The risks of climate change (physical, transition and liability) are becoming an ever more important consideration for capital markets. The pricing of financial assets, risk to investment, and the access to, and cost of, capital are becoming more frequently, and more significantly, effected by climate change. From the effects of climate change (Japan’s Government Pension Investment Fund estimates that climate change has the potential to destroy $69tn in global economic wealth by 2100) to climate change activist action (last month ExxonMobil shareholders handed directors a mandate to push a more aggressive strategy to drive down emissions while a Dutch court ordered Royal Dutch Shell to accelerate and deepen its emissions cuts which effected both companies' share price) the value of financial assets will continue to be affected. In short, climate change is a financial risk to which capital markets must be alive.
One of the most important tools with which capital markets can assess and quantify their potential climate-related risks is disclosure. Proper and comprehensive disclosure of climate-related risks would allow for more strategic planning, risk assessment, and capital allocation and management for capital providers.
There is already a drive for greater transparency in relation to climate-related risks with regimes such as Taskforce for Climate-related Financial Disclosures (TCFD) being adopted by companies and states alike. Whilst efforts have been made to standardise disclosure, there is no single source of guidance or regulatory benchmark. Underwriting and sponsor agreements often do not contain specific climate-related due diligence questions or climate-related warranties and indemnities. Where such wording is included, it is light, and the focus is on regulatory oversight. More disclosure and consistent standards would allow for capital to be provided in an informed manner.
It is possible to add wording to contracts to allow for such disclosure. The Capital Markets ESG Due Diligence Questionnaire would require companies to provide information, which can be adapted to the company/sector, regarding its considerations of climate change issues. The Climate Underwriting Sponsor Warranties extend warranties and undertakings in placing agreements and other similar contracts in respect of environmental positions and climate change risk based on specified metrics.
Clyde & Co is proud to help clients increase their awareness of climate change in capital market investment. These clauses may go some way in bringing this issue to the fore. Please reach out to me or one of our climate change experts if these clauses are of interest.
This post is part of a series of short updates summarising the precedent clauses drafted in the course of collaborative hackathons organised by The Chancery Lane Project. Clyde & Co held its own hackathon in partnership with The Chancery Lane Project in July 2020, and has taken a leading role in the Big Hack, another hackathon organised centrally by The Chancery Lane Project throughout autumn 2020.