislation currently requires only certain companies to annually report their carbon emissions, all companies should be taking action to reduce their carbon footprint.

Climate related risks facing businesses 

Climate related risks are often discussed with regard to the danger they are likely to pose to people and communities around the world, but mainstream discussion often neglects the significance of the risk posed to commercial interests. 

The dangers facing businesses, both big and small, are varied and verge on the existential. They range from physical risk to assets to financial risks that are likely to materialise in the cost of the resources necessary to enable companies to meet net zero targets and to decrease their carbon footprint. 

Physical risks also include the risk to commercial operations in areas that are vulnerable to climate change. This might have a direct effect on companies’ insurance policies and the soundness of their supply chains, especially where companies have an international presence. 

Increasingly, big corporations that have contributed directly to environmental damage have been sued in some jurisdictions, and climate activism is also becoming more commonplace and is garnering popular support. Consumers are becoming more environmentally-educated and are beginning to pay attention to the positions adopted by the brands they buy on environmental issues, meaning that companies that fail to take action on environmental issues risk damage to their reputations. 

Green investment is becoming increasingly popular, too. Investors are beginning to pay closer attention to companies’ climate-related disclosures and policies in coming to a decision on whether to invest in a business. 

How climate clauses can help you reach net zero 

One way that companies, especially those with significant resources and influence, can contribute to the fight against climate change is to view their contracts as opportunities to ingrain environmentally sound practices into the DNA of their commercial relationships and their general dealings with suppliers, employees and customers. 

Legal advisers are well-positioned to advise companies that have set (or will set) net zero targets on how to meet those targets. Environmental law is likely to transform from a niche practice area into one that permeates many other areas of the law. 

Pro bono legal initiatives like the Chancery Lane Project are spearheading this transformation. The Chancery Lane Project provides a free net zero toolkit and free climate clauses that relate to a variety of practice areas and can be inserted into existing contract templates. 

For example, employers can choose to insert a climate clause into their employment contracts that encourage employees to work from home or to volunteer with environmental charities during their garden leave. They can also insert clauses into their supply chain contracts requiring that suppliers transport goods in an environmentally-friendly fashion, and clauses setting out mutual obligations on climate related risks in their business agreements.

The Chancery Lane Project's net zero toolkit can be used as a benchmark against which to draft climate clauses that address climate change targets and associated climate risks. 

The adoption of climate clauses encourages parties to view environmental issues as important and central considerations in commercial agreements. Climate clauses can easily be tailored to apply to the many different situations in which companies must enter into contracts, and are likely to become significant leverage and negotiation points as their popularity grows. 

The bottom line

Climate clauses are an easy way to make net zero targets more actionable and easy to achieve, and the clauses can be tailored to align with each user’s priorities and apply to their practice areas. By using these clauses, companies stand the best chance to continue to meet their commercial objectives while mitigating climate change related risks and meeting climate targets. 

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The opinions on this page are for general information purposes only and do not constitute legal advice on which you should rely.

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