How the climate crisis is changing business
The climate crisis has become a major business issue – companies are changing their strategies because of its impact and because of their growing desire to be part of the solution, not the problem.
GCs have an opportunity to lead their organisation's thinking on the opportunities and risks the crisis presents. We hear how from leading lawyers and a chief executive-turned climate champion.
With Alastair Morrison, Madeleina Loughrey-Grant and Philippe Joubert.
Hello and welcome to the Brain Food Podcast for GCs from Pinsent Masons. My name is Matthew Magee and I am a journalist at Pinsent Masons and today we'll be investigating GCs' role in helping their companies address the climate crisis.
Climate change has long been a social, political and ecological issue but meaningful action can't happen without change from the business world. Companies direct and use a huge portion of the world's resources, and unless they alter how they do that then true change on the climate won't be possible.
The stakes simply could not be higher. For 30 years each decade has been hotter than the last; 17 of the 18 warmest years ever recorded have happened since 2000. Extreme weather events like stronger, longer heatwaves and intense, heavy rainfall, are on the increase.
The UN's Intergovernmental Panel on Climate Change has warned that this means extinction of plant and animal species; reduced food and water security and damage to human health, all on a sliding scale relative to the increase in temperature.
This is a problem that won't be solved unless business gets involved – and there is evidence that companies realise this, even if governments in some of the world's biggest countries don't.
There is also evidence that the law is becoming one of the main tools for changing corporate behaviour.
So what should companies be doing? And what role should GCs play in that? To help us answer those questions we'll be hearing from Alastair Morrison who is in charge of client strategy for Pinsent Masons; Philippe Joubert whose Earth On Board organisations helps companies reframe their strategies in light of the climate crisis, and from Madeleina Loughrey-Grant, group legal and tax director at construction company Laing O'Rourke.
It can be hard to focus on this bigger picture when the world is occupied with dealing with a more immediate threat: coronavirus. But as we'll hear, how we deal with this pandemic could have far-reaching consequences for climate action. It might give us a break point, a second chance to take the kind of radical action that it's become clear will be necessary.
But first we'll look at the role of business in this issue. Should they be involved at all? Alastair Morrison says they have a duty to act, and that action will vary enormously from sector to sector
The general obligations on a company when it comes to climate change issues will really depend on the environment that the particular organisation is working with and what kind of sector it is in and what it is doing. It is a kind of common thing that I have is, that companies have an obligation to improve against themselves and to make a contribution to helping to arrest climate change and that might vary according the particular statutory and the particular challenges they have and how they might have to transition from one particular way of doing things to another.
If you look at just our business we are a professional services business working in a legal environment, the challenges that we have with, we have set ourselves quite difficult challenges and have indeed met them and exceeded them, but you cannot help thinking that that is relatively straight forward compared to the challenges that are faced by some of the clients that we are working with in particular sectors where they really are in areas where they have to transition their whole business. A classic example would be if you are in hydrocarbons and you kind of have been providing energy and looking at other ways and your source of income and your source of profitability is through hydrocarbons, yet you know you have to do something that goes way beyond utilising the existing sources of energy to develop energy into new areas and thinking about how you transition from the old to the new.
Philippe Joubert says companies have no choice. They must act, and now.
If you have to summarise in one sentence, the way we have been doing business for nearly one century now is we have taken nature for granted and unlimited. We have never recognised the value that the service that nature has rendered to us free of charge, unfortunately as we have been doing this for decades and decades and decades. We reached the limit of the planet. Scientists say we reached the planet boundaries and we are using free of charge, the service rendered by nature at the moment. Pollination, water, air: our business model which is made upon these three resources is just it. So we need to change, the year of 2015 will certainly be seen as the year where the world has recognised this, because for the first time we have got the Sustainable Development Goals that are nothing else than trying to decouple development from abusing nature or abusing social capital. Business is no longer a problem. It should be a solution. Business are certainly at the origin of 70% or 80% of the impact that we have, but business is the only human organisation I know that has the resources, the organisation and the speed of reaction able to help us to find a solution. So business is a solution, but, and to be the real solution business do change, we should design another business model that is not taking nature for unlimited and granted.
It is one thing to say that companies should change, but quite another to make it actually happen. Philippe has already told us that the 2015 Paris Agreement, when the world's countries agreed targets to limit global warming, was a watershed. But is this being felt on the ground? Madeleina Loughrey-Grant says that out there in the real world a very definite shift has happened.
I think there has been a big shift even if you just look at the last 12 to 18 months. The understanding of the criticality of this is really starting to resonate and when people ask how it is possible to get this on the agenda in the boardroom, the answer is, it is actually very easy now. I think if you asked people who were trying to tackle this and move it up the agenda. A few years ago or even two to three years ago, it would have been more of a challenge, but right now and I do not foresee this changing, there has been a transformational attitude change at board level across all industries on this issue and recognition that it is a significant business risk. An opportunity yes, but a significant business risk that needs to be addressed and kept on the agenda. Sustainability is not something that people can park off to the side and pick it up when they choose. It may have been at some point but it is certainly not the case I think anymore and there is huge appetite I am seeing, a huge appetite to understand the issues more and to understand what can and should be done and to understand the risks that exist even more and a recognition that in tackling this is an issue and really tackling it that, you know, from a sustainable and business perspective and the future proofing of the business this absolutely has to be tackled.
And Philippe says that the shift has reached not just chief executives, but the investors whose views and actions can change the direction of whole sections of the economy.
You see some very interesting movements last year, on the Business Roundtable in the United States or some institution in the UK or the World Economic Forum. People are starting now to understand that this model of shareholder primacy is not sustainable for sure and it is not what we need for societies. You know when Blackrock or other big investors are saying you should go back to the purpose of the business; you should look at stakeholders, etc, you should change the way you do business. I do not think they do that to save the planet or humanity. They do that because they need to save their business and they have understood that the way we are doing business at the moment is too dangerous for the big players because these big players are systemic players. They have nowhere to hide if the system is in trouble and they will die with the system. So they are very conscious that they have to change now. You can talk about banks, insurance, rating agency, exchange, Every single part of the financial market is moving in that direction, what they call impact finance now is taking the lead. Not yet, in term of volume because it is starting but in term of speed of course, this is taking the lead.
MM: If this is understood at the very top of major companies now, what business is it of GCs and senior legal staff? Well for one thing a GC or a head of legal is someone a company turns to when they want to discuss what the right thing to do is. That's a fascinating position to be in, and one that GCs should take seriously.
There are specific legal risks here but the bigger picture is more interesting – this is an opportunity to help shape the future of the organisation, and Alastair Morrison says GCs are already aware of the issues and are in a unique position to help.
When we look at discussions that we are having with the general counsel community, it is really interesting to see the overall level of awareness and interest in seeking to make a difference. The kind of awareness at a personal level is really high - everybody knows the challenges and issues that we face. I think the kind of phrase I might use is it goes from awareness to activation. How can I take that awareness and activate it so that it makes a difference?
Then the awareness and activation point also comes in, when one looks at how you might use your power or control leaders within the legal context of your organisation and your influence. Very senior legal people have a great degree of influence within an organisation and many of them are really good advocates. So, armed with a technical knowledge or a good scientific background of the issues, coupled with the knowledge of what is going on within an organisation, one can therefore be using influence, influence in the board to be raising consciousness around issues and seeing what an organisation can do. You cannot really have a situation where something like this is outsourced to a department. It has got to be in the consciousness of an organisation and therefore that kind of facilitative role endorsing, empowering, connecting becomes really-really important.
Madaleina Loughrey-Grant has found herself in exactly this position - with a personal interest in the issue and keen to steer her company in the right direction. But some legal leaders might worry about whether they'll be listened to, whether they have the internal standing to speak up on an issue that isn't strictly, technically a legal one. Madeleina says they shouldn't underestimate their influence.
I think a lot of senior lawyers and senior legal leaders perhaps do not always realise the extent of their ability to influence. Going beyond legal issues I certainly think that GCs and legal leaders can very much leverage their role as trusted advisors in encouraging this positive change and CEOs I think and certainly from my experience are increasingly looking to legally provide that leadership and some strategic advice on initially how to navigate the risks and the opportunity presented by climate change but obviously then building on that and looking at this strategies that might flow from it. The role from in-house lawyers I think is evolving and in particular increasingly focused on not just what is legal but also what is right.
I do think that legal teams are a really well placed to support a company on climate change efforts. It is not just on the green issues like the company's carbon footprint, so looking at wider issues like governance and the wider implications of issues like human rights. Things have changed rapidly over the last 12 to 18 months and so I think certainly lawyers will be pushing at an open door to raise this issue and ideas around possible resolution or strategies or consideration the company might like to take. I think from a personal perspective it has been a massive learning curve but I am very personally invested and personally interested in the climate change agenda and I think that really does help if there is a personal connection. It is not enough on its own, you have got to balance it against the needs of the business, but I think having that personal enthusiasm really does help because it means you in directing the board and directing your CEO you are being very well thought through but very authentic in how you raise these issues and you know of itself you are not just demonstrating that you are trying to tick something off a list, you are demonstrating a real desire to shift the dial.
A GC's role here is not just about their position as a general advisor, it is also about the law, which is increasingly a tool being used by individuals, governments and courts to ensure that businesses change their behaviour.
Philippe points to the Peruvian farmer suing a European energy company over the effect of emissions on a glacial lake which threatened his land, or to New York City's case against energy companies over the costs of dealing with the impact of global warming.
Madeleina points to a ruling this year by the UK Court Of Appeal that in adopting the UK government's Airports National Policy Statement, which backed a third runway at Heathrow Airport, the government had failed to consider its commitments to the Paris Agreement. She thinks this ruling will be pivotal in focusing minds on the legal aspect of the issue and how the law will increasingly be used to ensure organisations meet climate change requirements.
Anybody who is in the construction sector will be acutely aware of the impact of the Heathrow decision in the Court of Appeal that came out a little while ago. The Court of Appeal effectively held that the government's decision on Heathrow and the third runway was unlawful, because it did not take account of or explain how the government took account of its own policy on climate change.
What it does is it starts to put pressure increasingly on governments more widely and that will be the impact of that and other decisions that have come out and a decision like that will have major consequences for future infrastructure projects. There have been cases overseas and certainly in the Netherlands at the end of last year there was the decision of the Supreme Court where the government was effectively ordered to speed up its efforts to cut carbon emission which was really interesting and the Supreme Court in the Netherlands based its judgment on the UN Climate Convention but also and this was quite interesting on the obligations that exist in the European Convention on human rights. So effectively that the government was breaching people's, individuals', human rights by not acting quickly enough. Those decisions are not to be viewed in isolation, I think there will be similar decisions across the globe.
Alastair Morrison says the legal and regulatory landscape is changing, while Philippe says that GCs must make their companies aware of the risks.
There's a whole raft of areas where we are just seeing growing and growing areas of regulatory and legal changes coming through from governmental organisations or from regulators that are having an impact. So, I would kind of say expertise, technical awareness is some of these issues, because that becomes important in terms of having positions within organisations that an advice of organisations of positions to avoid contravening regulatory environments or legislative environments because it is going to become more and more common that there will be in certain sectors class action litigations against organisations who might be falling fire while benchmark standards regulations or legislation.
When you look anywhere in the world you always have the three main responsibility of the board, what I call the three duties. The first duty is you take care of the interest of the company, not the shareholders, the company, that means all the stakeholders. Second, due care and diligence and this is quite interesting because care and diligence means you do not need to be a specialist on everything, but you need to do your homework. You need to have eyes open on the risk and opportunities and you need to give some guidance to the management and for me, I defend the idea that 2015 will be seen as the year of tremendous change in the duty of the board in this aspect, because of Paris Agreement, you cannot say you do not know. This for me changed fundamentally the risk and the responsibility of the directors. 2015 is probably the year where being climate sceptic is not a safe harbour for directors and directors should go even further, directors should have very clear idea of where the risks are and what you are doing, what is your strategy to mitigate this risk and protect the interest of the company and put the company in a safe ground for growth.
Of course the climate is not the only crisis we are facing just now – coronavirus has had an impact on all businesses and will present immediate practical concerns and a wider economic challenge for months to come.
It is a health and social tragedy but it has shown us what a different world looks like – one without ubiquitous travel or commuting, one where working methods are more sustainable and the environment has a chance to recover, however slightly.
Alastair Morrison doubts, though, that we can pin our hopes on a sudden and enduring change of behaviour across the world. And indeed air pollution in China is back to pre-coronavirus levels, confirming that some things will go very much back to normal after lockdown.
So what kind of change will be the coronavirus legacy?
Alastair says that it could give us the opportunity for an economic re-set. Governments will be investing huge sums in jump-starting economies and protecting jobs, and this presents the chance to re-wire the economy, to focus this investment on projects and incentives that make for a properly sustainable future.
I do not think it is so much about we have radically learnt to alter our behaviours and therefore we are not going to fly around as much or commute to work anymore or those kinds of things because it will gradually come back on stream and this is a global issue, not a kind of a localised issue to a particular place. But if you look to the last global financial crisis when the world went into economic meltdown there were stimulation policies to get the world out of economic meltdown. So, for example you have the American Recovery and Reinvestment Act (ARRA). A whole lot of stimulus loan packages and stimulus was put around, but it was put around clean energy. So, one of the things that happened as a result of that was that there were $90 billion worth of loans that went into clean energy investments and one of those helped to build Tesla's first factory.
I think now if we look at the link between Covid and the economic recovery and stimulus, I think we should be creating awareness in the legal community about the kind of opportunity that exists to stimulate further clean sources of energy as we look to make our recovery to put money and effort behind that so that as part of the deal our clean energy obligations or investments into renewable energy and I think that is an interesting way of looking at this because there is no doubt the evidence is that governments can make a material and enormous shift in relation to climate change and that is the biggest shift. So, I think we can take this opportunity now and look to see how we can make that shift.
This is not an environmentalist's pipe dream, it is what business itself is asking for. 200 firms have written to the UK government, for example, asking for post-covid investment to focus on industries whose growth is environmentally sustainable, and explicitly asking for green strings to be attached to grants or loans.
Phillippe says that in France this is already happening, offering a glimpse of a hopeful future for business and the climate.
We are bailing out a lot of companies, are we not? Because most of them are in big trouble. The first question that the financial system is asking now is can we really bail out companies from the old model or do we want to bail out companies for the new model. This is now happening in France, the $10billion that we are handing over to Air France and KLM, in which the governments are shareholders, they are bailing out but with what we call green strings attached, which means you will receive the money but you will have to have a certain change in for example in the emissions of the company because we think it is important. So, you see you have consumers behaving differently, financial markets, the governments also because you see the government is now insisting that the green plan is used as a base for choice in the sectors we want to help and the sectors we don't need to help that much.
Thanks for joining us for the latest Brain Food For General Counsel podcast. Remember you can keep up to date with hour by hour coverage of business law news by the Out-Law reporting team at Pinsentmasons.com, and don't forget to subscribe to us wherever you get your podcasts. Until next time, goodbye.
Brain Food For General Counsel was produced and presented by Matthew Magee for Pinsent Masons, the international
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