Restructuring 'can be useful tool' amid climate challenges

Out-Law Analysis | 30 Mar 2021 | 3:34 pm | 3 min. read

Many countries around the world, including the UK, are in the middle of implementing measures to counteract climate change.

The impact of climate change on the environment is now widely recognised, but there may also be an impact on businesses facing financial difficulties either as a result of climate change itself or due to the impact of transitioning to a cleaner world.

A total of 196 countries are seeking to implement the aims of the 2015 Paris Agreement on Climate Change which set global goals to reduce carbon emissions. The UK, which is one of the signatories, has set a target of net zero greenhouse gases by 2050.

The United Nations (UN) has also adopted 17 sustainability and development goals which include targeting climate change and its impact. As a result, businesses can expect to see increased regulation and disclosure in this area and may need to make significant changes.

Climate change and efforts to reduce its impact are global issues that affect everyone, not just the sectors which are heavily reliant on fossil fuels. How and when a specific business will be impacted may be difficult to predict; some will flourish and others will struggle.

But it is important that every company consider the impact of climate change now, together with whether a restructuring tool could be used to build a more financially and environmentally sustainable business.

'Green' restructuring

Many businesses will not be financially robust enough to survive the challenges posed by climate change without undergoing some form of restructuring. Now is the time for businesses to make pro-active choices and changes.

A scheme of arrangement, voluntary arrangement or the new restructuring plan can be used to restructure a company's balance sheet and introduce new finance and investment alongside an operational restructure. A pre-pack administration may also be an effective mechanism to rescue those parts of the business that are capable of adapting to climate change.

Those businesses which address the impact of climate change and increased regulation head on, making use, where necessary, of these corporate and insolvency tools available to them, will be best-placed to succeed in a greener future.

Climate change – what are the risks?

Businesses need to be aware of the physical risk that climate change may have to their assets, supply chain and operation both in the UK and abroad. Physical risk refers to climate-related adverse trends and severe weather, for example raised sea levels, floods, storms, droughts and wildfires. Physical risk can damage or destroy property and impact the value of assets and the ability to obtain insurance, all of which can leave a business in financial difficulty.

Secondly, businesses need to consider whether 'transition risk' will have an adverse effect as the world moves to a greener economy. Sustainability and decarbonisation will require a transformation of the economy to cleaner energy sources and business models.

The transition for many businesses will require significant financing and large-scale investments. Some sectors will face bigger challenges than others: energy companies, manufacturers of raw materials and those in the automotive and aviation industries are the most obvious candidates. But most sectors will be impacted to a lesser or greater extent.

Thirdly, businesses also need to consider the potential liability to third parties seeking to recover losses they may have suffered because of the physical or transition risk of climate change. Future generations may look to place blame.

Businesses should also be aware of the impact that climate change will have on all stakeholders including their suppliers and customers. A resilient supply chain is vital to the success of a business, so it is essential that suppliers are also able to adapt to and survive the ongoing risk of climate change. It is also likely that there will be changing consumer trends towards more sustainable products.

Availability of finance and investment

It is crucial that businesses consider implementing sustainable business strategies now. In the future, those businesses that have been slow to enact climate control measures may find it increasingly difficult or expensive to obtain funding and investment as their assets devalue, risk profile increases, credit rating is downgraded and business models become less viable from a sustainability perspective.

Lenders and investors are becoming less willing to support businesses which do not have long-term strategies to achieve environmental sustainability; banks are already moving towards aligning themselves with more sustainable businesses with the Paris agreement and the UN goals in mind.

Blackrock, the world's biggest fund manager, has cautioned that businesses which do not adopt sustainable business strategies can expect less investment as shareholders grow more focused on topics like climate change.

Then-Bank of England governor Mark Carney warned in 2019 that companies and industries not moving towards zero-carbon emissions would be punished by investors and go bankrupt. Carney said there would be industries, sectors and firms that do very well during this process because they would be part of the solution, but there would also be ones that lag behind "and they will be punished".

A business that cannot obtain funding or investment will fail. A number of green and sustainability linked financing products and government support is available to facilitate the change for those businesses that are dedicated to making a change and to fund new projects. Businesses will need to ensure that any changes are real; lenders and investors will increasingly seek independent verification that businesses are making genuine changes and are not just "greenwashing".