Article Law360

Making and Keeping Corporate Climate Commitments: Part 1

As pressure mounts on companies to commit to climate change initiatives, in-house compliance and legal teams have key roles in ensuring that climate goals are achievable and appropriately messaged, and that governance programs are in place to support their fulfillment and minimize risk, say Kirkland partner Alexandra Farmer and associates Michael Mahoney and Donna Ni in this article for Law360.

On July 21, the heads of nine companies, including Microsoft Corp., Nike Inc. and Starbucks Corp., announced the establishment of a new initiative, Transform to Net Zero, to accelerate the transition to a net zero global economy. This is just one recent example of companies continuing to create climate goals and affirm climate commitments, even during the COVID-19 pandemic.

In this first article of a two-part series, we discuss the natural role that in-house compliance and legal teams have to play in ensuring that climate commitments are appropriately messaged, and that proper governance programs are in place to support their achievement and minimize downside risk.

How Companies Around the World Are Taking Climate Action

The economic impacts of climate change are clear. According to the Federal Reserve Bank of New York, the U.S. economy lost over $500 billion in the last five years due to climate-related events, and by some estimates, the U.S. gross domestic product may shrink by as much as 10% by the end of the century due to climate impacts. Between 2009 and 2018, the U.S. Fire Administration recorded a 90.6% increase in fire losses, reaching $25.6 billion in 2018 alone.

Since the 2015 signing of the Paris Agreement, the number of Fortune 500 companies with carbon-reduction public commitments has increased fourfold, driven by a call for action on climate from both the public and the global business community. In 2019, for the first time in its history, the World Economic Forum's Global Risks Report found that severe threats to the climate accounted for all of its top five long-term risks.

A group of the world's largest companies has valued the risks to their businesses from climate change at nearly $1 trillion, with many physical impacts (e.g., flooding, extreme heat and drought) likely to hit within the next five years.

While national commitments from governments throughout the world have wavered, the pressure on corporations to take action to address climate change is at an all-time high. Shareholder initiatives such as the Climate Action 100+, which represents more than 450 investor signatories with over $40 trillion in assets, as well as shareholder engagements and resolutions have increasingly pushed companies to evaluate and disclose their climate risks for the benefit of investors and the public.

Mounting public awareness and civic engagement around climate change led to months of global climate protests that drew millions of people ahead of the 2019 annual meeting of the World Economic Forum in Davos, Switzerland. Activists are increasingly pressuring companies to divest from fossil fuels, and are encouraging citizens to make climate-friendly consumption and employment decisions.

To that point, the 2019 Edelman Trust Barometer found that 73% of people around the world believe it is important for CEOs to speak out about climate change, and 74% want CEOs to take the lead instead of waiting for governments. Companies are addressing these pressures, and are preparing for a likely future of increased climate-related regulation, by committing to a series of carbon reduction goals. The most common goals include the following.

Becoming Carbon Neutral

To achieve carbon neutrality, a company must measure its carbon footprint and reduce it to zero, often through a combination of in-house efficiency measures and external emission reduction projects.

Becoming Carbon Negative

A carbon negative company must go beyond carbon neutrality, to remove more carbon from the atmosphere than it releases. Microsoft, for example, announced its goal to be carbon negative by 2030, by using nature-based and technology-based carbon removal strategies.

Meeting a Science-Based Target

The Science Based Targets initiative is a partnership between the United Nations Global Compact, the World Resources Institute, CDP (an international nonprofit organization formerly known as the Carbon Disclosure Project) and the World Wildlife Fund, to help companies establish reduction targets in line with the need to keep global temperature rise to below 2 or 1.5 degrees Celsius. At least 942 companies are currently taking science-based climate action.

Sourcing 100% Renewable Energy

RE100 is a global program set up by The Climate Group and CDP to increase corporate demand for 100% renewable electricity. Since RE100 was launched in New York City in 2014, the initiative has expanded across Europe, North America, India, China, Japan and Australia. At least 242 companies have made 100% renewable commitments under RE100.

Signatories to these programs include some of the world's most influential companies. Natural Capital Partners notes that 35% of European and U.S. Fortune Global 500 companies have now made a public commitment that they are, or will be by 2030, carbon neutral, using 100% renewable power or meeting a science based target.

If current trends continue, Natural Capital Partners predicts that 79% of all Fortune Global 500 companies could be carbon neutral, using 100% renewable power or meeting a science based target by 2030.

Tools for Achieving Climate Commitments

After completing an initial carbon footprinting exercise, companies have several tools for achieving their climate commitments, including operational emissions reductions, purchasing renewable energy and purchasing carbon offsets.

The first step for any company looking to achieve carbon reductions is to calculate its carbon footprint. Carbon footprint calculators are readily available for this purpose.[1] Some companies also use third parties to audit and certify their carbon footprint. It is important to keep in mind carbon emissions from secondary sources, such as goods and services in a company's supply chain, and to clarify whether such emissions are included in the accounting.

After measuring their carbon footprint, companies often achieve carbon reductions through a combination of (1) operational reductions, such as increasing energy efficiency and reducing waste; (2) purchasing renewable energy, such as through power purchase agreements for solar or wind energy; and (3) purchasing carbon offsets, such as through emission reduction purchase agreements.

Operational Reductions

Companies can reduce the carbon emissions associated with their operations through a variety of methods, from recycling materials to sourcing local products to utilizing low emission vehicles. Prominent examples of operational reductions include:

  • Siemens AG, which has pledged to be carbon neutral by 2030, is using distributed energy systems to increase energy efficiency;
  • Duke Energy Corp., which aims to achieve net-zero carbon emissions by 2050, is modernizing its electric grid;
  • Ikea, which is committed to becoming climate positive by 2030, is ensuring that carbon remains stored in Ikea products longer through the circular economy and is removing and storing carbon through reforestation and responsible forest management; and
  • United Airlines, which has pledged to reduce its emissions by 50% by 2050, has incorporated sustainable aviation fuel in regular operations and invested in a sustainable aviation fuels producer.

Purchasing Renewable Energy

Another common way that companies reduce their carbon footprint is through purchasing renewable energy. Companies can purchase renewable energy directly from specific generators, which can be located on-site or off-site, through power purchase agreements.

Companies can also make retail purchases from suppliers and utilities, and purchase stand-alone (i.e., unbundled) energy attribute certificates.

Purchasing Carbon Offsets

Companies can also achieve carbon reductions by purchasing carbon offsets, which are reductions in emissions of carbon dioxide or other greenhouse gases made in order to compensate for emissions generated elsewhere.

One carbon offset represents the reduction of one metric ton of carbon dioxide or its equivalent in other greenhouse gases. The second article in this series will discuss carbon offsets in further detail.

Climate Action in a COVID-19 World

The COVID-19 pandemic presents new challenges for companies that aim to take climate action. In the initial months of COVID-19, some businesses experienced a slowdown in new project development.

Current and future travel restrictions, uncertainty of demand, cost impacts or access to financing could affect future project start dates or stall the construction of current projects. As a result, opportunities to achieve carbon reductions may become harder to find in the midst of the pandemic and its impact on project development.

Nevertheless, companies are continuing to take new climate action and create climate goals, while others have affirmed their climate commitments, and the landscape of opportunities to achieve carbon reductions is constantly evolving, even during the pandemic. For example, in June, Inc. launched a $2 billion fund to back companies developing sustainable and decarbonizing technologies. The fund is part of Amazon's Climate Pledge, announced last September, through which the company committed to meet the goals of the Paris Agreement by 2040.

Also in June, Verizon Communications Inc., Infosys Ltd. and Reckitt Benckiser Group PLC (the parent company of Calgon and Lysol) became the first global companies to sign up for Amazon's Climate Pledge. In fact, despite the COVID-19 pandemic, 93 companies have committed to meeting a science based target since April.

Meanwhile, a number of companies have affirmed their climate goals. For instance, Finnair Oyj, Barclays PLC and Samsonite LLC have committed to continue progress toward carbon neutral operations, despite the pandemic.

Microsoft has also affirmed its climate pledge in spite of COVID-19. And since April, 91 companies that had committed to meeting a science based target have now set their targets.

In addition, the world's largest asset manager, BlackRock Inc., has continued to build on its announcement earlier this year that it is making sustainability central to the way it invests. In July, BlackRock released a report outlining its strategy for promoting sustainability among its clients' investments that included a discussion of punitive measures against noncompliant companies.

Specifically, in this report, BlackRock noted that it has identified 244 companies this year that are making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, BlackRock took voting action against 53, and put the remaining 191 companies on notice that they risk voting action against management in 2021 if they do not make significant progress.

The Role of Counsel and Compliance Teams in Corporate Climate Commitments

In the U.S., there is currently no legal requirement for most companies to make a climate commitment. But those that do make such a commitment need to be aware of the legal complexities that it creates.

In-house compliance and legal teams have a significant role to play in ensuring that climate commitments are achievable and appropriately messaged, and that proper governance programs are in place.

Build Off of Baseline Regulatory Requirements

While this article has focused on voluntary corporate climate commitments, many companies, particularly in the energy sector and other carbon-heavy industries, are challenged to simultaneously meet greenhouse gas emissions regulatory requirements (e.g., reporting, tax and/or reduction requirements), while also making additional progress on a voluntary basis.

In these cases, a counsel's primary objective should be to ensure that any voluntary efforts maintain and build upon baseline regulatory compliance frameworks, rather than create an opportunity for contradiction, confusion or inadvertent violations.

Ensure Accurate Statements

With respect to any public commitment or disclosure, counsel should ensure that they are accurate and not misleading before they are released to the public. Companies should consider whether external resources would be valuable in this effort.

For example, some companies have their carbon footprint calculations verified by third parties, and append that verification to their annual sustainability or climate reports.

Use Aspirational Language and Appropriate Disclaimers

Climate goals should be carefully drafted so as to be aspirational and estimates of future performance, and not material commitments upon which an investor could be reasonably expected to rely.

For example, language such as "strive" or "seek" should be used, rather than "will" or "must." In addition, disclaimers regarding forward-looking statements or estimates should be considered.

Build a Governance Framework

Companies should determine where ultimate responsibility and oversight lies, and build a governance framework for achieving that goal. Senior management should be empowered with clearly defined responsibilities and reporting expectations.

Board committee charters may need to be amended. Risk management policies and internal training may need to be developed. And, finally, climate disclosures should be appropriately audited.

While many companies work with skilled outside counsel to achieve these tasks and stay up to date on evolving regulatory requirements, it is naturally the role of in-house counsel and compliance teams to raise these issues with company leadership at the outset, so that they understand what resources will be required to minimize downside risk. Accordingly, in-house compliance and legal teams should get up to speed on these issues and proactively coordinate with company leadership to maximize the benefits of climate action.

The second article in this series will provide a more in-depth look at carbon offsets as a tool to enact corporate climate commitments.

Alexandra Farmer is a partner, and Michael Mahoney and Donna Ni are associates, at Kirkland & Ellis LLP.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] For instance, there are carbon footprint calculators available from Terrapass, the U.S. Environmental Protection Agency, the United Nations and CoolClimate Network.