Signed, sealed and delivered: How business contracts can drive decarbonisation

Becky Annison shows why the practice of climate contracting is imperative in mitigating climate change, in this Business Green opinion piece. She explores how contracts can be moulded to unlock a zero carbon future and how they might block it.

Contracts are the hidden enablers and the hidden roadblocks to everyone’s net zero goals. As our economy runs on carbon, that carbon is hard baked into contractual arrangements, hidden in the pricing, delivery and many other terms. If business is serious about meeting its climate targets then it has to get into its contracts and turn those voluntary goals into enforceable, legal obligations.

Countless businesses have set net zero targets because they have realised three things: a) climate is a serious risk to their bottom line, b) decarbonisation provides enormous economic potential and c) globally, the entire world is shifting towards a Paris-aligned pathway and that falling behind the race is a risk. These targets need to be supported by sound policy and political consistency to progress at the necessary pace and scale needed to meet the Paris Agreement. In the UK for example, the current political environment is causing a lot of uncertainty and inconsistency for businesses looking to decarbonise. As such, businesses are looking for other sources of guidance and reassurance amidst growing climate risk and uncertainty.

Contracts bridge the gap between policy and a business’s net zero targets. A contract is a legal agreement, enforceable in the courts, designed to lock the parties involved into a set of agreed terms. They give both parties certainty and crucially, turn voluntary targets into enforceable action. After all, every business deal is just a nice idea until the contract is signed. From then on it is a legal obligation. They can be made bespoke to a particular industry and geographical location. They can even be tailored to an organisation’s specific net zero target and carbon reduction plan. And, they can be a surgical tool compared to the sledgehammer of legislation, allowing more precision at a faster pace.

The starting point for any business is to determine which contracts are the most carbon intensive. Those are the high impact targets. Next, look at the expiration dates for those contracts, which tells a business which deals to start planning to decarbonise first and sets out a timescale for action. When climate clauses are put into contracts they will be priced, solutions will be created, people will work out how to get it done, because the alternative is being in breach of contract and the possibility of damages.

The types of climate terms that can be weaved into a contract depends on the type of contract in question. There are a huge range of solutions and an equally large range of ambition. Some examples include requiring both parties to set Paris-aligned net zero targets and report greenhouse gas emissions. Ambitious organisations could go one step further, setting a carbon footprint target for the contract, with a specified yearly reduction rate. Incentivising compliance is key and there are different approaches that can be used. A collaborative approach may integrate an incentives regime rewarding contracting parties for beating climate targets. Conversely, other industries insert a damages provision for parties who persistently breach carbon limits. Ultimately, the strategy is to start at a level realistic for the industry, and increase ambition over time until climate goals are achieved. Every supplier relationship is different and will require its own approach. But, there are a wealth of options out there and the important thing is to start these conversations early; this is not something to spring on business partners. Early engagement, supplier education programmes and stakeholder workshops are the way that other businesses have made a success of climate contracting.

Contracts are powerful catalysts for change and they are just as powerful at blocking it. Long-term contracts with no decarbonisation provisions can undermine net zero goals that an organisation has set. This is why the practice of climate contracting, mandating decarbonisation targets through legal contracts, is imperative in mitigating climate change. They are a critical piece of the climate puzzle and in the transition to a zero carbon future.

After all, how are you planning to meet your climate goals without using your contracts?