Climate Contract Playbook Edition 3
139
[Gordons clause] NEW
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Capital Markets ESG Due Diligence Questionnaire
Practice Area / Sector
Capital Markets, Finance
There is a significant shortfall in Climate Finance required to limit the world to a 1.5-degree scenario 68 .
Issue
Capital Markets are important to bridging that gap. However, climate change considerations are often not raised until the late stages of a transaction when the deal is already being marketed.
Issue a capital markets focused due diligence questionnaire (DDQ) at the early transaction stage which requires the company to provide information regarding its impact on and considerations of climate change issues for the present and for the future. Increasing demand for transparency and investor scrutiny in capital markets highlights the importance of thorough due diligence from a legal, risk and reputational perspective. There is however no single source of guidance or regulatory benchmark when it comes to climate change due diligence and companies, underwriters or lenders and law firms may have their own internal ESG processes leading to differing information requests, inconsistent disclosure and confusion. As the effort to harmonise decision useful ESG disclosures continues, regulators in the United Kingdom and the European Union have suggested additional disclosures and benchmarks to promote sustainable economic activity. The recent consultation paper published by the UK’s Financial Conduct Authority (FCA) proposes that U.K. companies make climate change disclosures consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) on a comply or explain basis. The European Commission’s Technical Expert Group on Sustainable Finance has published its final Taxonomy report for screening environmentally sustainable activities.
Solution
Context
There is no one size fits all and convergence is therefore best achieved through a more consultative due diligence process at the outset of the transaction.
Policymakers have also indicated that ESG considerations will continue to become increasingly important in regulatory analysis and policy making 69 . ESG considerations may have a growing impact on value creation. Integrating ESG factors during the due diligence phase raises awareness of potential risks and opportunities that can affect investment performance.
68 https://www.climatepolicyinitiative.org/publication/global-landscape-of-climate-finance-2019/ 69 https://insight.factset.com/esg-regulation-where-to-start; https://ec.europa.eu/commission/presscorner/detail/en/IP_19_1571 ; https:// boardagenda.com/2020/02/13/uk-government-set-to-implement-mandatory-tcfd-reporting/ ; https://assets.publishing.service.gov.uk/government/ uploads/system/uploads/attachment_data/file/820284/190716_BEIS_Green_Finance_Strategy_Accessible_Final.pdf
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