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With climate regulations topping the ESG agenda, a new era of corporate responsibility is upon us - and General Counsel has a chance to play a pivotal role in the transition.
As environmental impact becomes a critical risk factor for financial investors, climate change is no longer something that businesses can afford to ignore. With a raft of newly enacted or proposed climate reporting regulations underway across the globe, the relationship between our planet and big business is changing - with knock-on effects reaching every level of the supply chain over the next few years.
Carlos Chambers is a lawyer, B2B software entrepreneur and CEO of climate software start-up CarbonInvoice. Carlos has advised major corporations in his capacity as a solicitor, from electricity retailers to key players in the aviation industry - but his passion for sustainability has led him to find his niche in the net zero space. We spoke with him about the impact of new ESG reporting rules on SMEs (private businesses with less than 500 employees) and what role GCs might play in guiding their organizations through this new sustainability landscape.
Climate reporting is coming
“Corporates are seeing the writing on the wall. They know that they will be in scope for reporting sooner or later - and are starting to get ahead of it.” - Carlos Chambers, CarbonInvoice
With governments inching slowly toward net zero carbon targets, climate reporting legislation is bringing ESG to the forefront of the corporate compliance agenda for the first time in history. From the Climate-related Financial Disclosure (CFD) regulations in the UK to the U.S. Securities and Exchange Commission’s (SEC’s) climate-related disclosures and mandatory climate-related financial disclosure requirements across New Zealand and Australia, most of the western world’s business centers have either already been hit by new measures, or will feel them within the next couple of years.
At the same time, climate-related litigation against corporates is on the rise. According to the Norton Rose 2023 Annual Litigation Trends Survey, more than a quarter of corporate legal departments reported heightened exposure to environmental impact concerns last year, with one in three concerned about being on the receiving end of climate-related class actions.
No carbon targets - but broad impact
While incoming regulations are jurisdiction-specific, all broadly require in scope companies to conduct record keeping and disclosure of their carbon footprints. Critically, the purpose of these frameworks is to provide transparency for investors - they do not impose carbon targets. Their scope is also narrow, currently affecting only those at the top of the corporate food chain. However, Carlos is clear that they will eventually be landing on desks across even the smallest of SMEs sooner or later - for three reasons.
Firstly, it’s highly likely that what are currently top-down regulations will be expanded once a precedent has been set at the head of the market - climate concerns aren’t going anywhere, and the demand for insight into environmental risk is only likely to increase. “What is currently a voluntary phase for smaller companies will inevitably merge into a regionally specific compliance or regulated phase,” Carlos predicts.
Secondly, “less than half of the emissions generated by in-scope companies are their own - the rest emanate from their supply chains,” he says. Finally - and perhaps most importantly - irrespective of legal obligation, climate reporting is becoming a high priority for the shareholders on whom businesses depend for their long-term survival.
Combined, all of these factors will eventually create widespread pressure across the market, as climate reporting ultimately becomes a condition of doing business. Carlos is already seeing this in the world of big tech, with the likes of Microsoft, Atlassian, and Apple already asking their suppliers for carbon data. The long-term result is likely to be a mammoth governance and data demand for SMEs - the question will be how they tackle the job, and who is best placed internally to take ownership of the challenge.
Carbon reporting - a broken system
In respect of the first question at least, Carlos believes he has an answer. CarbonInvoice is a climate software startup with a simple mission - to help small businesses play their part in reducing the world’s carbon footprint by empowering them to measure and mitigate their own environmental impact in minutes.
The concept was borne out of the struggles that Carlos experienced getting one of his own earlier businesses carbon certified - after weeks spent laboriously gathering the data needed to obtain a basic carbon measurement, his team realized that they were dealing with an archaic system. He laughs as he recalls the final straw: “Our marketing manager came to me and said, ‘Carlos, I will not weigh our bags of rubbish. I have found my line, and this is it.’” At that point, the penny dropped and he realized there had to be a better way.
Determined to solve the problem, Carlos’ team set about designing software to automate the measurement process. They came up with an activity and spend-based solution which can now conservatively measure the carbon footprint of an SME in around three minutes, all using basic business information and accounting data from their existing systems. For busy SMEs this low-effort, fast results approach makes an overwhelming task into an easy one. The accuracy of the measurement can be uplifted by bringing in activity data (including electricity, travel, and waste outputs) with the goal of ultimately building a full carbon profile including every element of the company’s operations.
The system then helps the business take responsibility for their emissions, mitigating their footprint by offsetting through native tree planting schemes. It also provides them with content to communicate the positive action they have taken to their prospects and clients, with the aim of ultimately helping them to retain and win more business. Carlos is proud of the results so far, with clients beginning to secure supply contracts which can be at least partly attributed to their carbon measurement activities.
What difference does it make?
“There is far too much paralysis by analysis in the climate space. Action beats strategy when you’re trying to learn and figure things out.” - Carlos Chambers, CarbonInvoice
For anybody conversant in the world of sustainability, one question is obvious - can carbon offsetting really offer a full answer to climate change? “Of course not,” Carlos says; in an ideal world, governments would regulate primary emissions at source through taxation. But with no realistic prospect of this happening any time soon, responsibility is shifting downstream - and with just two percent of global SMEs measuring their carbon footprint, Carlos says there's an urgent need to find a way through “without creating a huge compliance overhead which stunts productivity and cripples businesses”.
With all of this in mind, Carlos believes that measurement is a great place to start - and his aim is to bring the number of businesses who know their “magic number” up to at least 50 percent over the next few years. “What we’ve designed is the easiest, simplest answer to the reporting challenge for SMEs. Is measurement and carbon offsetting the full solution? No. Does it provide a tangible way for businesses to get going on a journey which the vast majority haven’t even begun? Yes.” The ultimate aim, of course, is to transition away from carbon emissions altogether - and Carlos assures me that the CarbonInvoice product roadmap points in this direction.
SMEs - Why should this be on your radar?
Setting aside wider market pressures, Carlos believes there are strong commercial reasons for SMEs to take climate reporting seriously now as part of wider ESG strategies - reasons which lean into opportunity rather than risk. One of the biggest is the marketing power of strong climate positioning: “Quite simply, this is a very powerful way to differentiate your brand.” As conversations about climate reporting between regulated companies and potential suppliers become more commonplace, he identifies this as a chance for businesses to set themselves apart ahead of time.
Carlos also sees a key value opportunity here for companies when it comes to talent acquisition. “Thirty percent of the workforce are now millennial or Gen Z,” he notes. And according to CarbonInvoice’s survey of over 900 SMEs in 2023, these are professionals who value climate far more highly as a factor in their employment relationships than previous generations. For businesses and their legal teams looking to attract and retain in-house talent, he believes being able to speak coherently to this topic could be a game-changer.
A leadership opportunity for General Counsel
“With no clear owner for climate reporting, in-house legal professionals are well placed to upskill and become thought leaders in this area.” - Carlos Chambers, CarbonInvoice
Raising the level of climate awareness across your business is one thing - but for any new concept to really take root within an organization, someone usually needs to take ownership of it. This is something that Carlos acknowledges - whilst large corporates are likely to have ESG teams dedicated to environmental policies and practices, this is ultimately a new function which is likely to lack any clear leader within smaller businesses. “It could potentially fall under finance or operations, but I think in-house legal professionals are very well placed to upskill and become thought leaders in this area,” he says.
And if corporate legal leaders are ready to take on the challenge, what will this mean in practice? Carlos predicts it will involve a lot of skills which come naturally to in-house lawyers - from getting internal policies and codes of conduct up to speed to managing wider governance responsibilities. The ability to communicate the nuances of climate reporting clearly to shareholders will be particularly crucial: “There will be a need for individuals who understand the interplay between climate and commercial concerns, and who are able to have lucid conversations about these issues with senior decision makers.”
There will also be a need for someone who understands how these high-level conceptual shifts will flow through to business and employment contracts. Vendor contracts are likely to eventually require extensive revisions to meet greenhouse gas emissions requirements. Other key commentators in this space, such as PwC, have already observed that the pain factor of this task could be well mitigated by legal teams bringing in other tech solutions, such as AI-assisted Contract Lifecycle Management (CLM) tools.
In the short term, Carlos believes that the way GCs respond to this new landscape will depend very much on their individual perspective. While there is a clear compliance and risk mitigation angle for legal teams, there is also an opportunity to use the new regulations as a catalyst to explore new marketing and business development ideas. “Start by simply asking the question,” he suggests. “What do we have going on in the ESG space? Is this something I can contribute to?” Just taking the first step may initiate the first ripples of change across your organization.
The future of climate reporting
As for the future of this space, Carlos is confident that the journey is just beginning. With the initial outlay of primary legislation setting a climate reporting framework, the expectation is that more meaningful regulations will eventually follow to actively push down emissions. Carlos is hopeful on this front: “It does need to go further, and it will go further. We’re going to start seeing reduction targets - a lot of the biggest companies have already proactively set them, and governments are likely to follow suit.”
As to how as-yet unregulated companies - and their legal leaders - respond in the immediate term, Carlos believes there’s a clear choice. “The first option is to ignore the issue until the last possible moment”, he says. “This might be a valid approach. But you may end up with frustrated clients, a workforce which lacks confidence that you take the issue seriously, and a struggle to keep hold of good talent as a result.”
The alternative, he suggests, is to embrace this new way of thinking and incorporate it into both legal and the wider business function sooner rather than later. “Our other option as lawyers is to accept that this is a clear systemic issue with clear risks, and turn it into a positive opportunity. If you do that, there’s a very real chance to add value to both the top and bottom line of your business.” For now, at the very least, it’s something well worth keeping a close eye on.
Learn more about CarbonInvoice at www.carboninvoice.com
