Advancing corporate climate governance to meet the Paris Agreement objectives
This article explores how corporate climate governance is critical to achieve the transition to a low-carbon and climate-resilient economy and highlights the pressing need for companies and financial institutions to take climate action. It also discusses the EBRD’s technical cooperation projects, focusing specifically on the Bank’s support for the development and implementation of corporate climate governance action plans.
Climate action: The need of the hour
The Paris Agreement sets the objective of limiting average global temperature rise to between 1.5°C and well below 2°C above pre-industrial levels.1 To achieve greenhouse gas (GHG) emission reduction in line with this temperature increase goal, states have formulated forward-looking plans with clear climate commitments referred to as nationally determined contributions (NDCs).2 The Paris Agreement explicitly references the private sector’s role in implementing NDCs and the Intergovernmental Panel on Climate Change (IPCC) also recognises that partnerships involving non-state public and private actors, among others, would facilitate actions and responses consistent with the temperature increase goal of the Paris Agreement.3, 4
In the latest IPCC report, however, a lack of private sector engagement and insufficient private sector sources of climate finance have been identified as key barriers, with public and private finance flows for fossil fuel projects being greater than those for climate mitigation and adaptation.5 As such, an urgent systemic transformation is needed, and it is vital that private and public sector entities identify and establish climate-related targets for their assets, portfolios and supply chains. With growing consensus that climate and sustainability-related data are essential to monitor progress towards achieving the Paris Agreement goals, mandatory regulatory requirements and voluntary market-driven standards have emerged that set requirements for entities to identify, assess, manage and report on sustainability and climate-related matters.
The recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) are a pioneering market-driven initiative in this regard. These recommendations span four thematic areas that are central to the functioning of public and private enterprises: governance, strategy, risk management, and metrics and targets. The TCFD provides guidance on what information entities should disclose to support investors, lenders and insurance underwriters in assessing and pricing climate-related risks.6 The aim is to encourage entities to identify the financial risks and opportunities related to climate change as part of their risk management and strategic planning processes.
In a more recent market-driven endeavour, sustainability standards have been published by the International Sustainability Standards Board (ISSB). These standards build on the recommendations of the TCFD, but require more specificity for climate-related disclosures. The ISSB seeks to set a high-quality, comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. While both the ISSB standards and TCFD recommendations are voluntary, jurisdictions such as the United Kingdom,7 Singapore,8 Nigeria,9 Australia and others have already expressed strong support for reporting in line with them.10 In addition to voluntary initiatives, stricter national and regional regulations are coming into force across jurisdictions such as the European Union (EU), Egypt, Georgia and the United States.
The heightened focus on climate and sustainability-related disclosures has set in motion an urgent process of internal transformation in entities. Strong corporate climate governance (CCG) is at the heart of this transformation as, to make accurate and reliable climate and sustainability-related disclosures, entities would need to (1) establish the appropriate internal governance and operational arrangements; (2) establish relevant policies, processes and management practice guides; and (3) develop strong internal capacity.
The heightened focus on climate and sustainability-related disclosures has set in motion an urgent process of internal transformation in entities. Strong corporate climate governance is at the heart of this transformation.
The EBRD’s corporate climate governance facility: Supporting clients and raising awareness
CCG is the set of rules, practices and processes that an entity puts in place to identify, manage and improve decision-making and disclosures related to the impacts of climate change. The EBRD is the first international financial institution to set up a CCG facility that brings together lawyers, economists and policy experts to help private sector and state-owned enterprises (SOEs) develop and strengthen their climate-related governance, strategy, risk management, target setting and disclosure practices. In particular, the EBRD provides dedicated support to clients to develop and implement corporate climate governance action plans (CCGAPs). These plans involve the two key components discussed below.
A. Assessment: Identifying corporate governance gaps with respect to climate
The first step is to understand the entity’s corporate governance practices and to assess their suitability for identifying and addressing climate-related risks and opportunities. International standards and, where applicable, regional and national regulations form the benchmark for this analysis. This assessment looks at the entity’s practices in the context of the TCFD’s four thematic areas in order to identify material sustainability and climate related risks and opportunities. It is interesting to see that prevailing regulations and standards have different expectations regarding the assessment of the “materiality” of identified climate-related risks and opportunities.
For example, the ISSB standards focus on “financial materiality” by applying only to sustainability and climate-related risks and opportunities that affect an entity’s cash flows, its access to finance or cost of capital. This is because the ISSB standards focus on the needs of investors and providers of capital. On the other hand, the European Sustainability Reporting Standards require disclosure of information which is material both in terms of the impact on an entity’s financial value and the entity’s impact on people and the environment – “impact materiality” or “double materiality” – thereby focusing on a broader set of stakeholders than merely investors.11
In any event, entities must consider both physical climate risks (the impacts on physical assets arising from the occurrence of extreme weather events and gradual shifts in climate patterns) and transition climate risks (the financial risks, such as the risk of stranded assets, which result from the process of adjustment towards a low-carbon economy). The assessment process would include scoping of portfolios and value chains (both upstream and downstream) as well as infrastructure and physical assets to identify potential climate sensitivities. This would cover both sensitivity to transition risks (for example, reliance on carbon-intensive inputs or exposure to climate litigation) and to physical risks (such as water-intensive activities or exposure of key facilities to extreme weather events).
From a strategic and risk management perspective, the damage to or destruction of a company’s physical assets can reduce its productivity and output as well as adversely impact its financial position. Financial institutions having contractual ties with such affected companies may also suffer financially owing, for instance, to the affected company’s inability to service debt repayments, diminished equity returns and/or a depreciation in collateral value. On the other hand, financial losses from transition risks can arise in several ways for both companies and financial institutions. These include climate-related mitigation policies (such as the introduction of a “green” tax), shifts in public sentiment (such as increased climate-related litigation) and evolving regulatory/supervisory expectations (such as the introduction of more stringent climate-related reporting requirements).
The EBRD is the first international financial institution to set up a corporate climate governance facility that brings together lawyers, economists and policy experts to help private sector and state-owned enterprises develop and strengthen their climate-related governance.
B. Capacity building: Improving CCG and disclosure practices
The EBRD has developed a CCG matrix and associated questionnaire to assist with the assessment of a client’s maturity level across three stages – early stage, developing stage and advanced stage – with respect to CCG practices. The matrix and questionnaire are based on existing and emerging voluntary standards and regulations, and are designed to help companies identify their current maturity level as well as graduate from one maturity level to the next. Once an entity’s CCG maturity is identified, the Bank’s next step is to help formulate a CCGAP commensurate with the maturity level of the entity’s current corporate (climate) governance practices.
- Governance: The allocation of responsibilities and accountability mechanisms of the board, operational committees and senior management in identifying, managing and monitoring climate-related matters must be clearly established and disclosed. To govern climate risks and opportunities effectively, organisational procedures for communicating identified risks to the board and relevant committees for due consideration should be clearly defined. To develop the competence of the board and executive officers, steps should be taken to improve their knowledge of and resources for climate risks and opportunities. In terms of more advanced practice, executive incentives could be linked to climate-related targets and indicators, where appropriate.
Tunisia’s mitigation efforts under its NDC focus on the energy sector, as it is one of the biggest contributors to GHG emissions in the country. Tunisia’s state-owned utility – Société Tunisienne de l’Electricité et du Gaz (STEG) – is the central player in the domestic energy sector as it is solely responsible for distribution and transmission of electricity and gas, acts as the single buyer for all generation output and controls electricity generation. As such, STEG’s long-term sustainability is critical for the green energy transition in Tunisia.
Since December 2020, the EBRD has been providing technical cooperation to STEG to implement a detailed reform and energy sustainability roadmap to improve its CCG. Under the CCGAP developed with STEG, clear reporting and accountability structures across its operational departments were established and, notably, the responsibility for approving climate-related risk and strategy (including key climate-related performance indicators) was allocated to the board. This is a major step forward for STEG and is an example for other SOEs in the region, especially considering the challenges that such enterprises face in making governance changes. As an outcome of the CCGAP project, STEG adopted a new corporate climate strategy in 2022, which provides a clear strategic roadmap for reaching the objectives of Tunisia’s NDC targets.
- Strategy: As climate-related impacts are becoming clearer to entities, organisational procedures must be reinvented to ensure the identified climate-related impacts systemically inform investment planning and decision-making processes. As part of this, disclosures should include transition plans. A transition plan is a time-bound action plan that clearly outlines how the entity will pivot its assets, operations and business model to align with the goals set by the Paris Agreement.12 Transition plans are encouraged so the entity has the benefit of a blueprint to tackle climate issues. This would also enable investors and other stakeholders to assess the entity’s commitment to achieving a low-carbon and climate-resilient pathway.
In December 2022 the EBRD published its Paris Agreement alignment methodology, which sets out the Bank’s commitment to screen all its lending operations to ensure they are on track to limit global warming to no more than 1.5°C.13 In particular, as part of this effort in the context of the EBRD’s indirect lending operations (that is, EBRD finance extended to financial institutions which on-lend the funds to local projects or investments), the Bank provides technical cooperation to such financial institutions to prepare and implement their own transition plans. The aim is for these financial institutions to ensure their entire portfolio aligns with the goals of the Paris Agreement, well beyond the EBRD’s own financial support, thereby bringing about a systemic change. Bank al Etihad, the fourth-largest bank in Jordan in institution to sign up to develop a pilot institutional transition plan with EBRD support to align its business practices and financial flows with the goals of the Paris Agreement.14
- Risk management: Entities must carry out a materiality assessment to define how the identified climate-related risks and opportunities affect their business, strategy and financial planning. It should also be clearly established which business divisions or units are responsible for identifying, disclosing and managing material climate-related risks and their reporting lines to senior management. The principle of double materiality requires that businesses consider not just the financial impact of climate-related risks and opportunities on the entity, but also the entity’s impact on people and the environment.
Olam International is a leading food and agribusiness company supplying food, ingredients, feed and fibre in more than 60 countries worldwide. Olam Food Ingredients (ofi), a member of the Olam Group, operates in several supply chains – hazelnuts, coffee, palm oil, cocoa and others – where material social and environmental challenges exist. With the EBRD’s assistance, ofi has undertaken a climate-related risk scenario analysis to thoroughly understand the risks and opportunities associated with low-carbon transition and physical climate impacts in ofi’s hazelnuts operations in Türkiye. To put this in context, it is estimated that 70 per cent of the world’s hazelnut supply is sourced from Türkiye.15 The scenario analysis exercise with ofi led to the formulation of recommendations on how climate actions can be implemented within value chains to improve climate adaptation and resilience for Turkish hazelnut farms that form part of ofi’s supply.16
Since 2022, the EBRD has been helping a Bulgarian electricity distribution company develop and implement a CCGAP. Climate change vulnerability and risk analysis for Bulgaria shows that the energy sector (including critical infrastructure) will be among the most affected sectors in the country.17 Electricity utilities are particularly susceptible to the physical risks of climate change, such as the exposure of network infrastructure to extreme weather events, as well as transition risks, including the evolving regulatory landscape relating to climate change and green energy in the EU. As part of the CCGAP, the distribution company was encouraged to consolidate, among other indicators, information on GHG emissions, energy consumption, renewable energy capacity and climate-related incidents affecting operations. It was suggested to monitor the evolution of each indicator and to set targets over the short (<2 years), medium (<5 years) and long term (>5 years).
- Metrics and targets: Entities must disclose the key metrics used to assess climate-related risks and opportunities in line with their risk management and transition planning ambitions. Ideally, climate-related targets should be formulated across multiple time scales (short, medium and long term) and include interim targets. Disclosures should also involve a description of the methodologies used to calculate metrics and targets. As an entity’s disclosure practices become more sophisticated, the metrics must be comprehensive and granular enough to cover different regions, businesses and/or products.
The EBRD has developed a corporate climate governance matrix and associated questionnaire to assist with the assessment of a client’s maturity level across three stages with respect to corporate climate governance practices.
The process of implementing CCGAPs is not without challenges, such as:
- Availability of data: CCG enables entities to use climate-related information in internal processes and decision-making, thereby promoting systemic changes that help to develop low-carbon and climate-resilient pathways for business operations. However, to accurately identify and evaluate climate-related risks and opportunities and undertake climate-related stress testing and materiality assessments, the available information must be high-quality, reliable and comparable. Further improvements in the quantity, quality, reliability and comparability of disclosures are urgently required. In 2020 the EBRD launched a policy initiative to help stock exchanges in our regions develop sustainability reporting guidelines based on applicable national and regional frameworks, with the aim of improving the quality of data reported by companies and helping market participants align with best practice standards for disclosure and reporting. Under this initiative, the Bank has provided support to the Prague Stock Exchange (2023), the Bucharest Stock Exchange (2022), the North Macedonia Stock Exchange (2022) and the Warsaw Stock Exchange (2021) in their development of sustainability-reporting guidelines.
- Lack of standardisation and alignment: There is considerable variation across entities and sectors with regard to the content, methodology of preparation and form of presenting climate-related information in disclosures, as well as transition plans. There is also a lack of transparency with regard to the methodologies and approaches applied. The fragmentation of climate reporting has resulted from the multitude of third-party reporting frameworks and gaps in interoperability. Transition planning is still a nascent activity and what these plans should include – and how individual low carbon pathways fit within sector or country pathways – is not always clear. However, the efforts of the ISSB and the European Commission towards ensuring interoperability and developing guidance may address this issue.
- Lack of capacity and awareness: Boards and operational teams must be equipped with the right tools and skills to fulfil their obligations with respect to climate-related governance, strategy and reporting. This requires ongoing training and capacity-building support. The nature of support will need to be tailored to the relevant sector, market, country-specific regulatory framework and maturity level of the entity. The EBRD has been successfully working with the Climate Governance Initiative (CGI) since 2022 to provide such support in its regions.18 For example, the CGI and the EBRD jointly launched Chapter Zero for Ukraine and the Caucasus in 2022 to accelerate knowledge delivery, peer-to-peer learning and sharing of best practices among boards and senior management in these regions.19
- Businesses are oriented to focus on short-term results and value creation: Businesses are traditionally oriented to deliver short-term value and returns for stakeholders. This can tend to be at odds with the long-term objective setting and risk management required for climate-related matters. As the board’s positioning of the entity on short-term decisions can have important long-term implications for organisational resilience to climate change, it is critical to consider how climate change might alter the future business landscape.
Private sector and public sector enterprises have a critical role to play in the transition to a low-carbon and climate-resilient economy. Strategic and risk management decisions and action will either slow or accelerate the pace of climate change and how we adapt to it, which will in turn shape risks and opportunities for businesses. Failing to reorient the business environment to address climate change or inability to clearly demonstrate positive action could have a major impact on the sustainability, financial performance, reputation and risk profile of entities.
The EBRD has a vital role to play in helping its clients address climate-related risks and identify business opportunities with reference to the relevant international standards and mandatory regulatory requirements. The Bank is also uniquely placed to offer such support given its focus on, and close relationship with, the private sector and public sector enterprises in its regions. By providing such assistance, the EBRD can enable its clients to identify the most effective pathways towards alignment with the Paris Agreement goals.
The impact of climate change on lawyers
The growing threat of climate change will define this century and our generation more dramatically than any other challenge. Scientists and environmentalists widely recognise that we have a small window of opportunity to halt the warming of the Earth to prevent a collapse of the vital ecosystems and natural resources on which modern societies are built.
Introduction: The climate emergency
The Intergovernmental Panel on Climate Change (IPCC), a United Nations scientific body, has released no fewer than six reports presenting a comprehensive assessment of the latest scientific knowledge on climate change, the human role in causing global warming and the potential impacts on nature and biodiversity, societies and economies. In the IPCC’s last synthesis report of March 2023, scientists underscored the urgency of taking more ambitious action to reduce GHG emissions.20 They argued that this was the last assessment period during which the world still had a chance of limiting global temperature rise to 1.5°C above pre-industrial levels, the threshold beyond which the adverse impacts to our planet’s natural and human systems will rapidly become irreversible. Global warming can be expected to cause yet more extreme weather and large-scale extinctions, phenomena that have already pushed millions of people into hunger, destroyed homes and livelihoods, and culminated in waves of migration and political instability.
Against this backdrop, the climate crisis is having profound implications on the rule of law, as well as the access to – and administration of – justice. The UN Human Rights Council, the International Covenant on Civil and Political Rights, domestic courts and international bodies recognise that climate change poses serious risks to fundamental human rights.21 In July 2022 the UN General Assembly declared access to a clean and healthy environment a universal human right. This decision should accelerate the implementation of national legislation and enforcement.
The number and complexity of claims for climate justice have increased. On the international level, the Court of Justice of the European Union is expected to issue a first-of-its kind advisory opinion regarding countries’ responsibility for climate change.22 At national courts, the profile of claimants ranges from farmers seeking to preserve their livelihoods and children requesting intergenerational justice to affected parties asking to hold large carbon emitters responsible for higher levels of carbon dioxide concentration in the atmosphere.
In this context, the role of the legal profession in tackling the impacts of climate change has come to the fore. Climate and sustainability disclosure standards and expanded regulation now aim at increasing corporate transparency and accountability relating to entities’ carbon (and broader environmental) footprints and their management of climate risks. And all the while, the risks of exposure to climate-related litigation are growing more acute and more clearly quantifiable. When it comes to addressing the climate crisis, lawyers are going to be very busy indeed.
The climate crisis is having profound implications on the rule of law, as well as the access to – and administration of – justice.
Shifting market, policy and regulatory contexts
Averting the worst possible consequences of climate change will require no less than a transformation of both economy and society, underpinned by a redirection of capital to new types of products, services and infrastructure. Financial markets and institutional investors are shifting towards sustainable investments with ever more urgency and purpose.
The Task Force on Climate-related Financial Disclosures (TCFD), established by the Financial Stability Board, published its recommendations on disclosures in 2017. Since then, many companies, investors and regulators around the world have adopted these standards. The Glasgow Financial Alliance for Net Zero (GFANZ) – the world’s biggest coalition of financial institutions, sitting on upwards of US$ 130 trillion of capital – committed to adopting high-ambition, science-based targets, including achieving net-zero emissions by 2050.23 More than 80 per cent of Financial Times Stock Exchange 100 companies and other big organisations have announced similar commitments over the last couple of years.24 In this context, asset owners, with a collective heft of US$ 11 trillion in assets, have pledged to align their investment portfolios to a net-zero target by 2050, while asset managers have committed to helping their clients decarbonise.25
Voluntary commitments, while laudable, will not alone suffice to avert the climate crisis. Policymakers and regulators are increasingly aware that market stability requires that organisations disclose their governance and management of climate-related risks. A growing number of policy, legal and regulatory measures have been taken on a national level since the 2015 Paris Agreement on climate change, including the following:
- Climate change legislation: There has been a 20-fold increase in the number of global climate change laws since 1997. These include the United Kingdom’s 2008 Climate Change Act, which commits the British government to reducing GHG emissions by 100 per cent from their 1990 levels (net zero) by 2050, to the European Green Deal and the European Climate Law.26 Policymakers have responded to a “ramping up” in pressure to establish legally based targets and obligations on climate mitigation and adaptation goals. This has tightened the regulatory regimes and expectations from companies working in all sectors of the economy.
- Mandatory disclosure regimes: The EU has developed a comprehensive sustainable finance legislative package that includes numerous measures and instruments. The Sustainable Finance Disclosure Regulation, for example, which came into effect in March 2021, requires financial market participants and advisers to reveal how they integrate environmental, social and governance (ESG) factors into their investment decision-making process and how they assess the likely impacts of sustainability risks on the returns of their investments. The United Kingdom has adopted mandatory climate-related financial disclosure regulations for publicly quoted firms, large private companies and limited liability partnerships; these requirements came into force in March 2021.27 The US Securities and Exchange Commission has also announced the development of climate disclosure standards that may become mandatory in public company filings. The International Organization of Securities Commissions has issued similar statements encouraging issuers to provide high-quality and decision-useful ESG disclosures to investors.
- Policies and emerging standards: Public markets and listing rules increasingly require more transparency around climate and broader ESG risks. The London Stock Exchange demands climate-related financial disclosures from premium-listed commercial companies, while some smaller stock exchanges have issued recommendations to their clients for coherent, decision-useful and consistent ESG reporting (for example, the Warsaw Stock Exchange and the Prague Stock Exchange).28 On 26 June 2023, the International Financial Reporting Foundation’s ISSB launched its climate and sustainability standards, which the G20 recognises as a global baseline. The European Sustainability Reporting Standards, expected to be approved later in 2023, underpin the mandatory reporting of the EU’s 2022 Corporate Sustainability Reporting Directive, which, in turn, will apply to more than 40,000 companies at the end of its five-year “phased-in” application starting in January 2024.
- Climate change in the courtroom: Increasingly, litigation is used to influence climate action. Courts hear climate change arguments against companies, policymakers and regulators and have been asked to uphold the principles of climate justice. In many cases, courts rule in favour of climate action, with some cases leading to new climate policies and actions.29 Climate litigation in Europe has advanced climate action, with 113 favourable and 86 unfavourable decisions.30 This trend is likely to continue, with the courts, in some cases, complementing the work of legislators in tackling the impacts of climate change.31 Climate cases can also have major indirect effects on the decision-making of private sector actors due to unforeseen costs involved, public perceptions or a decrease of company share value.32
In the face of these policy, legal and market shifts, there has never been a better time for lawyers to contribute to the climate and broader sustainability agenda. The world is changing rapidly as societies embark on an unprecedented journey to combat the climate crisis, consisting of efforts centred around the concepts of low-carbon and just, resilient and sustainable development. And, as in every societal and economic transformation, inequalities and inequities will emerge and even persist. In the face of this, the law – and lawyers – will therefore inevitably and appropriately be called upon to ensure that the scales of justice are balanced.
A growing number of policy, legal and regulatory measures have been taken on a national level since the 2015 Paris Agreement on climate change.
A critical role for the legal profession
Over the last couple of years, various bar associations and law societies – including the American Bar Association,33 the International Bar Association,34 the Law Society of England and Wales35 and the Council of Bars of Europe36 – have begun to underline the crucial role of the lawyer in the climate transition.37 Indeed, in their joint international meeting on climate change in March 2022, more than 15 bodies representing the legal profession recognised the key role lawyers can play in “leading climate action” and “leading on climate justice to protect the rule of law, access to justice and the public interest”.38 Since then, more joint statements have been released in support of the climate agenda. There is emerging recognition that lawyers should practise in a “climate-conscious” way, which is central to the Climate Change Resolution of the Law Society of England and Wales of November 2021.
Climate-conscious lawyering rests on the understanding that climate change is a growing source of financial risk to businesses and national economies, as well as to society more broadly and to the natural world.39 Organisations’ risk registers typically assess the likelihood of a risk occurring and the scale of its impact. Climate risk increasingly scores high for both measures.40 Climate change may not present the most important risks for every client of every lawyer, but it will affect most clients in some way. Solicitors in England and Wales, in particular, are increasingly expected to practise the legal profession in a way that supports the 1.5°C Paris Agreement goal.41
In particular, the Law Society of England and Wales, the International Bar Association and a growing cohort of professional legal organisations urge their members to:
- Consider the likely impact of any legal matter on the climate crisis and provide competent advice to their clients, taking into account the climate mitigation and adaptation objectives of the Paris Agreement;
- Consider the likely climate-related risks and liabilities for their clients and businesses;
- Advise clients, where applicable, about the benefits of disclosure of climate-related risks and opportunities related to their entire business operation;
- Continue their legal education on matters pertaining to climate change;
- Engage in pro bono activities that support the Paris Agreement objectives.
In light of these recommendations, lawyers should consider the extent to which these risks and other climate-related matters will be material to their clients or employers and their practice. While the response and engagement will probably vary across different areas of the profession, ultimately the lack of engagement on behalf of a solicitor may lead to the question of whether lawyers are truly acting in the best interests of their clients or employers (the latter in respect of in-house lawyers). As awareness of the impact of climate change on various practice areas grows, it is reasonable to expect that a competent lawyer would be able to advise clients how to mitigate their litigation and regulatory risks. Such advice may involve, for example, developing credible transition plans (for carbon-intensive businesses or financial institutions) and increasing the transparency of climate risk management and disclosure (to reduce climate litigation risks). Climate-conscious lawyering is, in fact, by its design meant to be consistent with a lawyer’s duties, including duties of care and the paramount duty to act in the best interests of a client or employer.
The legal profession is part of the solution
As climate-related pressures on the legal profession mount, the Law Society of England and Wales has taken a leadership role in issuing its landmark “Guidance on the Impact of Climate Change on Solicitors” (herein the “Guidance”),42 which is likely to inform legal practices globally. The document builds on the Climate Change Resolution and helps solicitors manage their practice in a way that aligns with a transition to a decarbonised economy. This includes a description of Scope 1, 2 and 3 GHG emissions and an indication of actions lawyers can take to reduce the carbon footprint of their law firm and their organisation (for in-house lawyers).
The Guidance also underlines the important role lawyers should play to avoid accusations of “greenwashing” by ensuring that their firms’ and organisations’ green targets, claims and commitments are based soundly on science and regulations.43 For example, marketing and pitch documents should not overstate climate and sustainability targets or progress; these should be meaningful and substantiated. A firm’s climate stance will likely affect its ability to attract and retain employees, as lawyers are increasingly asking about the green credentials of their future firm or employer. In addition, the Guidance explains lawyers’ “advised” emissions – that is, the GHG emissions associated with the matters on which a lawyer advises. This is probably the most significant source of climate impact for lawyers and is attracting increased attention in relation to professional services.
Climate change will affect most clients and most practice areas. It gives rise to physical, transition and/or liability climate risks, which in turn could become legal risks. For example, extreme weather events (a physical climate risk) can have impacts on the built and natural environment. This may affect asset resilience, value and insurability in commercial and corporate transactions. New climate-related disclosure or reporting regulations (associated with transition risks), for example, can scale up competency requirements and shift client expectations. Finally, the growing number of greenwashing claims and shareholders’ or fiduciary duties clearly increase the liability risks that lawyers are expected to manage and mitigate. Solicitors should be able to take into account relevant climate-change considerations in providing client advice, and they should be alert as to the possible impact of climate-related legal risks on their professional duties. The Guidance recognises that the effects of climate change are wide-reaching and constantly evolving, which has a major impact on legal practices of all sorts. Lawyers should understand this changing context, enhance their knowledge and ensure that their advice is competent.
The role of the in-house counsel
In-house lawyers have a unique role to play in responding to the climate crisis. They are closer to the business of their “clients” and thus can be expected to understand the likely effects of the changing policy and regulatory context. The general counsel in particular is often a trusted adviser to boards on matters related to good governance, reputation and integrity in the context of climate and broader ESG considerations. There is a natural role for the general counsel to advise an organisation on how to avoid misleading consumers, shareholders or broader groups of stakeholders about the environmental, social or other impacts of the organisation’s products and activities. More importantly, in-house lawyers may also steer senior management and board discussions towards favouring decisions that progress net-zero commitments and long-term value creation, eschewing choices that would tend to serve short-term commercial interests.
Below are a few actions in-house lawyers may consider taking in this new context:44
- Advising their boards of the need to develop leadership to respond to the climate crisis, to adopt a net-zero strategy with ambitious interim goals and, importantly, to be transparent about all of these.
- Helping their organisations embed climate and sustainability considerations in their strategic documents, integrating them into the broader business operations and policy engagement or dialogue.
- Demanding climate-conscious provisions in legal agreements and standard contracts, as and where appropriate.
- Developing climate literacy to advise the business, including in respect of the mitigation of climate risks.
- Seeking advice from specialised lawyers as required.
The Guidance also emphasises the role of in-house counsels in curbing greenwashing and delivering on the net-zero ambition or other green commitments of their organisation. In addition, in-house lawyers working in multinational businesses will need to include as part of their due diligence processes any impending policy, legal and regulatory changes in various jurisdictions that may give rise to climate risks (including transition or liability risks).
Several legal initiatives have started to raise awareness on the role of – and increased expectations for – in-house lawyers. Lawyers for Net Zero and the Chancery Lane Project, for example, provide resources to in-house and private-practice lawyers to help them take action and navigate the challenges that climate change raises. This is in addition to the Law Society of England and Wales’ new and growing resources web page.45
The role of the in-house counsel in international organisations
In-house lawyers in international organisations face an even more specialised version of this set of concerns and duties. These lawyers are generally asked to support the mandate of their organisation – which, in many cases, focuses on promoting sustainable development and improving lives in emerging markets or developing economies.46 Similarly, most international organisations are expected to act in a socially responsible way.47 In an operational context, this generally means having a material positive impact on society and the environment and having regard for the interests of relevant stakeholders. Given that in-house lawyers provide essential support to their organisations, it is reasonable to expect them to aim to offer advice that leads to sustainable and responsible practices across all operations of their organisations.
A number of multilateral development banks (MDBs), for example, have jointly committed to support the Paris Agreement goals and address the challenges of sustainable development, climate change and biodiversity loss in an integrated way.48 The MDBs and the International Monetary Fund (IMF) are committed partners in countries’ efforts to achieve the Sustainable Development Goals (SDGs).49 The financing that MDBs channel – both directly and by catalysing additional public and private resources – delivers a major sustainable development impact. The technical capacity, policy and regulatory tools and knowledge they provide help countries unlock investment and remove obstacles on the pathway to achieving climate objectives and the SDGs. In furtherance of their commitment to climate transition, some MDBs have developed Paris Agreement alignment methodologies for their investments and other operations. To support the expanding mandate of their institutions, in-house lawyers may need to enhance their expertise to integrate climate and ESG considerations in legal documentation, institutional operations and countries’ legal/policy reform. In-house lawyers in international organisations therefore naturally play a leadership role in developing and promoting climate-conscious lawyering – and, indeed, sustainable development more broadly.
Climate-conscious lawyering rests on the understanding that climate change is a growing source of financial risk to businesses and national economies, as well as to society more broadly and to the natural world.
Climate change may well be the defining challenge of our time, and lawyers – whether in firms or in-house – have an essential role to play in addressing it. Legal professional organisations have urged their members to reduce their firms’ carbon footprint and reassess their practices in the context of the risks and impacts caused by climate change. Contrary to the certainty and predictability principles on which the rule of law is built, climate change is causing uncertain and unpredictable impacts on a broad range of affected parties – and to natural systems as a whole.
Amid a rapidly evolving policy and legal context, lawyers will have to exercise their best judgement as they seek to uphold the rule of law and defend justice. Due to their role as both reputation guardians and trusted partners to clients within an institution, lawyers are increasingly expected to advise businesses on their sustainability and climate transition. International organisations’ in-house lawyers are value-adders and are expected to support the mission of their employers. By deploying their skills and expertise, in-house lawyers must be prepared to ensure the credibility and the necessary level of granularity in their organisations’ climate and sustainability strategy.
Powering the energy, digital and green transitions: EBRD support for the critical raw materials market in its regions
Despite the economic importance of the raw materials that underpin electrification, digitalisation and greening, until recently surprisingly little attention had been paid to the growing challenges of securing timely, diverse and sustained access to metals, minerals and other natural materials. Covid-19, Russia’s war on Ukraine and renewed geopolitical competition has focused increased attention on the sourcing of these critical raw materials. This article looks at the increasing demands for those vital minerals and the challenges in securing reliable supplies, highlighting the EBRD’s role and activities in this crucial area.
The security of supply of fossil fuels has been a serious concern to politicians and economists for years, and has taken on even greater importance due to the Russian invasion of Ukraine. Yet the growing challenge of securing timely, diverse and sustained access to metals, minerals and other natural materials has received limited attention until recently.
Many non-energy raw materials are not only vital to produce a broad range of goods and applications used in everyday life, but also to develop high-tech products and emerging innovations, for example, towards more environmentally friendly technologies. Simply put, our modern life – in all its dimensions, be it personal, social, commercial or family – is in thrall to the rocks and liquids that provide the raw material input for the technologies on which our daily lives depend. Those rocks and liquids, of course, consist of various metals, minerals and natural raw materials that pepper the periodic table.
As we move to a world defined by the energy, digital and green transitions, our world becomes one increasingly powered by technology filled with those raw materials. Cobalt, graphite and lithium for batteries to power our electric cars; tungsten to make our mobile phones vibrate; gallium and indium to light our LEDs; silicon for our semiconductors; and platinum for hydrogen fuel cells and electrolysers, to name a few.
As that technology evolves, we rely even more on the raw materials that are essential to its functioning. Given the economic importance of the raw materials that underpin electrification, digitalisation and greening, where they have a limited or high-risk supply source, they have become known as critical raw materials (CRMs).
The International Energy Agency tells us that in 2040 the world is expected to need four times as many critical minerals for clean energy technologies as it does today.50
Very little mining of these materials currently occurs in Europe, and production from recycling is unable to meet the growing demand, boosting reliance on external sources.
Unfortunately, however, CRM supply chains are often opaque and complex, and subject to increasing risk of disruption from recent long-tailed, and ongoing, global events – the Covid-19 pandemic, rising competition between western economies and China, and Russia’s invasion of Ukraine.
These events have created market volatilities and distortions, enabling some supplier countries to consolidate strong positions in the CRM market, while also isolating others from the supply chain. This leads to a situation where economies, their jobs and industries that rely on CRMs become vulnerable to those volatilities and distortions.
Governments the world over are therefore understandably keen to diversify their sources of CRMs for the green/digital transitions and ensure that their CRM supply chains are resilient enough to support the industries of the future, deliver on the energy transition and protect our national security.
Against this background, the Bank is keen to help its economies play a role in meeting the challenges of CRM supply volatility. It does this by helping those economies that are actual or potential suppliers of CRM to develop their resource base and become part of a more diverse supply of CRMs feeding that global demand.
The Bank can do this in two ways. First, by lending or investing in sector exploration or production companies and second, by helping to modernise governance and regulation of the minerals sector, as a means of improving the investment climate. Such an improvement will make it easier to attract more and better investment as a means of driving sector development and expansion.
The EBRD’s role in lending and investing in the minerals sector is relatively well known. Less known is its role in helping to modernise governance and regulatory frameworks as a means of enhancing the business environment, and thus driving investment in minerals sector development.
The author would like to thank Andrea Garaiova, Consultant, Competitiveness, Governance and Political Affairs, EBRD, for her contribution to this article.
Simply put, our modern life – in all its dimensions, be it personal, social, commercial or family – is in thrall to the rocks and liquids that provide the raw material input for the technologies on which our daily lives depend.
The why, when, who, what and how of EBRD technical cooperation in the minerals sector supporting governance and regulatory reform:
Why: The EBRD’s minerals sector technical cooperation helps build or strengthen policy, law, regulation and governance with the aim of attracting more and better investment as a means of driving sector development and enabling the sector to make a greater contribution to broader economic growth.
When: The EBRD’s minerals sector technical cooperation usually precedes the Bank’s lending/investment activities in the sector, or can run alongside that lending/investment, with the aim of amplifying the positive impact or mitigating any potential negative impact of that lending/investment.
Who: The EBRD’s minerals sector technical cooperation supports policymaking authorities (cabinet, ministries), regulatory authorities (mining regulator, geological surveys) and other implementation authorities.
What: The EBRD’s minerals sector technical cooperation helps to identify, adopt and operationalise proven best practice policies, laws, regulation, governance and methodologies/approaches, as well as training and capacity-building.
How: The EBRD’s minerals sector technical cooperation programmes are designed jointly by EBRD sector specialists and in-country counterparties, implemented by highly qualified and extensively experienced external consulting advisers, supervised by EBRD sector specialists and are largely or wholly grant-funded.
The EBRD’s minerals sector technical cooperation supports a broad spectrum of activities across a full range of mineral sector issues. Examples of types of activities and partner countries include the following:
Policy/strategy development: Mineral sector policy helps governments clarify and publicise the overall objectives and approaches for how minerals will be developed and is intended to guide the development of a country’s mineral resources as a foundation for national economic development. Policy should aim to address several interconnected priorities: establishing clear investment policies to encourage investment, ensuring clear delineation of institutional responsibilities, creating a well-balanced fiscal regime for mining activities, setting up environmental and social safeguards consistent with international best practices, and introducing critical standards for transparency and good governance of the sector. Mineral sector policy should guide development of a country’s mineral resources in a comprehensive way that considers the technical, economic, environmental, social and other mining-related aspects of the sector. The Bank’s support activities here can include help both to establish the policy development framework and to develop the policy itself.
Governments the world over are therefore understandably keen to diversify their sources of critical raw materials for the green/digital transitions and ensure that their critical raw material supply chains are resilient enough to support the industries of the future, deliver on the energy transition and protect our national security.
In Georgia and Uzbekistan, working with the government to develop a modern mineral sector policy and policy development framework designed to attract investment, establish responsible operations, protect the environment and increase revenues to government.
Preparing minerals sector legal framework: Upon adoption of new or revised mineral sector policies, new or revised laws are required to provide a firm legal basis for implementation of approved policies.
Bank support activities here can include help in preparing new primary laws and amendments to existing primary (mining, subsoil) laws.
In Georgia, Mongolia and Uzbekistan, working with the governments to prepare new mining laws, with the aim of creating a favourable legal environment and as a means to operationalise new, more modern, policies to attract more and better investment.
Preparing regulations to implement new primary law, together with support in implementing the law and regulations: Upon adoption of new or revised primary laws, new or revised secondary legislation – in particular regulations, guidance, methodologies and so on – will be necessary to practically implement and operationalise approved policy.
Bank support activities here can include help preparing new regulations, guidance and methodological frameworks to add the necessary detail to the general provisions of primary law. These regulations enable the functional implementation and operationalisation of policy in each topic area. Drawing on the provisions of law and policy, among the subtopic areas covered are:
- Institutional arrangements and regulatory governance
- Award and licensing of mineral rights
- Fiscal/tax provisions
- Geodata management
- Cadastral management
- Environment protection
- Land access and use
- Labour and safety
- Social and cultural safeguards
- Value addition and mining-related development
- Categorisation of minerals
- Classification and reporting of exploration results, and mineral resources and reserves
- Mine closure, reclamation and reinstatement
Capacity-building, training and support in practical implementation: Besides preparing the regulations and methodologies needed to operationalise policy in the subtopic areas noted above, capacity-building and training for officials involved in implementing specific regulatory areas are also necessary, along with help with practical implementation of the new regulations and approaches.
Examples of EBRD support for practical implementation activities among the subtopic areas outlined above include the following.
Geodata management: Modern systems and methodologies to capture, store, process and disseminate geoscience documents, maps and data – ideally in digital online form – are among the crucial tools available to accelerate inward investment into the minerals sector. Accessible geoscientific data (geodata), information and advice encourage mineral resource companies to invest by reducing exploration risk and the entry cost for them. This leads to higher expenditures to explore for mineral deposits – the first step to sustainable mining investments. Accessible digital geodata also help national governments understand their resource potential, which allows them to regulate activities and plan economic developments in a sustainable manner.
Unfortunately, obsolete methods are often used to record and store geodata, with much of the information available only in antiquated/non-digital form (for example, paper or disk). As the digitisation of geodata should contribute substantially to improving the transparency and wider accessibility of this vital resource to develop the sector, this is an area of keen interest for EBRD technical cooperation support.
EBRD support activities here can include establishing/strengthening viable geodata management practices such as database and data management, analysis capacity and clear rules for ownership and use of geodata.
The EBRD’s role in lending and investing in the minerals sector is relatively well known. Less known is its role in helping to modernise governance and regulatory frameworks as a means of enhancing the business environment, and thus driving investment in minerals sector development.
In Mongolia, working with the Mineral Resources and Petroleum Authority of Mongolia to establish a National Geoscience Database. Before operationalisation of the database, valuable geoscientific information was fractured and maintained across a number of paper and digital databases. Integrating these sources into one coherent system ensures all information is accessible and consistent – a key step to attract increased investment. This project covered design, hardware, software, installation and training.
In Ukraine, working with the Ukraine Geology Service (UGS) to accelerate the digitisation of the country’s huge collection of geological reports in its hardcopy archive.
This archive is an irreplaceable treasure trove of geoscience information, captured over decades in the context of state-funded and private exploration campaigns whose total cost may reach several billion euros and whose contents are also estimated to be worth billions of euros. EBRD support for UGS has four goals:
- Increasing accessibility of geoscientific data, information and advice to encourage mineral resource companies to invest.
- Enabling the government to better understand its resource potential, allowing it to regulate activities and plan economic developments in a sustainable manner.
- Helping to protect the Ukrainian hard-copy archive from the more immediate risk of damage or destruction during the conflict with Russia.
- Ensuring the digitalised documents can be readily available, as soon as possible, to contribute to ongoing physical infrastructure damage limitation and reconstruction efforts. Geodata are critical for those efforts in three ways, in that they identify the location, nature and grade of:
a) raw materials that will be essential for the physical reconstruction of the country (construction materials for roads, buildings)
b) CRMs that will be a key input for the digitalisation, electrification and greening of the Ukrainian economy (such as copper, cobalt, graphite, titanium and lithium), which are expected inevitably to be part of the country’s reconstruction effort
c) CRMs that can be exported to the EU and other foreign countries to generate significant revenue for the reconstruction effort, and to reduce the EU’s dependency on a few suppliers (rare earths, lithium and so on).
Having the geodata documents digitalised and ready in a public portal to attract investment to the sector once the security situation in Ukraine improves – without having to wait the likely years it could take without the intervention of this project – should make a major and quick contribution towards the reconstruction and recovery of the Ukrainian economy.
Fiscal regime and revenue management: A fair and predictable mining taxation regime is critical to increase market competitiveness, attract legitimate and responsible investment, and enhance the sector’s near- and long-term development and economic growth prospects.
Bank support activities here can include design of a modern royalty/tax-based system of payments. Additional work can include implementing revenue management approaches to facilitate more equitable distribution of mining benefits and prudent investment of mining revenues, as well as investor eligibility requirements and measures to track beneficial ownership and transfer pricing.
In Georgia, working with the Ministry of Finance to design and implement a market-based reporting and revenue monitoring system and introduce a modern royalty/tax-based system of payments.
In Mongolia, working with the Ministry for Mining and Heavy Industry and EITI Mongolia to design, adopt and implement a framework to track, and account for and publish sector revenue, ownership, production and operational data.
Standards for classifying and reporting exploration results and mineral resources and reserves: Adopting a global best practice independent reporting standard for the sector will improve the accuracy and reliability of reporting. This, in turn, will improve access to better information for existing or new investors in the sector.
EBRD support activities here can include helping with the transition from older (Soviet-era) standards to more modern, investor-focused standards (for instance, CRIRSCO/JORC based standards); helping to restate and reassess deposits according to newer standards; helping to establish a framework to identify and certify competent experts; providing support to develop the reporting code; and helping to prepare relevant laws, decrees and regulations.51, 52
The capacities, capabilities and experience of the EBRD in supporting the modernisation of sector governance and regulation described above – allied with its investment resources – places the Bank on a very strong footing to have a major impact on the development of the sector.
Given the centrality of CRMs to broader economic development in its green, digital and electrified forms, the Bank’s role in the sector is likely to expand, along with its impact across the EBRD regions.
In Kazakhstan and the Kyrgyz Republic, working with the government on the adoption and implementation of best practice standards for classification and public reporting of mineral exploration results, mineral resources and mineral reserves – a key means to bolster investor confidence in the sector in Kazakhstan and the Kyrgyz Republic. EBRD support is helping these two countries transition from Soviet-era reporting standards to more modern investor-focused standards.
The EBRD’s reform support team and minerals sector development in Ukraine
In addition to its broad support for minerals sector reform and development across its economies, the EBRD also implements a Ukraine-focused programme which helps the government tackle various mineral sector development issues. An overview of this programme’s work is set out below.
Before Russia’s invasion of Ukraine, the Ukrainian construction industry relied mostly on domestically produced raw materials. Now, reconstruction of roads, buildings and facilities depends largely on imported building materials. Difficult times, however, require innovative solutions, with waste from infrastructure destroyed by the war becoming an important source of input materials for the reconstruction of Ukraine.53 With that in mind, enhancing circularity in the minerals industry and attracting more investments into operations in the CRM value chain are key directions of the post-war reconstruction of Ukraine.
The EBRD is supporting the reform and development of the minerals sector in several ways, with the goal of drawing investment. One way the Bank helps sector reform and development is through the work of EBRD- supported reform support teams (RSTs). These teams are composed of professionals from outside the Ukrainian civil service who are retained to work in ministries on a temporary basis to implement priority reforms and transform the ministries themselves.
One such RST, supporting mineral sector reform, is based at the Ministry of Ecology and works closely with the ministry and the Ukrainian Geological Survey. From the outset of the war, UGS and the RST have been working to develop a map of raw materials used in construction, as a means to speed up identification and extraction of materials that can be used in reconstruction efforts. These materials include more than 20 different types of minerals and 6,000 subsoil areas (mineral deposits), the lion’s share of which represent approved reserves and promising resources that can be distributed to interested developers.
Additionally, RST advisers on minerals support a newly formed government entity in developing stimulus measures to attract investment into extraction of construction minerals used to restore objects damaged due to the ongoing conflict.54
RST advisers are also helping to coordinate and monitor an EBRD technical cooperation project that supports UGS in the digitisation of Ukraine’s vast archive of geological data. Advisers’ work will help ensure the protection of these data from damage or destruction and their continued availability to support mineral extraction in aid of reconstruction.
Together with UGS, RST advisers helped to develop a Partnership Roadmap 2023-24 which the European Commission endorsed on 20 March 2023. The actions agreed as part of this action plan – once the conditions on the ground allow for their implementation – will help to rebuild and modernise Ukraine’s economy while also supporting the country to align with the EU’s policies and regulatory frameworks. These include the application of EU and international ESG standards, as foreseen in the Memorandum of Understanding with the European Union on a strategic partnership on raw materials.55
On 5 April 2023, the Verkhovna Rada Committee on Environmental Policy and Nature Management established a working group to study international experience and develop legislative proposals to improve the legislative regulation of strategic and critical minerals in Ukraine.56 RST advisers on minerals have been included as participants in the working group’s work focus on aligning Ukrainian legislation in the area of raw materials to the EU best practice and regulations.
In addition to its broad support for minerals sector reform and development across its economies, the EBRD also implements a Ukraine-focused programme which helps the government tackle various mineral sector development issues.
Green procurement for green investment
Buying green infrastructure and ensuring a more sustainable and greener supply chain are vital, but cannot happen without considering inclusive and equal economic growth and harnessing innovation and technology to achieve fair and equitable public services. Most governments in the EBRD regions are only just embarking on their journeys towards green procurement and sustainable public infrastructure. Local governments around the world are being recognised for developing a better understanding of how sustainability fits into their local community considerations, priorities and governance processes. Municipalities can frame sustainability benchmarks in a clear and meaningful way and use them to manage their public infrastructure investments.
Since the 2021 United Nations Climate Change Conference known as COP26, there has never been more interest in sustainability. But there has probably never been more frustration, either. With commitments covering a coal phasedown, deforestation, methane and finance in particular, governments now need to translate their climate change pledges into real delivery. This is where sustainability of investment and public contracts comes in.
Public procurement makes up a significant part of the global economy and, depending on levels of economic development, may represent 16-19 per cent of a country’s gross domestic product, according to the Organisation for Economic Co-operation and Development (OECD).
What is less frequently mentioned is that government commerce – that is, what governments buy and sell – is responsible for 15 per cent of all GHG emissions annually, according to World Economic Group estimates. That’s seven times as much as the global aviation industry.
To tackle this, governments must commit to delivering public infrastructure and public services in a fundamentally different way. It is no longer a choice – whether it is a case of “building back” to recover from the impact of natural disasters or war, or a new public-sector investment programme, public infrastructure and public services must be sustainable to meet climate change pledges.
Sustainability in public procurement refers to several different policy areas and priorities. For governments, it means the challenge of regulating not only how to buy, but also what to buy, to determine how taxpayer dollars or euros are going to be invested in green projects and sustainability. For procurement officials, meeting the public sector’s climate change pledges means carrying out complex and knowledge-intensive public procurements better and more frequently. If the current practice of procuring infrastructure is left unchanged, it will put a brake on environmental progress and leave transition economies most vulnerable.
Eu example of climate change goals
The EU’s Green Deal aims to create an economy that produces no net emissions of GHGs by 2050 and where economic growth is decoupled from resource use and no person or place is left behind. The EU has acknowledged on the regulatory level that economic development can take a less environmentally damaging path than the one followed by countries that finished industrialising in the 20th century. There have been headline commitments, including across the entire European Union Resilience and Recovery Facility. EU leaders believe procurement can play a major role in sustainable development as 250,000 public bodies spend around 15 per cent of the bloc’s annual gross domestic product procuring goods, services and works. Used strategically, procurement can dictate trends in markets – especially those of the food, textile and technology sectors and for public infrastructure. The Green Deal is clear: the European Commission will propose further legislation and guidance on green public purchasing.
It’s a long way from a climate change pledge to a sustainable infrastructure project
EU member states realised the potential behind public infrastructure procurement budgets in the early 2000s and several governments started using green procurement strategically. Since then, green public procurement has become the most institutionalised and ambitious strategic procurement area in the EU with, arguably, the highest uptake levels. New EU public procurement directives adopted in 2014 redefined its “most economically advantageous tender” process as “price and other criteria” selection to make it easier to procure goods, services and infrastructure based not only on the lowest-cost criterion, but also considering quality, sustainability, social impact and innovation.
Circular procurement is one of the more recent trends that provides specific opportunities, and countless institutions are working on the green agenda across the EU. Despite the opportunities for green procurement provided in the 2014 EU directives, the daily procurement practices of most public buyers in Europe, especially municipalities, have changed very little. Sustainability is still an afterthought and not a default way to design and procure public infrastructure projects. So, what are the institutional blocks and barriers – both regulatory and non-regulatory – to wider uptake, and how do we tackle them?
The authors would like to thank Maya Almog, Associate, Green Cities, EBRD, for her contribution to this article.
As long as green procurement is not defined and mandated by law, buying “green infrastructure” is a strictly declaratory exercise, with no monitoring of the project and procurement cycle from planning through to contract implementation and no measuring of the project’s environmental impact.
Legal barriers imposed by public procurement regulation
If we were still in the early 1990s, with public procurement laws highlighting the importance of “value for money” in the short term, legal frameworks could be seen as barriers to reducing GHG emissions. A regulatory concept of green public procurement was born in the 2000s and today, international public procurement legal instruments, starting with the World Trade Organization’s revised 2012 Agreement on Government Procurement, are freeing governments up to focus explicitly on reducing carbon emissions and setting ambitious green public procurement goals.
Several countries have introduced compulsory regulatory instruments to reduce GHG emissions in government commerce, including public procurement carbon footprint registries (Spain), decarbonising the transport and construction sectors (Norway), promoting life-cycle costing in public infrastructure (Sweden) and reinventing environmental product declarations to inform about product carbon footprint (Germany). Looking at practices in their domestic markets, however, it should be noted that following green public procurement principles remains voluntary for public authorities in the EU. The lack of obligation means there are vast differences in green procurement implementation across the EU.
In some member states, such as Bulgaria, Poland, Romania and the Slovak Republic, fewer than 5 per cent of public contracts include any green procurement considerations. There is no evidence of ambition among EU governments to achieve green targets, with green procurement limited to minor spending categories. In many European countries, green procurement is mandatory only in certain product and service categories. These include Denmark (wood products), Estonia (furniture, cleaning products, information technology (IT)), France (energy efficiency, waste requirements), Greece (transport, road lighting), Latvia (street lighting, food), Malta (office buildings, roads) Norway (construction, food catering), the Slovak Republic (roads) and Slovenia (buildings, roads).
At the same time, there is a clear correlation between the levels of green achievement in public infrastructure and making green procurement principles mandatory for all or most public procurement of goods, services and works. Green procurement principles must be incorporated at all levels of government in Cyprus, Czech Republic, Italy and Norway, but not for all public procurement. Green procurement principles are mandatory for central government procurement in Austria, Croatia, Cyprus, Czech Republic, Finland, Germany, Italy, Norway, Spain, Switzerland and the United Kingdom. Levels of green requirements differ widely, though, from use of minimum sustainability criteria, giving preference to the most environment-friendly bid, to mandating life-cycle analysis. Ireland required all public procurement to incorporate green criteria in January 2023.
Like low-carbon energy debates, green public procurement is a divide between developed and low- and middle-income countries. As they have contributed the least to global GHG emissions, low- and middle-income countries – including several EBRD economies – have resisted linking climate change pledges to their public budget spending and modernising their public procurement systems with green procurement principles in mind.
Knowledge asymmetry and complexity barriers
When it comes to market knowledge, public procurement markets in developed economies (excluding for defence procurement) frequently suffer from knowledge asymmetry between the private and public sectors. This prevents public-sector procurement from innovating and performing at the same level as commercial firms. In transition economies, when public procurement regulations are modernised in line with international legal instruments and the public sector introduces new purchasing methodologies and techniques to domestic commercial markets, green procurement is often a complex topic for both public and private-sector market stakeholders. This is where “green procurement” knowledge products, such as methodologies and tools, are becoming important.
At the same time, few procurement transformation strategies unlock green innovations from markets. Many resources are publicly available under open licences and intensively promoted by various international organisations, from the EU to the United Nations. These include eco-labels, International Organization for Standardization standards, sector- and product-specific technical specifications, sustainability award criteria, life-cycle costing-based calculators, carbon footprint tools, environmental management systems, environmental product declarations and environmental spend analysis. However, it is difficult to discern where and how often these tools are used and at what stage of the procurement process, and their specific application to infrastructure procurement.
As a result, green procurement skills and the expertise of individual public bodies are perceived as low and the public sector continues to search for suitable tools to meet needs in terms of procuring infrastructure. The reason for this may be the complexity of this knowledge. Green procurement is far more information-intensive and complex than standard price-based sourcing and average public-sector bodies with average budgets (also in developed countries) are not incentivised to invest in the development of green procurement expertise in-house, unless strictly mandated by law.
Green procurement capacity barriers
The “green excellence” of national centralised purchasing bodies, especially in Austria, Italy and the Netherlands, underscores the impact of green procurement capacity barriers. Centralised purchasing bodies are typically given regulatory or financial incentives to develop green procurement expertise in-house and/or have budgets adequate to purchase top-level expertise from the market.
These entities are more likely to know where to start and how to calculate carbon emissions and source more sustainable building materials for infrastructure projects for the domestic market. They are also more likely to develop and retain expertise and the skills needed to plan, tender, award and deliver truly sustainable public infrastructure. This gives rise to the question of whether investing in centralised green purchasing is the best way to move the public sector towards sustainability and inclusion in public infrastructure projects. Despite the resounding success of centralised green procurement, the question is valid because of the widely known market risks of creating any type of state budget-supported monopoly.
Insufficient transparency of public procurement information translates into market access barriers to green investment
The ability to define what constitutes green procurement is closely linked to measuring the environmental impact of green procurement and tracking the domestic economy’s progress towards green objectives. Even the best advice on buying green and using procurement to “green” markets does not immediately translate into new sustainable infrastructure without a comprehensive and standardised infrastructure project governance process and accessible comparable data across the public infrastructure life-cycle, from design to decommissioning.
The speed at which green procurement of infrastructure can become an established mainstream policy depends on political and regulatory decisions, budgetary/financing commitments and digital transition. The OECD says 69 per cent of its members identify procurement as having the highest potential environmental impact, budgetary importance and potential to influence the market, set ambitious green procurement goals and track progress towards them. Still, mainstreaming green procurement is not happening at the pace and scale needed and evidence of new and green infrastructure mitigating the worst impacts of climate change is relatively limited. For most OECD member states, only indicative green procurement information is available as a percentage of total public procurement spending. Beyond that, there is no reliable information, regular data collection or clear reporting on reduced waste or carbon emissions.
Green, not greenwashed
With climate pledges taking the political spotlight, it is increasingly clear that fuzzy definitions of what constitutes green procurement and insufficient transparency of information on public procurement are creating market access barriers to genuinely green procurement. For example, Latvia calls its public procurement “green” when just one green criterion is applied to qualify a supplier or award the public contract and it represents at least 5 per cent of the total contract amount. This means that Latvia can claim to have achieved 100 per cent green procurement in the public procurement market when only 5 per cent of these procurements are green in reality.
As long as green procurement is not defined and mandated by law, buying “green infrastructure” is a strictly declaratory exercise, with no monitoring of the project and procurement cycle from planning through to contract implementation and no measuring of the project’s environmental impact. The lack of common legal standards and no pressure to provide publicly available data on green versus non-green procurement discourages markets from offering green products, services and works. It hampers the capacity of national governments to implement and deliver plans that will turn climate pledge commitments into actual investments in genuinely green public infrastructure.
In this context, it should be mentioned that while national governments are struggling, cities in many countries stand out for their advancement in green procurement at the municipal level.
Cities that (may) lead the way
While the sustainable infrastructure challenge is complex politically, economically and institutionally, there may be a way to bridge the divide. Local governments around the world are being recognised for developing a better understanding of how sustainability fits into their local community considerations, priorities and governance processes. This is because cities are major contributors to climate change. Their global share of GHG emissions stands at 70 per cent and is rising. Urban populations are also highly vulnerable to the effects of climate change, and without a redesigning of the delivery of municipal services such as infrastructure, housing, health and safety, cities’ capabilities to grow sustainably and inclusively are hampered. Faced with challenges, municipalities are potentially quicker to identify the barriers or limitations that arise when investing sustainably and understand why past sustainable procurement initiatives have failed or succeeded. With some help, cities can frame sustainability benchmarks in a clear and meaningful way and use them to manage their public infrastructure investments.
Copenhagen, Helsinki, Oslo and Stockholm target zero-emission construction sites, have rigorous circular economy standards for construction and civil works, and advance climate neutrality and zero-waste projects through local green public procurement strategies. Barcelona, Berlin, Bremen, Hamburg and Vienna have made green procurement of public infrastructure mandatory for all local government investments, whether privately or state-budget funded. What all these cities have in common is careful selective drawing on market expertise, investing in in-house green procurement skills and advancing digitalised governance of public infrastructure projects. And yes, they are all in developed countries, when the effects of climate change are worse in poor and low-income communities.
Would it be possible for local governments and municipalities in transition countries to follow their example – to become a building block of sustainable public infrastructure and public services for their domestic economies? With this question in mind, the next sections examine the EBRD green investment, finance and technical cooperation available to municipalities in our regions. There is a role to play to provide significant, long-term support to cities to help them invest and adopt policies aimed at preventing or mitigating the negative effects of climate change.
EBRD Green Cities
The EBRD has been implementing the Green Cities programme since 2016. This programme promotes municipal leadership in developing sustainable infrastructure in the EBRD regions. Rapid urban growth has greatly increased demand for resources, which, in turn, affects both the environment and the quality of life of urban residents. Worldwide, cities account for 70 per cent of energy use and 80 per cent of GHG emissions. In the EBRD regions, these challenges are particularly acute due to demographic changes, insufficient investment in infrastructure and historical legacies of high energy and carbon intensity.
The Bank developed EBRD Green Cities to build a better and more sustainable future for cities and their residents. The programme helps identify, prioritise and link cities’ environmental challenges with sustainable infrastructure investments and policy measures. EBRD Green Cities uses four interventions to help cities achieve sustainable local development with a reduced carbon footprint:
- Green City Action Plan: Assessing and prioritising environmental challenges based on specific indicators and developing an action plan to tackle the challenges through policy interventions and sustainable infrastructure investments.
- Green infrastructure investment: Facilitating and stimulating public or private green investments in water and wastewater, urban transport, district energy, energy efficiency in buildings, renewable energy, solid waste and climate resilience.
- Green finance: Providing green finance for locally delivered projects reducing the carbon footprint.
- Capacity building: Providing technical support to city administrations to ensure that sustainable infrastructure investments and green finance are implemented effectively.
At the time of writing, EBRD Green Cities covers 54 cities – most recently, Gaziantep in Türkiye. All participating cities, with EBRD help, work on a Green City Action Plan to create a tailor-made list of environmental investments and policy actions addressing their individual environmental challenges. The Bank aims to mobilise €5 billion to replace dated infrastructure causing environmental degradation and higher GHG emissions and, through these investments, help save 1.2 million tonnes of carbon dioxide equivalent a year.
EBRD Green Cities draws on the Bank’s unique internal expertise as an international financial organisation offering green investment. It provides technical support, giving partnering cities market knowledge and on-demand sustainability market expertise and helping them to develop in-house sustainable infrastructure and the necessary digital transformation skills to digitalise governance of public infrastructure projects.
EBRD Green Cities has harnessed the strategic institutional orientation towards a green transition and positioned sustainable infrastructure at the forefront of climate finance.
Green procurement strategy for sustainable municipal infrastructure and services
EBRD Green Cities has harnessed the strategic institutional orientation towards a green transition and positioned sustainable infrastructure at the forefront of climate finance. If required – as demonstrated by the success stories of Barcelona, Berlin, Bremen, Hamburg and Vienna – EBRD Green Cities’ technical cooperation may support the development of green procurement strategies to underpin delivery of municipal sustainable infrastructure specified in individual action plans, as well as other projects, including the projects supported by EBRD green finance.
A green procurement strategy with a horizontal impact on several municipal services may strengthen the impact of the Green City Action Plan and harness the benefit from synergies across sectors to maximise the value of green investments. Developing a municipal-level green procurement strategy in the context of a Green City Action Plan has several practical advantages. First and foremost, with priority green infrastructure investments identified by the action plan that cover both public budget and private sustainable infrastructure investments, the green procurement strategy is fit-for-purpose and is inevitably very sector- and product-focused, to support delivery of specific investments. The framework of the Green City Action Plan should help the municipal administration better navigate knowledge asymmetry and complexity challenges and tailor its green procurement strategy to fit targets of planned sustainable infrastructure. With clearly specified sustainability targets, the municipal administration can better manage the selection of relevant green procurement best practice as well as methodologies and appropriate resources.
As a result of the EBRD’s commitment to facilitating and/or stimulating public or private green investments in line with the action plan, municipal-level green procurement strategies also have access to the Bank’s procurement expertise for green municipal investments. Importantly, the green infrastructure investments facilitated and/or stimulated by the Bank within the framework of the priorities specified in the action plan give the partnering city an opportunity to pilot and verify the approach of the green procurement strategy in practice. Piloting the green procurement strategy with green investments facilitated and/or stimulated by the Bank creates unprecedented opportunities to learn and improve to fit specific market needs and adopt tested green procurement instruments for regular use with other relevant municipal infrastructure investments.
Digital transformation accelerates sustainable infrastructure
Finally, in the context of a Green City Action Plan and building on technical cooperation knowledge products and resources developed by the Bank to support the modernisation of national public procurement systems, the Bank can help partnering cities develop in-house sustainable infrastructure capacities and new green procurement skills and tools harnessing the technology to accelerate green transition in municipal infrastructure. These include SOURCE – an online platform for managing private-sector investment in sustainable infrastructure projects – as well as several green procurement digital tools developed as part of the Bank’s technical cooperation projects to help public-sector organisations overcome complexity and capacity challenges in implementing energy performance contracts (EnPCs), life-cycle costing and purchasing energy-efficient products for municipal services.
The EBRD LTP promotes modern regulatory standards for concessions and PPPs and to develop new legislative solutions with governments of the EBRD regions. The EBRD Infrastructure Project Preparation Facility seeks to improve public-sector capacities in preparing and managing quality sustainable infrastructure projects. International finance institutions set up the Sustainable Infrastructure Platform (SOURCE) in 2016 to harmonise regulatory, governance and sustainability standards for infrastructure project preparation and to create a reliable database for infrastructure projects.
Current efforts to improve the functionality of SOURCE will enable interoperable digital solutions that can be integrated with national digital registers, e-procurement systems and online contracting and payment solutions for creating an end-to-end digital governance process for PPPs and concession projects. The update will also enable SOURCE to focus on gender and inclusion issues to support further infrastructure sustainability from the initial design stages. Pilot projects are being developed to integrate the platform with the national e-government systems of the EBRD regions.
The EBRD LTP promotes adoption of new laws and regulations targeting energy efficiency and reversing climate change, including EnPCs, life-cycle costing and eco-labelling. To be effective, regulatory change must be accompanied by accessible implementation tools. The best way to improve the understanding of new environment-friendly regulatory instruments and ensure they are highly accessible to market stakeholders is to use the technology. The programme’s experience from technical cooperation indicates that digital green procurement tools can show that life-cycle costing represents a better indicator of value for money than the initial product price, the eco-labelled products purchased by the government lower public budgets and aid the environment, and a large-scale use of EnPCs helps private-sector investment reverse climate change in municipal communities.
For example, within 12 months from January 2021, a “green online shopping” technical cooperation pilot project with Prozorro Market introduced 23 energy-efficient product categories to public-sector buyers and qualified 203 suppliers of eco-labelled products to participate in public tenders in Ukraine. As a result, energy-efficient products bought in 319 public tenders in Prozorro Market saved the state budget UAH 10 million (€242,530) and generated annual energy savings of 3,856,307 kWh. Similarly, upon adoption of new legislation on EnPCs in Ukraine, a technical cooperation pilot developed and digitalised standard bidding documents and introduced Prozorro ESCOlator – an online automated energy performance public tender for EnPCs. This enabled transparent and competitive online synchronous bidding for ESCO companies with excellent results: within 12 months of the pilot, which started in November 2017, Ukrainian municipalities advertised 172 EnPC contracts and 72 contracts worth UAH 40 million (€970,120) were signed, with energy use expected to be halved.
An EBRD feasibility study in Chisinau Municipality in Moldova identified 119 buildings to be renovated to save enough energy costs to attract private sector investment. The EBRD Green Cities project in the municipality covers Bank loans of up to €25 million and a total project size (loans) and co-financing grants amounting to €37.5 million.
The loans and technical cooperation grants finance energy-efficiency measures in public buildings to be carried out through energy performance contracts. An EnPC mechanism was tailored for Moldova, drawing on the lessons learned in Ukraine to maximise private sector interest. The EBRD Green Cities project with Chisinau included technical cooperation grants to develop a Green City Action Plan, prepare a feasibility study covering technical, environmental and social due diligence, and provide project implementation support that covers (i) energy audits of selected buildings, (ii) selection of buildings to be renovated under the EnPCs and (iii) engineering design, procurement, contract award and administration. The project aims to reduce energy consumption and carbon dioxide equivalent in the buildings.
Chisinau has prepared and adopted the action plan to guide green investment at city level and the first EnPC contracts for 47 buildings are in progress. Despite initial challenges, the private sector has introduced incentive-based outsourcing or management contracts. A solid waste project was developed in 2020, drawing on the action plan.
As the EBRD Green Cities project seeks to promote a replicable financial product for similar energy-efficiency projects across Moldova and enable the private sector to help design and implement energy-saving projects through EnPCs, the EnPC mechanism developed and tested by the project was introduced to national procurement practice. Lessons learned in Ukraine were again helpful. The EBRD LTP has been working with Moldova’s Ministry of Finance since 2016 to introduce a new e-procurement system, MTender, which builds on the success of Prozorro Market in Ukraine.57 Potentially, digital green procurement tools for EnPC, life-cycle costing and purchasing energy-efficient products in online shopping can be used for technical cooperation with Chisinau Municipality.
A green procurement strategy with a horizontal impact on several municipal services may strengthen the impact of the Green City Action Plan and harness the benefit from synergies across sectors to maximise the value of green investments.
EBRD Green Cities helps build the municipal-level capacities and skills necessary to carry out green infrastructure projects and use new digital tools for sustainable infrastructure. If extended to cover developing green procurement strategies, it opens the door for a municipality to access modern digital tools for sustainable infrastructure project management and green procurement tools, which are necessary to implement green investment and green finance programmes successfully.
Developing a green procurement strategy under a Green City Action Plan can help municipal administrations identify the relevant green procurement best practice to implement their green finance and green infrastructure investment projects. The Bank’s technical cooperation may support municipal administrations as they identify and prioritise necessary green investments under a Green City Action Plan, designing municipal green investment programmes and facilitating and/or stimulating green investments.
A green procurement strategy gives municipal governments reliable and best practice sustainability information, methodologies and “easy wins” that can make a big difference for local communities. It goes beyond strategic guidance, suggesting concrete steps to take and practical tools to use, because the Bank is harnessing the technological revolution to help local leaders unlock the power of technology and create green change for cities and their residents.
The EBRD’s technical cooperation projects in the area of sustainable infrastructure and green procurement focus on adopting green procurement strategies through digital tools that drive sustainable procurement by helping public and private market stakeholders overcome knowledge and complexity barriers. This will make it easier to capture and share procurement sustainability data and remove market access barriers to green infrastructure investment.
The Bank’s technical cooperation is creating innovative green procurement knowledge and digital products in the hope of making green procurement knowledge tools easily available to market stakeholders through user-friendly online portals. The objective is for green sector and product-specific technical specifications, evaluation methodologies and sustainability award criteria, life-cycle costing-based calculators, carbon footprint tools, eco-labels and environmental spend analysis of public contracts to become both standard and frequently used components of national e-procurement systems.
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- The ESRS are drafted by the European Financial Reporting Advisory Group pursuant to the EU Corporate Sustainability Reporting Directive. The ESRS were adopted on 31 July 2023.
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- GFANZ was launched at the 2021 United Nations Framework Convention on Climate Change (UNFCCC) Conference of Parties. Its more than 550 member firms represent an astonishing 40 per cent of the world’s financial assets under management. They will all now work to meet global net zero by 2050. See “Amount of finance committed to achieving 1.5°C now at scale needed to deliver the transition”, Glasgow Financial Alliance for Net Zero (2021). Available at: https://www.gfanzero.com/press/amount-of-finance-committed-to-achieving-1-5c-now-at-scale-needed-to-deliver-the-transition/, (last accessed on 19 September 2023).
- Including the non-profit We Mean Business coalition, which works with more than 10,000 companies to set climate actions and take action to deliver them, and Climate Action 100+, which works with more than 171 focus companies that are considered the largest corporate GHG emitters.
- The UN-convened Net Zero Asset Owner Alliance is a member-led initiative of 86 institutional investors who have committed to moving their portfolios to net zero by 2050. See https://www.unepfi.org/net-zero-alliance/. The Net Zero Asset Managers Initiative is a group of 301 investment managers with US$ 59 trillion in assets under management who are committed to helping their asset owner clients decarbonise by 2050. See https://www.netzeroassetmanagers.org/, (last accessed on 19 September 2023).
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- The EBRD has provided technical cooperation to stock exchanges to develop frameworks for ESG disclosure in line with EU sustainable finance standards and good international practices. See EBRD press release, “EBRD helps North Macedonia exchange to develop ESG guidelines”. Available at: https://www.ebrd.com/news/2022/ebrd-helps-north-macedonia-exchange-to-develop-esg-guidelines-.html https://rb.gy/630ne6, (last accessed on 19 September 2023).
- An assessment of direct judicial outcomes in climate change cases indicates that around 55 per cent of the 549 cases in which either an interim or final decision has already been rendered have outcomes favourable to climate action. See J. Setzer and C. Higham (June 2023), Global trends in climate change litigation: 2023 snapshot, Grantham Research Institute on climate change and the environment (lse.ac.uk). Available at: https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2023/06/Global_trends_in_climate_change_litigation_2023_snapshot.pdf, (last accessed on 19 September 2023).
- J. Setzer, H. Narulla, C. Higham and E. Bradeen (December 2022), Climate litigation in Europe: A summary report for the European Union Forum of Judges for the Environment, Grantham Research Institute on Climate Change and the Environment. Available at: https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/12/Climate-litigation-in-Europe_A-summary-report-for-the-EU-Forum-of-Judges-for-the-Environment.pdf, (last accessed on 19 September 2023).
- J. Setzer and C. Higham (June 2022), Global trends in climate change litigation: 2022 snapshot, Grantham Research Institute on Climate Change and the Environment. Available at: https://www.lse.ac.uk/granthaminstitute/wp-content/uploads/2022/08/Global-trends-in-climate-change-litigation-2022-snapshot.pdf, (last accessed on 10 July 2023).
- A filing or unfavourable court decision in a climate case has been shown to lower a company’s value, with the largest stock market responses seen for cases filed against Carbon Majors, which faced a 0.57 per cent drop in firm value following case filings and a 1.5 per cent drop in firm value following unfavourable judgments. Setzer and Higham, op. cit.
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- Other professionals (for example, financial advisers and accountants) have also been asked to promote responsible practices in the public interest and contribute to long-term value creation. See ACCA Global (2021), Climate Action and the Accountancy Profession: Building a Sustainable Future. Available at: https://www.accaglobal.com/gb/en/professional-insights/pro-accountants-the-future/climate-action-accountancy-profession.html, (last accessed on 9 June 2023).
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- Greenwashing is a behaviour or activity designed to signal that an organisation or a product is more environmentally friendly, green or sustainable than it is in reality.
- The ESG context is far broader than the issue of climate change and deserves a separate discussion, including the impact of a changing climate on human development and human rights.
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- Usually defined as “meeting the needs of the present without compromising the ability of future generations to meet their own needs”. See United Nations (1987), Report of the World Commission on Environment and Development.
- These commitments are expressed in an international organisation’s establishing treaty, charter, and/or relevant policies. The main purpose of international organisations is to provide a mechanism for people to work more successfully together in the areas of peace and security and also to deal with economic and social questions.
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