November 24 - Recent events in the UK have shown just how instrumental a budget can be. The entire financial world, alongside millions of ordinary borrowers and homeowners, looked on in amazement as the two recent UK budgets have taken the country from a spending spree to extreme belt-tightening in just over a month.
Using our spending power is standard fare in economics and public finances, but for sustainability professionals and in-house legal teams it may not be familiar territory. Where corporates decide to spend their pound is equally important when it comes to tackling the climate crisis.
In my last column, I highlighted four-key climate-conscious business practices that organisations need to adopt: a) creating a culture of decarbonisation, b) using the power of your spend to take account of your decarbonisation targets, c) setting a carbon budget so that carbon becomes the currency for your decarbonisation transition plan, and d) rewiring your contracts to deliver your decarbonisation targets. Previously, I focused on creating a culture of decarbonisation. This piece will follow up on the power of your spend and carbon budgeting.
1. Harnessing the power of your spend. Corporates need to make sure how they spend their budgets, such as an in-house legal budget, takes account of their decarbonisation targets.
You can use your budgets to work with suppliers that have aligned, or are working towards aligning, their business with the Paris Agreement goal of limiting warming to 1.5 degrees Celsius. When you are purchasing goods or services, ask your suppliers about their decarbonisation targets. If they aren’t aligned with the 1.5C goal, ask them if they plan to be. If they don’t have adequate decarbonisation plans in place, you need to decide whether you want to use a supplier whose GHG emissions will adversely impact your own decarbonisation targets. Alternatively, work out how you can work with suppliers to set and meet adequate decarbonisation targets.
This is likely to mean that procurement takes more time and may require you to establish new supplier relationships or new ways of working with your suppliers. A good example of this is the work done by Vodafone to decarbonise its supply chain.
You may find that you have to pay a premium to work with suppliers who have 1.5C-aligned decarbonisation targets. However, to do otherwise may mean you don’t meet your greenhouse gas (GHG) targets and this will bring unwanted climate risks, including damage to your reputation. The Chancery Lane Project's (TCLP’s) Javier’s Clause sets out questions that you can ask of suppliers to explore their climate ambition.
2. Set a carbon budget. We all need to start thinking of carbon as the currency for our decarbonisation transition plans.
We need to halve GHG emissions by 2030. That’s 2,632 days. 376 weeks. Or 83 months. For a company with 1,000 tonnes of GHG emissions per annum and a decarbonisation target aligned with the 1.5C Paris Agreement goal, that means their carbon footprint in 2030 can be only 500 tonnes. They might decide to step down their emissions by making savings in 2023 of 10% and ramping up those savings through the intervening six years until they get to 50%. Another approach is to set a carbon budget in 2023 of 900 tonnes, which reduces annually so that it is at 650 tonnes in 2026 and 500 tonnes in 2030.
Setting a carbon budget alongside its financial budget means the company will need to allocate that carbon budget across a range of departments and projects. Each budget holder will need to work out how they can change the way they currently operate to deliver their share of the decarbonisation targets and stay within their carbon budget.
TCLP’s Griff’s Clause provides template drafting for board papers that prompts consideration of the climate impacts of a significant contract or transaction and the associated climate risks to the business. Using this clause could help the company’s board to manage their carbon budgets when they are deciding how to prioritise significant projects.
Another resource is Ming’s Clause, which sets a target carbon footprint for products, and can help production teams to set a carbon budget.
Aligning your spend with your decarbonisation targets and setting an organisation-wide carbon budget sends a powerful message to your contracting partners, especially suppliers, and your staff that you are changing how you operate. This approach will get your organisation on track to deliver your climate targets and it is a powerful response when answering questions from your customers, regulators or other stakeholders about your decarbonisation ambition, targets and progress. As you can see, budgets can do a whole lot of good too.