How the financial sector can mitigate climate risks through contracts

The global finance community faces direct costs due to the climate crisis. As such, there is an urgent imperative – and opportunity – to drive sustainable financial flows and help the global economy adapt to a warming world. 

The Chancery Lane Project works across the global finance and capital markets sector and the legal teams who advise them to decarbonise the global economy using the power of contracts, legal documents and governance. Together, we use contracts to future-proof the planet and deliver a sustainable global economy for all.

Real application of climate contracts

In the wake of USD 30 million of damage wrought by Hurricane Beryl in July 2024, Grenada triggered the first-ever government bond “hurricane clause”. This clause, inserted into Grenada’s debt arrangement over a decade ago, prompted deferrals that unlocked around USD 17 million in immediate debt relief. 

Debt suspension clauses like this show the power of contracts in helping the global economy adapt to the climate crisis. Elsewhere, investor activism and long-term prosperity incentive a push for greater climate prominence in shareholder relations and corporate governance. 

At The Chancery Lane Project, we work across the global finance and capital markets sector and alongside M&A deal teams to re-write their standard investment policies, share purchase agreements, lending facilities and other contracts. All to drive sustainable financial flows and a better future for us all. See how Portuguese law firm PLMJ used Noah’s Clause in four lending facilities amounting to EUR 150 million allowing the borrowers to benefit from a lower cost of finance subject to achieving specific sustainability KPIs and GHG emissions reduction targets.

Contracts for a competitive edge

Financial institutions and investors are acutely aware of their legal, physical, reputational, and transition risks as failure to mitigate these can result in unexpected financial losses. As regulation catches up, the global finance community is exploring efforts to minimise the impact of the climate crisis on their portfolios. They are looking into new business opportunities, such as green finance, renewable energy, clean technology, sustainable agriculture and green construction.

Contracts, pre-contract legal documents and financial instruments have a critical role to play in the green transition. 

• Embedding climate considerations in contracts and other legally binding documents means companies can address and mitigate their climate risks and protect themselves from loss if the other side fails to meet their obligations.  
• Contracts turn decarbonisation aspirations into hard deliverables. They drive reputational value-add and competitive edge. 
• Contracts are flexible tools that can be adapted to specific business goals and climate targets, offering the potential to shape new standard market norms. 

Use climate clauses in your contracts

TCLP publishes free, open-source content you can use to quickly adapt your governance processes, financial instruments and contracts to mitigate climate risks. Several companies, including Vodafone, NatWest, and Salesforce, have already adopted TCLP climate clauses, accelerating their path to net zero, as detailed in TCLP case studies. 

• Our guides are a route-map for how, where and when to write your contracts and legal processes in a 1.5C warming world.
• ESG due diligence questionnaires (DDQ) for M&A and capital market transactions identify climate risks affecting your target company or issuer from the outset. Gordon’s DDQ is one of our most widely used for M&A and Lola & Harry’s DDQ for capital markets. 
• Our sustainability-linked lending requirements build on and amplify Loan Market Association standard forms and approaches. See PLMJ case study.
• Green obligations in shareholder agreements align investors and companies to achieve sustainability goals and encourage investee companies to adopt credible green transitions and net-zero targets. See how the New Zealand Green Investment Finance team did it here.

If you’ve set climate targets you need to operationalise and deliver, we can help you do it using your contracts. Contact me at [email protected].

Tell us how you’re already using climate contracts by completing our impact survey here.