Climate hazards present significant physical risks both to tangible assets and business supply chains. It is accepted that the financial markets and investors need clear information on how exposed businesses in the UK are to climate risk.
However, historically there has been a lack of clear and comparable data in this area. To assist with this The Task Force for Climate Related Disclosures (TCFD) was set up in 2015 by the Financial Stability Board with the aim of improving climate related engagement between investors and the financial markets. The hope was that if investors understood how exposed the companies they lend to are to climate risk it would help those investors to channel funding to sustainable opportunities and business models.
While TCFD was initially voluntary it has become part of the regulatory framework in many countries. In the UK the government has adopted TCFD as part of its roadmap to getting to net zero by 2050. From 6 April of this year it became mandatory for certain organisations (including banks, insurance companies and companies/LLPs with over 500 employees and a turnover of more than £500 million) to provide climate related financial disclosures in line with TCFD recommendations on an annual basis. TCFD provides UK companies with a uniform way to assess how a changing climate may impact their business model and strategy. Companies have to disclose against 4 key areas -governance, strategy, risk management and metrics & targets. The goal of TCFD is to ensure that climate change is at the heart of any company's strategy and operations.
Understandably, climate related financial disclosures have become a great area of topical interest. While the reach of TCFD does not yet apply to a great many companies many organisations are choosing to voluntarily make climate related financial disclosures. However, it is accepted that there are some significant challenges to implementation in terms of cost and lack of internal expertise in companies.
So, if you are a company keen on making climate related financial disclosures how can The Chancery Lane Project help you? The Chancery Lane Project features crowd sourced clauses drafted by lawyers in the UK who are committed to providing net zero drafting. We are proud to be involved in this initiative. One clause which can assist with climate related financial disclosures is Anna's Clause.
Anna's Clause is a generic reporting/disclosure clause that can be included in the Loan Market Association information and undertakings provisions of any corporate loan. It addresses reporting requirements in relation to climate related risks and is intended to be used in conjunction with other clauses made available via The Chancery Lane Project which cover reporting on Scope 1, 2 and 3 emissions (a methodology to calculate direct and indirect greenhouse gas emissions produced by a company and its supply chain) and clauses pursuant to which the company will contractually agree to reduce such emissions.
Anna's Clause broadly states that on an annual basis a company will provide its lender with a report containing various information. This annual report will include details of the processes and procedures implemented by the company to identify, assess and manage climate-related risks impacting the business, strategy and financial planning of the company. The clause also requires the company to provide details of any actual or potential impact of climate-related risks on the company including an assessment of the physical risks of climate change on the business operations and the value of the assets of the company (including any transition risks associated with the transition to a Net Zero economy and any step(s) being taken to address or mitigate such risks). The suggested wording stipulates that any report should also include details of any processes, procedures and targets implemented by the company to contribute to or mitigate any harm to a number of environmental objectives including climate change mitigation/adaption, sustainable water and marine resource use, the transition to a Circular Economy (being one which decouples economic activity from the consumption of finite resources), pollution prevention and control and biodiversity protection. The clause also includes detailed definitions for each of these environmental objectives.
Arguably, Anna's Clause is too far reaching. Realistically, a company at the beginning of its ESG journey considering how it should move towards the goal of annual TCFD reporting is simply not going to be in a position to comprehensively report on every aspect that Anna's Clause recommends on day one. However, Anna's Clause provides an incredibly helpful starting point for a company considering enshrining climate related financial disclosures wording in their loan documentation. Companies are being challenged by their stakeholders to go further in terms of their net zero goals and voluntarily including climate related financial disclosure wording in a company's loan arrangements is a way to focus a company's attentions on its climate strategy. Understandably there may be some hesitancy from organisations about including such a comprehensive clause in loan arrangements from a risk perspective. However, while Anna's Clause is comprehensive the excellent thing about The Chancery Lane Project clauses is that they are completely adaptable meaning that organisations can choose to adapt the clauses to their own needs. Perhaps a company won't need or want to report on every aspect Anna's Clause recommends straight away but it provides them with the wording they would need to start moving towards that goal. Anna's Clause and other similar clauses produced by The Chancery Lane Project are a helpful first step to gently transitioning companies to a net zero future.
Next week we look at using The Chancery Lane Project drafting in construction contracts to drive reductions in emissions and to promote procuring greener materials.