Climate Contract Playbook Edition 3
89
[Lola & Harry’s clause]
The Origin Story
Child’s names
Lola & Harry’s Questionnaire
Full name
Climate Change Due Diligence Questionnaire
Practice Area / Sector
Corporate
Traditional due diligence questionnaires tend to focus on compliance with environmental laws and regulations and the associated consequences of a breach. Indeed, Buyers may not ask any questions regarding these matters of target companies, relying instead on more generic ‘compliance with laws’ type questions. This approach is not prudent in a world where “climate change has become a defining factor in companies’ long-term prospects” 47 and can affect value across mainstream investment horizons.
Issue
Issue a due diligence questionnaire which asks the target company to provide information regarding a wide range of climate change-related issues going far beyond the standard compliance-focused questions.
Solution
The risks of ignoring the potential impacts of climate change on a target company are obvious. Without doing so, the buyer may not fully understand or even have considered whether its investment or reputation could be jeopardised by climate change risks or how geared up the target company is to make the net- zero transition. As a result, it may be buying a business which is not viable or sustainable in the medium to long-term, however impressive its recent financial performance may be and regardless of its strategic importance. The buyer’s board will need to ensure that any acquisition aligns with their corporate strategy, which may include environmental, social and corporate governance targets against which they will be held to account. Further, directors could be in breach of their fiduciary duties should they “consciously disregard, or wilfully ignore, material financial risks associated with climate change and their potential impact on corporate risk management and strategy” 48 . Having this questionnaire available gives the opportunity for buyers to appraise how the target company currently approaches climate change matters (if it does at all). If the target company has not previously considered how climate change might have a future impact upon it, at least a buyer who asks these types of questions will be aware of that and can act accordingly. At one extreme, the buyer may pull out if the risks are too great or it might appropriate to seek a price chip or contractual indemnities; at the other, the buyer may wish to proceed anyway due to other commercial factors but will have properly evaluated the target company’s approach to climate change-related issues and be aware of the work that is required to be undertaken post-acquisition to align the target company with the wider group’s environmental strategy or manage climate change risks that are identified through the due diligence process.
Context
Impact
47 https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter 48 https://ccli.ouce.ox.ac.uk/wp-content/uploads/2019/10/CCLI-Directors%E2%80%99-Liability-and-Climate-Risk-Comparative-Paper-October-2019
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