Summary report: Legal considerations for the transition to net zero, a series with Freshfields and Chapter Zero

12 Mar 2024

In 2023/2024, the Centre was delighted to partner with Freshfields and Chapter Zero to run a series of events focused on the intricate legal aspects of transitioning to net zero. The pivotal shift towards corporate sustainability is set to introduce a myriad of legal challenges and opportunities for organisations across various sectors. Non-Executive Directors (NEDs) stand at the forefront of guiding corporate boards through this complex legal terrain.

At the events, legal experts from Freshfields presented their insight and guidance to NEDs in the audience, who then had a chance to ask questions and describe their own experiences dealing with these legal issues. This collaborative learning experience was tailored to equip attendees with the tools necessary to make informed decisions and effectively contribute to their organisations’ journey towards a sustainable future.

Nick Scott, Content Manager for the Law for Climate Action Programme at CCE said:

“As boards deal with increasingly complex climate-related legal issues, law firms can play an important role in clarifying transition risks and opportunities. In addition to providing access to Freshfields’ leading expertise in a range of legal areas, this series gave directors an opportunity to reflect on how they have and will navigate these issues in practice.”

The first session took place on Tuesday 19 September and covered the critical topics of climate litigation, stakeholder campaigns and regulation, exploring how they interact with each other and their impact on businesses. Vicky Moffatt, CEO of Chapter Zero, underscored the expansion of Chapter Zero and similar global networks via the Climate Governance Initiative, reflecting growing board-level focus on climate issues. Similarly, Jake Reynolds from Freshfields highlighted the firm’s dedication to sustainability, noting the importance of navigating the legal challenges associated with transitioning legacy businesses towards a climate-aligned future. He outlined managing legal risks during this transition as a triple-focus task: addressing legacy risks, current operations, and future zero-carbon planning, each demanding distinct legal strategies.

Freshfields partners Vanessa Jakovich and Simon Orton discussed the evolving legal risks associated with climate change and its implications for corporate boards. Vanessa focused on regulation, detailing how UK and UK-headquartered companies are affected by both current and upcoming climate-related legislation. Initially, climate laws targeted major emitters to reduce nationwide emissions. However, newer regulations extend obligations to a broader range of businesses, mandating them to assess and report on their climate impact and risks through double materiality reporting. Additionally, UK companies will be legally required to create and share comprehensive climate transition plans. These developments are complemented by various sector-specific regulations and standards, further broadening the scope of climate-related legal requirements for businesses.

Simon Orton, leveraging his dispute resolution expertise, highlighted the diverse grounds on which businesses face climate litigation, from consumer protection to human rights. Litigation has scrutinised companies’ climate risk management practices, including their disclosures, strategies, and public representations regarding climate initiatives. Orton noted that in the UK, directors might face personal legal challenges through derivative actions by minority shareholders for failing to manage climate risks adequately. Although a recent case against Shell’s directors was unsuccessful, it signals a growing trend of litigation aimed at holding directors accountable for their companies’ climate impact. Furthermore, while much of the climate litigation seeks to hasten the net zero transition, there’s a rising trend of ‘anti-ESG’ litigation in some US regions, posing additional challenges for companies operating there.

Chapter Zero members then discussed climate-related legal risks and their experience of relevant conversations in boardroom. For high-emission businesses and those in heavily regulated sectors, climate change is a critical issue. Directors acknowledged the increasing importance of climate regulation and litigation, foreseeing it as a growing boardroom priority. Challenges highlighted included navigating the expanding complexity of climate-related regulations and avoiding litigation amidst ambitious climate initiatives. The necessity for climate change to be a board agenda item has been amplified by disclosure regulations, physical impacts, and demands for stronger climate action from stakeholders. There was a consensus on the need for directors to tailor their approach to climate issues, driven by compliance, stakeholder pressure, or the opportunities arising from the climate transition, to make it relevant to their specific organisational context.

The series continued on 13 February 2024. Laurel Powers-Freeling of the Chapter Zero board initiated the session by spotlighting the strategic emphasis on transition planning and the expansion of director networks committed to integrating this focus within their businesses. Jake Reynolds from Freshfields stressed the crucial role of legal expertise in advancing meaningful business transformations toward meeting the Paris Agreement goals.

The conversation highlighted the overwhelming nature of climate regulation, with new double materiality requirements requiring an in-depth understanding of how strategy and operations are impacted by, and may impact, climate change. The Freshfields team observed a shift in regulatory frameworks towards transparency in transition targets and overall organisational strategy, raising discussions on board members’ responsibility regarding sustainability reporting.

The dialogue then shifted to governance, underscoring the need for effective management of legal pressures and the significance of governance structures in implementing change and mitigating risks. Discussions covered directors’ duties under the Companies Act 2006, the EU’s sustainable finance regimes, and the potential impacts of the Corporate Sustainability Due Diligence Directive on governance practices. The issue of parent company liability and the necessity for boards to evaluate vulnerabilities to litigation, especially in supply and value chains, were also examined.

The session concluded with insights into the role of mergers and acquisitions in addressing the global energy transition to net zero, showcasing case studies like Tenaga Nasional Berhad’s acquisition in EDF’s Blythe Offshore Wind Farm and General Atlantic’s investment in Venterra Group through the BeyondNetZero fund. These examples demonstrated M&A’s potential to foster climate innovation and finance new business models. The discussion then touched on various financial instruments supporting corporate sustainability goals, urging boards to understand and navigate these options effectively. An interactive M&A case study exercise allowed members to engage directly with these concepts, considering a hypothetical acquisition that offered cost savings, but risked climate-related challenges.

Further reading:

Chapter Zero summary of 1st event

Chapter Zero summary of 2nd event

The next Law for Climate Action series of events will be held in partnership with Clyde & Co, comprising of three roundtable discussions on sustainable finance.