Template Board Paper for Significant Contracts or Transactions

Clauses

Issues: Material climate aspects to the [significant contract OR transaction]

[Drafting note: insert the description used in the rest of the board paper.]

[Rehearse an introduction of Climate Transition Action Plan (CTAP)*, or emissions reductions targets of Corporate Social Responsibility, Responsible Business or ESG plans]

*[Drafting note: for an example, see Unilever Climate Transition Action Plan.]

1. Strategy implications

Alignment 

1.1 The proposal to enter into the [significant contract OR transaction] is [fully OR partially OR not] aligned to our agreed [decarbonisation OR net zero] target**, interim emissions-reductions targets, Paris-aligned business strategy and operational plan on climate change, and in particular the delivery of near- and medium-term milestones that are a prerequisite to reaching the longer-term [decarbonisation OR net zero] target, for the following reasons: [Explain and insert reasons. If the contract is aligned in one aspect but not another, please explain.].

** [Drafting note: a net zero target means setting a date (ideally before 2050) to (i) reduce greenhouse gas emissions (emissions) and (ii) remove emissions, to achieve a balance between the Company’s sources and sinks of emissions (of all types of greenhouse gas and all scopes) in a calendar year and for each subsequent year thereafter, to achieve the goals of the Paris Agreement. The removals are achieved by buying carbon credits from a project that has been verified in accordance with a voluntary standard or under the United Nations Framework Convention on Climate Change clean development mechanism, in order to ‘offset’ the Company’s emissions. Offsets should only be acquired to address the emissions that remain after all reasonable efforts have been made by the Company to reduce its emissions from all operations including value and supply chain.]

1.2 The [significant contract OR transaction] will help us achieve our net zero strategy] for the following reasons: [Explain and insert reasons, which could includeenabling the Company to deliver on the interim industrial or mergers and acquisitions (M&A) goals that are consistent with its near- and medium-term emissions-reductions targets.].

1.3 The [significant contract OR transaction] may hinder our achievement of our [decarbonisation OR net zero] strategy and interim industrial, M&A and emissions-reductions targets, for the following reasons: [Explain and insert reasons, which could includeincreasing emissions in a manner which is inconsistent with the Company’s near- and medium-term emissions-reductions targets, diverting financing from necessary mitigation or adaptation measures, or cementing the risk of stranded assets.].

1.3.1 This is necessary because [insert rationale].

1.3.2 This can also be mitigated by [insert mitigation options].

1.3.3 [These mitigation options do not involve the use of offsets OR involve a limited use of high-quality offsets but only for the purposes of offsetting residual emissions that cannot be reduced, removed or otherwise mitigated after adoption of best-available technologies, so are aligned with international best practice on net zero strategy.] OR [These mitigation options involve the use of offsets to mitigate all or a substantial proportion of the emissions without reducing, directly removing or otherwise making use of best-available technologies to mitigate such emissions. As such, they are not aligned with international best practice on net zero strategy. They are subject to the following risks [insert reputational risks from use of offsets and/or commercial risks should assumptions on cost and the continued availability of offsets differ materially from actual outcomes.]]

1.4 [Our Scope 3 emissions targets [have OR have not] been cascaded to the counterparty as part of [the significant contract OR transaction], and therefore [do OR do not] bring us closer to meeting our near- [and/or] medium-term Scope 3 emissions targets.]

1.5 Once signed we [will OR will not] be able to terminate the [significant contract OR transaction] to move to an alternate, lower-carbon counterparty.

1.6 The following due diligence has been undertaken on the counterparty to ensure they are aligned with our [decarbonisation OR net zero] targets and corporate climate strategy: [insert outcome of due diligence, if conducted, which could include the following];

1.6.1 [Our [decarbonisation OR net zero] and interim targets are [not] aligned];

1.6.2 [The counterparty’s SECR carbon intensity ratio, a key metric by which they measure their emissions reduction progress, has [reduced OR increased] by [rate of change] in the last [number] years];

1.6.3 [The counterparty’s decarbonisation strategy focuses primarily on greenhouse gas emissions reduction, with limited recourse to high-quality offsets for residual emissions, rather than large-scale offsetting as a substitute for mitigation]; and

1.6.4 [The [climate OR sustainability] team has reviewed their [transition OR decarbonisation] plan and concluded it is [credible OR not credible OR needs work], for [the following reasons]].

Emissions

1.7 [Our best estimate of the emissions arising from the [significant contract OR transaction] are:

[ ] Scope 1: [number];

[ ] Scope 2: [number]; and

[ ] Scope 3: [number].] OR

[It is not possible to estimate the emissions arising from the [significant contract OR transaction] because [insert reason].]

[Drafting note: scope 1, 2 and 3 emissions are categorised by The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard,(as updated from time to time).]

1.8 This means our carbon footprint will [increase OR decrease] by [number] tn. CO2.eqv per year [see TCLP Glossary: Carbon Dioxide Equivalent].[Drafting note: Carbon Footprint means [see TCLP Glossary: Carbon Footprint].] 

1.9 The [significant contract OR transaction] is estimated to [delay OR accelerate] the achievement of our net zero target or interim target by [number] years. This will be announced to shareholders [and or] markets.

Measurement and progress

1.9.1 The [significant contract OR transaction] contains contractual rights to information to support the measurement and progress towards our [decarbonisation OR net-zero] target, interim emissions-reductions targets, Paris-aligned business strategy and operational plan on climate change. [Explain].

[Drafting note: Paris Alignment means [see TCLP Glossary: Paris Alignment].] 

Commercial opportunities

1.9.2 The climate considerations and net zero reduction created by the [significant contract OR transaction] contains the following commercial opportunities for the Company. [Explain. For example, might the Company be acquiring technology or systems it could synergise with its own to reduce the cost of its progress towards its net zero targets, or could the Company leverage the lower carbon footprint of a new supplier to advertise the increased sustainability of its products and thereby gain competitive advantage in the market?]

2. Financial implications

2.1 The [significant contract OR transaction] involves or will result in capital or operational expenditure that is [fully OR partially OR not] aligned with our agreed [decarbonisation OR net zero] target, interim emissions-reductions targets, Paris-aligned business strategy and operational plan on climate change. [Explain.]

2.2 [There is no ‘green premium’ for this transaction.] [The [significant contract OR transaction] has a ‘green premium’ of [number percent].] This green premium will be [recovered OR mitigated] by [explain].

[Drafting note: a ‘green premium’ is the extra cost incurred in, or value attached to, a transaction as a result of reducing certain negative environmental impacts, including emissions.]

3. Risk analysis

Climate risks to our business 

3.1 The [significant contract OR transaction] may lead to the following climate-related risks to our business:

[Insert risk analysis in accordance with the company’s enterprise risk management framework, which may cover the 

• Physical – for example where there is long-term engagement, contracts relating to physical assets or operations, goods requiring extensive supply chain distance, assets located near the ocean or rivers or in areas with scarce waters, critical input supply contracts; 

• Economic transition – for example the possibility of acquiring ‘stranded’ assets, contracts for the sale of a high-carbon commodity, long-term projects, non-transferrable inputs, cross-border transactions including the potential introduction of carbon border adjustment mechanisms impacting profitability, the continued cost and availability of project finance and insurance, counterparty credit ratings; 

• Climate counterparty reputational risk – for example where a counterparty acts in a way to hinder rather than accelerate the transition, which could reflect badly on the company, or where their wider business is not in keeping with the acts of the counterparty; or 

• Litigation risks – for example if the transaction involves government permitting processes which may be the subject of judicial review claims,

to the Company, its facilities, its employees, or its value OR supply chain associated with climate change and the transition to a decarbonised economy].

Contractual risk allocation

3.2 Climate change continues to significantly alter the nature and allocation of material contractual risks. The [significant contract OR transaction] involves the following climate-related contractual risks.[Insert risk analysis for climate-related contractual risks. In particular, identify:

• Physical risks – for example how losses are allocated in the event of natural disasters and other forms of business disruption, the extent of either party’s ability to terminate the contract in the event of force majeure, or broad indemnities potentially being triggered by climate-related losses;
• Transition risks – for example increased costs or a complete inability to perform contractual obligations in the event of increased regulation, or the allocation of costs arising from a change in law which imposes emissions charges; and
• Climate counterparty risk – for example where the counterparty is at risk of default because of particular vulnerability to climate events, or a withdrawal of insurance availability affecting the value of the security taken for the contract, or where the counterparty is party to sustainability-linked financing terms which may impact on its commercial obligations.]

Risk mitigation strategies

3.3 These risks have been identified through [our enterprise risk management OR the due diligence] process, and we have sought to address them through contractual drafting and negotiation in the following manner: [explain]. 

3.4 In addition, these risks will also be managed throughout the life of the contract by [insert risk management and mitigation strategies]. [Drafting note: see Gordon’s DDQ.]

4. Triple bottom line implications

4.1 In addition to the core strategic and financial implications set out above, the [significant contract OR transaction] may lead to broader environmental and social impacts that are relevant to sustainable stakeholder and enterprise value and our culture and purpose. These are distinct from standard ESG considerations and include:

4.1.1 Just transition – [describe any positive or negative impacts on the Company’s contribution to a just transition for employees, supply chains and communities];

4.1.2 Culture – [describe any positive or negative impacts on the Company’s culture, employee engagement and satisfaction, recruitment and retention of talent, upskilling or reskilling]; and

4.1.3 Biodiversity and nature – [describe any positive or negative impacts on biodiversity loss and ecosystem services].

5. Corporate governance and regulatory compliance

5.1 For the purposes of section 172 of the Companies Act 2006, it is noted that the [significant contract OR transaction] may have implications for the following stakeholder groups: [insert details of stakeholder groups relevant in the context of this board paper (for example, shareholders, investors, employees, customers, suppliers, community, environment), why they matter and the issues or concerns that they may have in relation to the significant contract or transaction. Cross-reference discussion on just transition at 4.1.1 above if relevant.].

5.2 The following actions have been or will be taken to address such stakeholder concerns through [add details of relevant trade-offs or concessions adopted or parts of the significant contract or transaction that may be tailored to address stakeholder concerns]. 

5.3 Such actions will create opportunities for value creation and [are [fully OR partially] aligned with][have no impact on][will help us to achieve] our [decarbonisation OR net zero] strategy OR interim emissions-reductions targets OR Paris-aligned business strategy OR operational plan on climate change OR long-term sustainable success]. [Add details including how the analysis of implications for stakeholders and steps taken to address these align the significant transaction or contract with business strategy.]

5.4 The [significant contract OR transaction] [does not] raise issues of regulatory compliance from a [climate OR sustainability] perspective. [Detail.]

6. Management responsibility

[Identify manager or committee who is responsible for the climate-related strategic and operational issues, if different from the manager or committee responsible for the other commercial aspects of the [significant contract OR transaction].]