Climate clause

Board Paper Implementing Net Zero for SMEs [New]

Lila's Clause

A board paper for building net zero objectives and targets into corporate strategy and for ongoing monitoring and evaluation of a company’s progress against its net zero targets.

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This clause brings climate considerations to your drafting. It is not yet net zero aligned. To align this clause with net zero, use our toolkit or join one of our events.

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Why use this?

The board paper provides a framework for building net zero objectives and targets into corporate strategy and for ongoing monitoring and evaluation of a company’s progress against its net zero objectives and targets. The board paper encourages small and medium-sized enterprise (SME) directors to consider how to present the company’s environmental values, targets and objectives to stakeholders and sets out the benefits to the company of doing so.

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The clause

BOARD PAPER: NET ZERO

Purpose of meeting

This meeting has been convened to consider, and if thought fit, resolve the following: 

  • the board’s commitment to transitioning [the company’s] business to align with Paris Agreement goals; and
  • procedures to determine, implement and monitor the progress towards our net zero targets.

[OR

Management is seeking board approval to carry out a program of work to develop science-based targets to reduce organisational emissions to net zero, in line with the Paris Agreement.]  

Overview

Climate-related risk is a material financial and legal risk issue for our organisation. Robust and proactive management of climate-related risks is not only necessary and prudent but presents an opportunity for value capture and market leadership. 

Setting net zero targets will enable [the company] to: 

  • take positive climate action;
  • build resilience against climate related risks;
  • attract and retain staff and customers;
  • enhance reputation;
  • create competitive advantage;  
  • navigate the transition to a new economy in a planned and organised fashion; and
  • keep up with further regulation of climate-related risks and impacts.

This board paper assists the board in: 

(i) understanding the importance of the economic transition to net zero greenhouse gas (GHG) emissions, and the risks posed by climate change to the business; 

(ii) setting net zero objectives and targets;

(iii) establishing procedures to implement the objectives and targets, and monitor progress; and

(iv) communicating the objectives and targets to stakeholders.

Detail is provided in the annexes to this board paper as follows:

  • Annex A: Explanation of our decarbonisation journey to net zero; and 
  • Annex B: Checklist of actions for management to consider when assessing our organisational emissions, and developing recommendations for the board in relation to our emissions-reductions strategy.  

It was resolved:

  • that [the company] understands and supports the need for the global economy to transition to net zero emissions before 2050 or sooner in line with Paris Agreement goals;
  • that [the company] is committed to transitioning its business to align with Paris Agreement goals; 
  • to instruct management to:

a) undertake a strategic review to assess the company’s emissions footprint; and 

b) revert to the board with a report containing recommendations for science-based organisational emissions reduction targets over short-, medium- and long-term time horizons, including net zero by 2050 or sooner, by [date].  The report should also provide recommendations for any updates required to our business plan in order to meet those targets.

Annex A

Net Zero – Our decarbonisation journey

For a three minute video explainer on net zero and how companies can begin their decarbonisation journey, see Net zero climate plans, explained – YouTube.

Why do we need to consider net zero?

  • Greenhouse Gases (GHGs) are the natural and anthropogenic (i..e. generated by human activity) gases which trap thermal radiation in the earth’s atmosphere (currently specified in Annex A to the Kyoto Protocol to the United Nations Framework Convention on Climate Change as updated from time to time, as carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons, sulphur hexafluoride, and nitrogen trifluoride).
  • In 2015, 196 countries adopted the Paris Agreement, which aims to substantially reduce global GHG emissions in order to limit the global temperature increase to 2℃ above pre-industrial levels, while pursuing the means to limit the increase to 1.5℃ and to strengthen resilience to the impacts of climate change.
  • In August 2021, the Intergovernmental Panel on Climate Change published its Sixth Assessment Report: Climate Change 2021: the Physical Science Basis (IPCC Report). It found that, human industrial activities (such as the combustion of fossil fuels (coal, oil and gas), the release of methane from livestock, generation of nitrous oxide from agricultural activity and clearing of natural ‘sinks’ for emissions in the form of forests and other natural landscapes) has resulted in volumes of emissions significantly higher than the natural baseline.  This, in turn, has caused the layer of gas to thicken. As it does so, more and more heat is trapped within the Earth’s atmosphere. Global average temperatures already exceed 1.09°C above pre-industrial averages.  As a consequence, the need to rapidly reduce emissions from economic activity has become critical in order to limit warming to the thresholds agreed under the Paris Agreement. This requires a reduction in emissions of at least 45% by 2030, and to reach net zero before 2050.
  • The IPCC Report found that the impacts of climate change are already here, widespread, and intensifying rapidly. This includes acute catastrophic impacts in the form of more frequent and intense extreme weather events (heatwaves, droughts, wildfires, extreme precipitation and floods) and gradual onset impacts (sea level rise, increase in average temperatures and rainfall variation). 
  • In 2019 alone, weather catastrophes caused US$130 billion in damages. It is estimated that if our approach to emissions is unchanged, global warming and climate risk could cost the world up to US$1.7 trillion a year, increasing to US$30 trillion a year by 2075.
  • The UK government announced in November 2020 that disclosures in line with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) (on climate related governance, strategy, risk management, metrics and targets) shall be mandatory across the economy by 2025. 
  • Financial institutions, investors, regulators and other stakeholders are increasingly focused on companies taking steps to address environmental change.

What is “net zero”?

  • “Net zero” refers to the state in which the activities within the value-chain of an organisation result in no net impact on the climate from GHG emissions, i.e. the amount of GHGs we produce is no more than the amount we remove from the atmosphere. 
  • The Intergovernmental Panel on Climate Change, in its Special Report on Global Warming of 1.5°C, explained that net zero can only be achieved through rapid and widespread systems transition in energy, land, infrastructural and industrial systems. It requires substantial reductions in energy demand and agricultural emissions, the decarbonisation of electricity and the removal and storage of carbon dioxide from the atmosphere. There must also be a substantial change in the way we demand conventional sources of energy and the way in which we generate and consume energy.
  • Net zero requires specific GHG emissions reductions and removals across the whole organisation. Net zero is a more ambitious target than carbon neutrality, which requires (i) only Scope 1 and 2 net emissions (ii), can relate to only one product line or area of business rather than the whole organisation; (iii) is not required to align with a 1.5°C science-based target; and (iv) is less specific around the type of carbon offsets that can be used.
  • Understanding how to achieve net zero involves a business analysing its GHG emissions according to the scope 1, 2 and 3 emissions categorisation adopted by  The Greenhouse Gas Protocol: A Corporate Accounting and Reporting Standard, Revised Edition 2015 as updated from time to time [Drafting note: Scope 1, 2 and 3 emissions defined on page 27 of the GHG Protocol], the most widely-used international accounting tool. Scope 1 covers direct emissions from owned or controlled sources; Scope 2 indirect emissions from the generation of purchased electricity, steam, heating and cooling consumed by the reporting business; and Scope 3 all other indirect emissions that occur in the value chain of a business. Examples of scope 1, 2 and 3 emissions  are set out in the table below:
Scope 1 Scope 2 Scope 3
  • Fuel combustion
  • Company vehicles
  • Fugitive emissions
  • Purchased electricity, heat and steam
  • Purchased goods and services
  • Business travel
  • Employee commuting
  • Waste Disposal
  • Use of sold products
  • Transportation and distribution
  • Investments
  • Leased assets and franchises

Who has already set net zero targets?

Many governments and local authorities have declared a climate emergency. As at September 2021 governments responsible for more than 73% of the world’s emissions have set net zero by 2050 targets (including China by 2060). There are many approaches to dealing with any emergency and opportunities exist for every business to reduce its carbon footprint.

Although the Paris Agreement was signed by states, the whole global economy must rapidly transition. Race to Zero is the UN-backed global campaign rallying non-state actors to take rigorous and immediate action to halve global emissions by 2030. Businesses can join through nine different partner organisations, one of which, the SME Climate Hub, is targeted at SMEs.

Risk management and disclosure

Alongside setting net zero targets (taking responsibility for the company’s impact on the climate), the board needs to consider current and future risks to the company from the climate crisis. 

Larger companies are increasingly being asked by investors and regulators to make climate-related disclosures in annual financial filings in accordance with the recommendations of the TCFD in areas spanning governance, strategy, risk management, metrics and targets. While it may not be currently mandatory for our business to report against TCFD recommendations, the framework provides us with useful guidance to draw from and prepare our own disclosures when such disclosures are legally required. It also provides a useful framework with which to ‘future-cast’ the potential impacts of climate change on our business across the plausible range of climate futures – whether that is a swift and disorderly transition to a low-emissions economy, to more delayed action that may result is higher physical risks to the natural and built environment.

Annex B 

Checklist for developing our Climate Change Strategy 

A. Understand how climate affects our business

1. Assess the likely impact of climate change on our business, now and in the future 

a) How will the following areas of the business be impacted by climate change risks: finance, operations, supply chain, brand/ Reputation, compliance/  regulatory?   

b) What are potential physical, economic transition and litigation risks? 

c) What are the specific risks for our business? 

d) What level of risk do they involve and how can we manage and mitigate such risk?

e) How do we implement climate risk management and mitigation solutions for our business? 

f) Consider how these risks may materialise for the business in short, medium and long term timelines (e.g.in three/five/10 years).

Additional resources: 

  • Chapter Zero Board Toolkit for a boardroom toolkit, including easily digestible summaries on pages 30-35 of how to consider risks, opportunities, strategy and governance.
  • Bank of England for further detail on climate change risk categories). 

B. Set targets

2. Measure and estimate the company’s current greenhouse gas emissions. 

a) Read WWF’s Emission Possible guide for an introduction to measuring. 

b) See The Greenhouse Gas Protocol guidance on Scope 2 and Scope 3 emissions and its free calculator

To understand carbon product footprints, see The Carbon Trust’s Carbon Footprint Calculator and Carbon Footprinting Guide, Business Road Map to Real Net Zero – Compare Your Footprint, Doconomy’s interactive tool for service footprints, see the Climate Hero Carbon Calculator for service businesses.

3. Set short and medium term targets for emission reductions, and a base year against which the company will measure those reductions. 

a) Define short, medium and long term horizons for the business. [Note: It is recommended that companies cut absolute GHGs emissions by at least 50% before 2030. This means the company’s own emissions (Scope 1 and 2) and emissions generated by the company’s value chain (Scope 3).] 

b) If possible, align our interim targets with halving emissions every decade (which equates to at least a 7%* year on year emissions reduction).  

* [The ‘Carbon Law’; and  J. Rockström et al., A roadmap for rapid decarbonisation, Science 355.6331, 1269-1271 (2017).]

Additional resources: 

4. Set a net zero target to be achieved by 2050. 

a) Consider if the target date is feasible but ambitious.

b) How ambitious does the company want to be? How rapidly do we want to decarbonise? 

c) Establish a set of targets and deadlines for meeting short, medium and long term targets. 

d) Obtain stakeholder buy-in for the net zero targets set. 

e) Define the sources of emissions that will come within scope of the company’s net zero target (to include direct and indirect sources of scope 1, 2 and 3 emissions)

5. Develop a plan to achieve emission reduction targets and operationalise the plan (see Section C below). 

a) The 1.5°C Business Playbook provides guidelines to set a climate strategy. 

b) See also the SME Climate Hub Toolkit.

6. Develop a strategy to remove emissions the company cannot immediately reduce (residual emissions). 

a) Quantify the company’s residual emissions.

b) Consider the viability of using offsets to reduce residual emissions

c) Purchase offset credits through verified providers to ensure quality and accountability. 

d) Prioritise offsetting projects that remove emissions (rather than avoid or reduce others’ emissions and aim to remove carbon from the atmosphere through long lived storage with low risk of reversal over millennia). 

e) Consider the implications of including the implications of offsets purchased by the company on a just transition, global equity and wider social and ecological goals. 

Additional resources:

7. Decide whether to sign up to Race to Zero  

Signing up to Race to Zero requires the company to:

a) pledge to reach net zero as soon as possible (by 2050 at latest) in line with efforts to limit warming to 1.5℃ and set an interim target to achieve in the next decade, which reflects maximum effort towards or beyond 50% emissions reduction by 2030;

b) within 12 months of joining Race to Zero, develop a plan of short- to medium-term actions to achieve interim and longer-term pledges;

c) proceed with immediate action toward achieving targets; and

d) publish (at least annually) the company’s progress against its interim and long-term targets, as well as the actions being taken. Companies that join through the SME Climate Hub can access a simplified reporting process appropriate to SMEs.

8. Monitor, evaluate and report on the company’s net zero journey

a) Establish a robust monitoring system to quantify GHG emissions and assess how the business is performing against its targets (see ‘measurement’ above).

b) Consider whether to have the company’s performance against its targets and company emissions reductions audited by an independent third party. 

c) Be aware of innovation, legal, regulatory, technical or political developments that may help the company achieve its targets more quickly.

C. Implement targets?

9. Start with areas of the business within the company’s control. See the Net Zero Toolkit website and UK Business Climate Hub for tools and resources to assist with planning (from minimising waste, to talking to suppliers, setting targets and building a strategy).

10. Evaluate the current position of the business, practical action we can now and their financial impact. Consider changes that might be needed in the longer term (e.g. product design, technological shifts, changes to suppliers, growth strategies).

a) Electricity suppliers 

b) Non-renewable fuel use

  • List all non-renewable fuel suppliers.
  • Establish a plan to replace them.
  • Review the financial and operational implications of changing fuel suppliers (including likely increases to taxes on fossil fuels).
  • Set a target date for running the company on 100% renewable fuel. 
  • See The Carbon Trust guide to energy saving opportunities).

c) Zero emission vehicle fleet

  • Consider ways to reduce travel (e.g. video conferencing, location of warehouses, processes for deliveries).
  • Switch to greener travel alternatives (e.g. trains rather than flights). 
  • In relation to the high emitting vehicles that need to be retained by the company, set a timeframe within which to switch to zero emission vehicles (there may be incentives for green vehicles and charging points). (See Transport advice for businesses – Energy Saving Trust). 
  • Consider how the company can encourage third parties (customers, suppliers and staff) to use zero emission vehicles?

d) Other avoidable GHG emissions 

  • Make a list of all other activities the business directly controls that emit greenhouse gases (freight, product footprint, supplier buildings, supplier operations, staff/customer travel, customer activities etc.). 
  • Estimate the carbon footprint of each activity (using a tool such as The Carbon Trust’s SME Carbon Footprint Calculator).
  • Identify where the company needs to make emissions reductions (such as reducing air miles or the carbon footprint of materials and packaging). 
  • Create a plan to measure and reduce emissions. 

e) Start/continue planning the reconfiguration of the business in the light of climate change, to cover medium to long term mitigation of the risks identified, and focusing on business resilience, financial gains and losses in particular.

11. Encourage others to begin/ continue their journey to net zero.

a) Supply chain

  • List suppliers that each make up at least [10]% of the company’s annual spend (or, if none, the company’s largest suppliers by annual expenditure).
  • Work with company procurement teams to build net zero commitments and climate change action in procurement policies.
  • Include emissions reductions terms in contracts with suppliers.
  • Consider implementing policy documents that can be shared with third parties.

b) Investments

  • List financial institutions that the company transacts with (banks, insurers, investments such as pensions).
  • Request information on how their investment policies align with Paris Agreement goals and the extent of any investment in high emitting sectors or fossil fuels.
  • Consider switching to Share Action approved providers; and 
  • (if relevant) set target date for disinvestment.

c) Lobbying/ campaigning

  • Consider if the company should support campaigns/ research aimed at tackling the climate crisis.
  • Consider if the company should engage in climate positive lobbying of government, policy makers and influencers.
  • Review our current trade associations and policy positions to ensure alignment with the goals of the Paris Agreement.

d) Employee (and contractor) engagement

  • Consider opportunities for training staff on their role in helping the company meet its net zero targets and transition to net zero.
  • Consider how to engage staff in the company’s net zero journey so that they can play an active role in it.

12. Implement and communicate company strategy internally and externally. 

We need to avoid “greenwashing” – that is, marketing our net zero initiatives in a manner that is not supported by evidence. It is important to get buy-in at all levels of the company to deliver meaningful change. 

Consider the following:

a) How will we embed our net zero targets into our corporate strategy?

b) Whether we need to amend our constitutional documents to embed climate into the purpose and articles of the company, e.g. our articles of association? 

c) Should the board consider the environmental impact of its decisions as a standard consideration in all executive decision-making?

d) Are there internal or external policies we can introduce to help us meet our net zero targets (net zero aligned procurement policies, terms and conditions for suppliers in our supply chain, clauses we want to include as standard in our contracts)? 

e) How best to share our climate ambition, objectives and targets with internal and external stakeholders. 

f) Stakeholder management best practice and how the company can optimise stakeholder buy-in.

g) What public disclosures should we make about our climate ambition and performance against our net zero objectives and targets? How should we communicate these, to whom and how often? 

h) How will our transparency on climate affect customer loyalty and brand image? 

i) Can we partner with our clients to encourage them to also take climate positive action to decarbonise and set their own net zero targets on their journey to a net zero future? 

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