Out-Law Analysis | 04 Nov 2021 | 9:25 am | 8 min. read
In-house legal teams are well placed to lead their companies’ navigation of the risks and opportunities arising from the climate crisis and the path to ‘net zero’.
To do so, those teams must anticipate changes in the market and in regulation, learn on the job, adopt a global approach, and develop a deep understanding of their business.
Pinsent Masons has teamed-up with leading UK energy company ScottishPower to explore how legal teams can do this.
The path to net zero and increasing focus on a range of climate and sustainability issues create both risks and opportunities for businesses. However, the environment in which businesses are encountering climate change and sustainability issues is a complex one.
The complexity is driven in part by a combination of international legal commitments, local or national laws and regulation – both in the form of mandatory requirements and incentives for particular behaviours – and also by the increasing demands of customers, employees, investors, lenders as well as wider civic society. Increasing exposure to climate related litigation and the need to defend businesses from activist threats are other drivers of change and complexity.
It is precisely that combination of drivers that makes in-house legal teams and general counsel well placed to take a leadership role on climate in most organisations. Strong legal teams have traditionally had roles as the providers of business solutions, protectors and champions of good governance and as identifiers and mitigators of risk.
As the in-house legal team at ScottishPower has helped illustrate, successfully managing the climate crisis risks and opportunities facing companies requires some core traits.
ScottishPower’s in-house legal team has supported the company in a number of decarbonisation actions. These include the sale of the company’s fossil fuel generation assets, meaning ScottishPower is now a 100% renewables developer. The team has also advised the business on the delivery of subsidy-free onshore wind farms, and on improving electric vehicle charging infrastructure, exploring the potential of ‘green hydrogen’, and in implementing ESG policies internally.
ScottishPower said that being able to anticipate risks and opportunities is vital for any in-house legal teams that want to oversee similar ‘green’ initiatives in their organisations.
“Being a trusted strategic adviser who is included in the design and inception of projects brings far greater value to the business by helping to shape and steer matters in a way that pre-empts potential issues further down the line,” a ScottishPower spokesperson said.
In-house legal teams which understand the existing legal framework in detail are very well placed to be advising the business and the board on the direction of travel. In times when the regulatory framework around climate risk and net zero is evolving quickly, the in-house legal team has a critical role as a horizon-scanner, advising on trends and ensuring legal structures and commitments are future-proof, wherever possible.
Legal teams are also well placed to advise the business on what actions might be needed at a corporate level to prevent or mitigate the impact of future regulation, allowing businesses to maintain more autonomy in how they respond to the climate challenge.
Increasingly, we find that legal teams need to be able to assess the risks of possible climate related litigation risks, an area that is developing quickly. This litigation risk does not just apply to so-called ‘greenwashing’ claims, it also concerns historic and future liability for carbon-intensive activities. Such litigation is increasingly being run by activists and we anticipate growth in the number of climate-related class actions.
Regulatory change is one of the main drivers behind businesses developing net zero strategies and embracing the climate transition. However, in many sectors, it is not just the black letter law that legal teams must get a handle on – often the actions businesses must take are shaped by very technical, industry-specific, requirements.
One example of this that ScottishPower’s in-house legal team was integral to was the RIIO-T2 network price control, which impacted one of the company’s subsidiaries, SP Transmission. The RIIO-T2 price control is a regulatory measure overseen by the UK’s energy regulator Ofgem that sets out what gas and electricity transmission network companies are expected to deliver for energy consumers from 2021-2026 to which net zero scenarios were very relevant.
“The legal team were instrumental in their support to SP Transmission in their appeal to the Competition and Markets Authority of certain parts of Ofgem’s final determination for RIIO-T2,” ScottishPower said. “Looking forward, the legal team are now working with the networks business towards its next distribution price control.”
Keeping up with evolving regulation is only one area in which in-house legal teams must learn quickly, however. Understanding how new technologies work and how they might benefit the business is also important, though this can be a daunting task.
Getting to grips with the main characteristics of newer technologies, such as green hydrogen and large-scale battery storage, for example, requires legal teams to identify what they need to know about a new technology quickly. If they can do that, however, they will be particularly well placed to help in the development of commercial models and in stress-testing those models.
In these cases, being able to tap into the experience and international networks of panel law firms can be particularly helpful in helping to bring clients up to speed.
For multinational companies, developing and implementing decarbonisation plans requires drawing up actions that can be implemented in all the countries they operate and invest in. Focusing actions, however bold, around one jurisdiction will not have the desired effect. However, this task is complicated by different cultures, regulations and demands. In-house legal teams have an important role to communicate these challenges to the board and advise them on how to navigate them successfully.
ScottishPower said: “The key challenges for the team focus around regulatory frameworks and emerging market opportunities. There is clear policy support for the UKs ‘net zero’ ambitions, however it is critical that legal and regulatory frameworks are aligned with this ambition. New technologies and developing markets typically don’t have the same level of certainty that more mature markets provide. That said, such a challenge also poses a great opportunity for legal innovation and to support the business in being an early mover in markets such as green hydrogen, helping to shape and influence how such markets develop.”
While every jurisdiction has its own nuances and sometimes distinct approaches, much of the leadership on climate issues and indeed much of the innovation on new technologies and commercial models is happening on a global scale. Being able to tap into experience and expertise internationally is vital, as is understanding what global themes are emerging.
It is important that in-house lawyers understand how activities in their own sector, and the sectors their own business interacts with, are being shaped by global initiatives – initiatives such as recommendations made by The Task Force on Climate-related Financial Disclosures, for example.
Understanding those frameworks and how that they are affecting behaviours just as much as they shape local laws and regulations can give a legal team a strategic edge. Just as international law firms do, in-house legal teams at global companies like ScottishPower parent company Iberdrola have an excellent opportunity to share knowledge, best practice and collaborate across jurisdictions.
To drive climate-related change within the business, in-house legal teams need to be involved in the formation of strategy. However, this itself requires an intimate understanding of the business and skilful handling of often competing interests and ideas.
ScottishPower said: “Having a deep understanding of your client’s business and its long-term ambitions and strategy is essential. Only by working closely with internal business teams can a legal team fully understand its company’s ‘green’ goals and how best to support them. ScottishPower is comprised of four business/corporate areas, each with their own unique set of characteristics. Having dedicated multi-disciplinary specialist legal teams in each of these hubs has been instrumental in the successful delivery of advice and support.”
Organisations that embed the legal team into both the setting of strategy and the early stages of new initiatives, projects or transactions will generally benefit from that investment. Legal skills bring a useful perspective, helping to balance risk with a mindset well placed to identify practical, implementable answers to problems. That is particularly the case in responding to the climate crisis where there is a need for innovation and also for understanding new and evolving regulations.
One thing that the global response to climate change has demonstrated is the centrality of good governance to effective running of a company and governance which fully embraces the risks and opportunity of climate change. A good legal team will be attuned to the importance of good governance and in some cases will have a core role in delivering on that governance.
The very best legal teams are able to play both an integrated and client-aligned role embedded in the businesses they serve while retaining sufficient independence to report on legal matters freely and openly as part of a robust governance framework. This can be a difficult balance to maintain and is often best managed by a combination of both constructive and well-managed relationships and appropriate governance regimes.
Round the board table, an effective general counsel can play a leadership role in making sure that climate risks are understood, properly managed and that the company’s strategy is taking those into account. At a time when investors are increasingly interested in the effectiveness of corporate governance regimes, this is a critical role.
There are things in-house legal teams can do proactively to promote decarbonisation of their company’s operations – like reviewing ESG procedures and policies and public statements or reports on climate targets and performance or building in appropriate clauses into supply chain contracts and project documentation. However, the legal team and general counsel can also play a wider role challenging and encouraging others to make sure that these issues are fully reflected in decision making and the setting of strategy. The legal function often has an unofficial role as the ‘conscience of the organisation’ and in that role can often spot the long-term benefits that will come from shorter term pain or discomfort.
In making a strategic decision to acquire or dispose of particular assets, or enter or exit a new market, the climate consequences are of increasing importance. Legal teams and law firms can play important roles in advising on both the transaction specifics and the wider narrative such transactions play into. Real expertise in a range of clean energy technologies and commercial models is vital, as is the ability to access external expertise where needed.
As ScottishPower said, “business sustainability, the fostering of talent, digitalisation, are all interrelated core drivers to a legal team’s success as part of the path to net zero and the green recovery”.
Legal teams are very well placed to ensure that those issues are being properly respected and advanced through their own work and in governance frameworks. It is a useful reflection that responsible and sustainable business is a larger goal of which how a business responds to climate risks and opportunities is an important and integral part.