When Quantifying and Minimizing Your Carbon Footprint Becomes a Good Business Decision

More and more people are talking about social responsibility, sustainable development and ESG factors (environmental, social and governance). Far from being mere trends, these notions have become unavoidable and will become even more important in the business world.

A Good Business Decision

While these issues can be viewed from a purely defensive perspective, as a reaction to market imperatives or as proactive management of both risks and reputation issues, a new and lasting trend is emerging: a genuine desire for businesses, their managers, employees, shareholders, and investors to go beyond mere compliance, and rather make sure that business decisions have a positive impact on their environment and on the various stakeholders.

Social responsibility thus becomes a vector of:

• positive business differentiation;
• added value; and
• employee motivation.

This can have a direct impact on the business’ financial results.

Large-Scale Ambitious Goals

On a larger scale, 196 countries have made a commitment under the Paris Agreement to limit the increase in global average temperature to 2°C above pre-industrial levels.

As for the Province of Québec, it has set a target of reducing GHG emissions by 37.5% from their 1990 level by 2030 and is part of the United Nations’ Race to Zero campaign, the members of which aim to be carbon neutral by 2050 at the latest.

Therefore, we can expect that there will be more laws and measures imposed on businesses, both in the Province of Québec and elsewhere, and that these will become increasingly stringent.

Meanwhile, some businesses are already joining forces to set ambitious goals. For instance, the “Science Based Target" initiative, which brings together more than 4,500 businesses, aims to limit the increase in average global temperature to 1.5ºC above pre-industrial levels.

Notably, 73 of the participating businesses are from Canada, and 35 of them have approved targets. Moreover, according to Elizabeth Sheehan, Director of Strategic Engagement at Climate Smart, Radicle, more than two thirds of the world's GDP is already linked in some way to organizations which have set a carbon neutrality target.

Now it's a matter of meeting those targets and collectively granting ourselves the tools to do so.

Supply Chain Impact

Businesses which have set targets measure their carbon footprint using quantifiable, accurate and credible data. Several standards can be used, including:

• Radicle's Climate Smart GHG Protocol; or
• the ISO 14064 standard.

According to each of these, emissions include those generated both directly and indirectly (through energy consumption). It should also be noted that the reporting of indirect emissions ("scope 3") is not mandatory, but many businesses do so on a voluntarily basis.

As a result, businesses are increasingly looking at the carbon footprint of their suppliers, particularly in the context of tenders and other contractual relationships.

Rise of Climate Clauses

Therefore, we should not be surprised to see an increasing number of contractual clauses requiring information and specific commitments regarding carbon emissions.

Businesses should be informed and proactive if they want to stay competitive in an evolving supply chain and not be surprised by the rise of "climate clauses." These clauses can take many forms and will undoubtedly continue to evolve and become more refined. They can be more or less coercive, depending on the situation.

The Chancery Lane Project (TCLP) - a consortium of lawyers and sustainability professionals - now offers a wide range of practical resources, including over 100 contractual clauses that can be added to commercial contracts.

In a nutshell, through these clauses, clients can ask their suppliers to:

• calculate their carbon footprint;
• set specific carbon footprint-related standards;
• set carbon emissions reduction targets to be achieved as part of the contract and meet certain climate and environmental impact targets;
• provide periodic reports on carbon emissions targets;
• establish and provide a written carbon emissions reduction policy;
• create incentives such as bonuses for meeting carbon emissions-related obligations;
• take on some of the risks associated with a potential climate change event or pandemic;
• use a proportion of low-emission vehicles in transportation; and/or
• include a "carbon budget" in addition to the traditional project budget.

These items may also be considered when evaluating suppliers in the context of tenders.

How these clauses will be applied in practice and what enforcement measures will be taken in the event of default will remain to be seen. Contracts may provide for specific measures, such as penalties or remedial measures. Even in the absence of specific clauses in contracts, the suppletive law of contracts may apply in case of default and lead to awards for damages or even termination of the contract. It would thus be unwise to accept such clauses lightly.

For more information, feel free to contact our business law team, who will be pleased to assist you.