Customers are increasingly turning their attention to the environmental impact of their purchase decisions. Shareholders, investors and entrepreneurs are aware of this and are looking for ways to follow. Events like COP26 show governments are trying to take climate change seriously. However, there is often a disconnect between what happens at a policy level and at a commercial level. It is easy to agree to aim for Net Zero but it is much more difficult to know (a) what that means, and (b) how to do it.
Movements like B Labs and The Chancery Lane Project have garnered support and have sought to provide a practical way of achieving these sort of aims. We have previously considered the legal effect of becoming a B Corp. This note looks to discuss environmental clauses which can be included in commercial contracts, articles of association, shareholders' agreements, supplier agreements and even share purchase agreements.
M&A and Investment
As part of any investment in or purchase of a company, shareholders are expected to provide warranties to their counterparties in order to enable them to make an informed decision when completing the transaction. If these warranties turn out to be untrue then a purchaser can bring a claim against the sellers. Basic environmental warranties are relatively common but we expect them to become far more extensive and apply to a wider variety of sectors in the near future.
Other elements of a share purchase agreement (SPA) where a sustainable approach may be taken is in the purchase price apportionment provisions. It is common practice to include a mechanism for apportioning the purchase price appropriately as at the date the deal completes. This is because it can be difficult to know the exact value of the target instantly at a given time. Accordingly, the SPA will (unless a 'locked box' mechanism is adopted) usually include an estimated value, which is paid at completion. A set of accounts are then drawn up within a certain period to look back and determine the correct figure. If the estimate was too low, the purchaser has to top up the purchase price and vice versa.
There is talk of this principle being applied to emissions targets whereby if the estimated emissions are too high, the purchase price is reduced. If someone had suggested this a few years ago, it would certainly have raised eyebrows but now, it may well emerge as an option, especially if the companies involved have become B Corps or similar.
Suppliers and Logistics
B2C businesses are perhaps most acutely aware of the benefits associated with being regarded as environmentally friendly. Customers expect them to know about their suppliers, to pay a good wage and to arrange for their product to be moved around the world in a sustainable fashion. Businesses are effectively left between a rock and a hard place, as there is a cost associated with all of these requirements, but there is also a limit to how much extra customers are willing to pay for products; a balance has to be struck.
Well-advised businesses should be looking to include assurances as to supplier working conditions and obligations to maintain and continue to seek ways to reduce their impact on the environment. Money talks, so one good option is for businesses to consider including financial incentives in supply chain agreements for meeting those goals.
The recent adoption of the Green Claims Code (as discussed by my colleagues, Alex and Rosie) means that the veracity of environmental claims is now open to greater scrutiny. You may have heard of "greenwashing"; this is the term used to describe a claim that a service or product is more environmentally friendly than it actually is. For B2C customers, where reputation and brand management is very important, an allegation of greenwashing could be very damaging.
Including appropriate provisions in terms and conditions and key contracts where you rely on third parties can help shift the risk down the supply chain. Should an issue arise, you then have an opportunity to explain the reasons why, and have some recourse against the offending party.
Although not a perfect solution, this approach drives a positive change.
Debt Financing / Funds
Finally, and perhaps surprisingly, fund and debt financing documentation is another area where environmental assurances can be included.
On the fund or bank side, these assurances can provide a USP to present to stakeholders; it need not necessarily even be a green/ESG fund - my view is that ultimately this is the way everything is going so ESG will simply become standard in time. We are currently in an interim period where ESG is still seen as a differential but this will cease to be the case in the future (he says optimistically!).
On the borrower side, these assurances provide an opportunity to complete the environmental circle. If, for example, you run a flexible workspace company out of buildings powered by renewable energy but finance your operations with a bank which has no regard to the borrower's environmental impact, it somewhat undermines your position.
There's a lot to unpack in this and there are opportunities everywhere. Reports indicate that B Corps tend to grow faster than their non-B Corp equivalents. In addition to this 'carrot', there is now a 'stick' in the form of the Competition and Markets Authority's implementation of the Green Code. That said, incorporating sustainability clauses into your contracts and agreements represents a great opportunity for forward-thinking businesses and entrepreneurs who are willing to consider how best to benefit from the changes.
Please do get in touch if you would like to discuss anything further.