How to address evolving climate change risk in infrastructure projects

With the help of multinational company EDF Energy, we explore how climate-related risk will impact infrastructure projects and what role in-house lawyers can play in helping their business adapt to its changing nature.

Limits to passing risk down the supply chain

Funders have already announced that they will impose increasingly stringent ‘green’ requirements in relation to the infrastructure projects they back as they themselves face pressure from regulators and investors to support decarbonisation. At present, this has required the demonstration of viable corporate and environmental, social and governance (ESG) strategies to achieve ‘net zero’, but in due course is likely to include specific obligations to report on and demonstrate the achievement of measurable and reportable low carbon commitments. In turn, employers, and main contractors, will seek to pass on the associated risks to their suppliers.

Given the potential funding implications should the risks materialise, employers and main contractors are also likely to place similar obligations in their supplier contracts to reclaim damages or losses if low carbon commitments are not achieved. Those rights are likely to attach to climate-related risks such as those associated with assessments of embedded carbon in construction or operation emissions, for example.

Where risks are passed down the supply chain, designers will need to understand the standards of performance they are required to achieve and how that will be assessed. This will impact the extent to which they design structures based upon historic data, make assumptions about future conditions, and build a margin of tolerance into their designs.

Whilst traditional lump sum models of procurement tend to encourage the transfer of risks down the supply chain, across the infrastructure sector we are seeing an acknowledgement that a top-down allocation of risk does not always incentivise the level of collaboration and innovation necessary to deliver major projects successfully. In addition, with the way the legal framework is evolving quickly in response to the climate crisis, asset owners could face limitations on their rights to pursue suppliers for damages or loss by the time a right of action is identified.

Future proofing is a moving target as things change

Adapting to evolving climate change risks and ‘future proofing’ infrastructure assets against them will become increasingly important. Industry will need to think about how they are managing and allocating responsibility for risk over the life of the project.  

There inevitably will be a cost to future proofing. Asset owners will need to find ways of assessing risks and both the costs and benefits of the adaptations that might be taken to build resilience. A whole lifecycle approach is needed, supported by a multinational standardised framework for measurement, assessing climate change risks from the earliest concept and planning stages through to design, construction, operation, maintenance and end-of-life.

Decisions will need to be taken against a backdrop of the growing push for the infrastructure industry to become more sustainable and embrace the ‘net zero’ emissions agenda. EDF continues to develop and adapt its ESG policy that shapes the company’s decision-making in this regard.

EDF said: “Environmental impact assessments, assessment of climate resilience and the impact on biodiversity are undertaken as part of the process for securing planning approval for our projects. At the other end of the spectrum, when our sites come to the end of their life, we will look to decommission them in sustainable ways.”

Reduced scope to insure against climate-related risks

Asset owners will need to consider their existing portfolio and assess steps that might need to be taken to mitigate potential future damage and losses. Securing protection from loss and damage by traditional routes such as through insurance may only be a part of the solution and in some cases may be unavailable.  

Certain types of assets which are strategically important are very often already located in challenging environments. Power generation assets are a good example. The changing climate is likely to have an impact on the ability to purchase climate-related insurance for those assets.

EDF said: “Renewables projects by their very nature are required to be in more weather-exposed locations around the world, which causes challenges for insurers. As the climate crisis is increasing the likelihood and intensity of extreme climate events, such events are no longer unexpected or unknown, which will affect the ability to purchase insurance that covers loss and damage as a result of the changing climate.”

The role of the in-house lawyer

Lawyers will have a challenging role in not only keeping up with changing legislation, but in supporting businesses in assessing and allocating climate change risks and then enforcing those rights. Our present experience is that many clients are looking to engage with their supply chains in a collaborative way to allocate risk appropriately.

EDF said: “The assessment of climate risk will become more and more integrated into business, beyond the areas traditionally focussed on such as energy-intensive industry.”

“There are many different ways in which in-house lawyers can effect positive change. One way in which the legal team is working to ensure the risk of loss and/or damage due to climate change is addressed is through the inclusion of climate change clauses in our contracts. We are considering the use of clauses made publicly available by The Chancery Lane Project such as ’coolerplate’ terms – climate aligned boilerplate terms – into our standard contracts, from construction to corporate contracts and including NDAs,” it said.

“There is still a long way to go before these types of clauses become industry standard, but we are hoping that by being ambitious now, we can help to shift the market so that this approach becomes more mainstream in the near future,” EDF said.