Given the scope and scale of climate change, and the all-hands-on-deck response required of both public and private sectors, even business-oriented lawyers lacking any sustainability interest are likely to encounter climate-related issues in their work.
As a corporate and commercial lawyer specializing in work with green businesses and non-profits, I write a lot of contracts touching on climate-related matters, and I see climate-specific issues arise regularly. Accordingly, below I’ve listed five basic practical considerations for lawyers to keep in mind when working on commercial agreements with a climate element.
1. Know Your Greenhouse Gases
When we talk about greenhouse gases (GHGs), we typically talk about carbon dioxide (CO2). Often, we simply call it “carbon” as in “carbon pricing”.
But carbon isn’t the only GHG out there. For various businesses subject to carbon pricing and other environmental regulation, carbon isn’t even the GHG of primary concern. Other consequential GHGs include methane and nitrous oxide. And Canadian carbon pricing law hasn’t forgotten about them, they’re simply accounted for in terms of their “carbon dioxide equivalent” atmospheric heat-trapping potential.
When working on agreements dealing with GHGs, lawyers should take care to ensure that they’re not referencing carbon to the exclusion of other GHGs they may want the contract to encompass. Otherwise, they risk a strict judge interpreting the contract more narrowly than preferred in the event of a dispute.
2. Who Gets the (Carbon) Credit?
The term “carbon credit” could refer to tradable “compliance units” parties earn for emitting less than their applicable cap in one of the various cap and trade systems in effect across Canada. Or it could refer to carbon offsets qualifying for sale in a voluntary or regulated market (note: with the recent launch of the federal Greenhouse Gas Credit Offset System, Canada now has four regulated offset programs).
All such credits can be quite valuable. That’s why it’s important in the context of a merger, acquisition, reorganization, or liquidation that lawyers ensure such credits are recognized and handled appropriately as intangible financial assets of the applicable corporation.
3. Scope 3 Standards
Companies of a certain size can potentially limit emissions along their supply chains (i.e., scope 3 emissions) by requiring suppliers to source goods and/or services from providers meeting certain quality standards (e.g., powered by renewables, using recycled content, etc.). Another option is requiring preferential treatment be accorded to suppliers meeting certain high standards (e.g., B Corp certification, carbon neutral operations, etc.).
Benefits of this approach include the ability to (i) showcase strong scope 3 emission reduction efforts in climate-related financial disclosures, (ii) boost one’s potential environmental, social, and governance (ESG) ratings, and (iii) create more resilient supply chains as governments look to impose border carbon adjustments on trade partners lacking serious climate regulation.
4. Reputation, Reputation, Reputation
“O, I have lost my reputation! I have lost the immortal part of myself, and what remains is bestial.”
Those lines were true when Shakespeare gave them to Cassio in Othello, but they’re even more true today for companies operating in an ESG-sensitive business environment. That’s why it’s important for lawyers drafting agreements on behalf of climate conscious parties to include a termination clause giving the client an out should the relationship with a counterparty become a liability. Like, for example, if the counterparty gets acquired by an oil giant, or it turns out they’ve been powering their operations with baby kittens.
5. Parisian Interpretation
All contracts are subject to the law of a particular jurisdiction, and that law is typically specified in a contract’s governing law section. An innovative way to push for particularly pro-climate contractual interpretation is to include an additional clause in this section stating that the agreement will be interpreted in accordance with objectives of the Paris Agreement and preventing global temperature rise beyond 1.5 degrees Celsius (to the extent such interpretation does not conflict with the applicable law of the jurisdiction).
This is called a Green Governing Law Clause. It’s one of many climate-conscious clauses lawyers can find in The Chancery Lane Project’s bank of climate clauses – a directory all contract lawyers may want to be familiar with as climate increasingly makes its way as a concern into agreements of all sorts.
Marc Z. Goldgrub is the founding lawyer at Green Economy Law Professional Corporation, a Toronto-based law firm specializing in work with green businesses and non-profits. You can follow him on LinkedIn for daily climate-related news, law, and policy musings, among other things.