Blog: What does the Law Society guidance mean for climate risk? 

The Law Society has issued guidance on its responsibility to ensure their organisations have a low carbon impact — how law firms operate in relation to climate change, the reputational threat posed by greenwashing, and how they can manage their business in a manner which is consistent with the transition to Net Zero.

While The Law Society is the first professional legal organisation in the world to issue climate guidance to its membership and it is to be commended for its pioneering stance, this is not before time. Climate change is, after all, the defining issue of our times.

Earth Day this year was swiftly followed by temperatures hitting 38.7 degrees Celsius in Spain, the highest recorded on a spring day in Europe. And last week we learned the world could breach a new average temperature record in 2023 or 2024, fuelled by climate change and the anticipated return of the El Nino weather phenomenon. The world’s hottest year on record so far was 2016, coinciding with a strong El Nino and the latest measures of average ocean temperatures are, according to National Oceanic and Atmospheric Administration “heading off the charts”.

The Law Society’s guidance is in two main parts — one is on how firms should consider their ethical approaches to the planet and who they engage with as clients, but the other focuses on the duties solicitors owe to their clients to advise, warn, and disclose climate risks.

This is particularly relevant to conveyancers and real estate lawyers working on residential or commercial property transactions where the value of assets may be affected by climate change. The guidance is intended, in part, to alert solicitors to the risk of professional negligence if they fail to understand and discharge their legal duties.

The good news is that, despite hostility in some quarters from conveyancers already bearing the PI burden on other matters, the way to engage with clients, and thereby reduce the conveyancers’ risk exposure, is pretty straightforward.

Groundsure’s ClimateIndex™ analysis has been applied across hundreds of thousands of transactions already and is provided automatically in the key residential and commercial environmental searches. The key is for conveyancers to be able to signpost this in a consistent way — so the analysis includes risk-specific guidance at a property level and is supported by standard clauses that the conveyancer can use to communicate to both the client and the lender on a potential issue.

What does this mean for lenders? Well, the guidance now provides an opportunity for engagement with their panel. Climate risks are well and truly flagged as a duty to advise and they have a straightforward way of doing so in existing reports that they were obtaining (for flood risk among other things) already.

The question has to be: What does a lender want to do in terms of instructing their panel? It should simply be a case of specifying that they should report any climate-related risks as identified in environmental searches. This is best done by amending their Part 2s and Part 3s in the UK Finance Conveyancing Handbook.

This ensures that any potential forward issues — provided over a 30 year timeframe with ClimateIndex™ — are highlighted in reports back from the panel to the lender. This enables an effective check before funds are brought forward toward completion and any consideration on retention or LTV adjustment made.

In time, more information will be provided for transition risk information, including the thorny issue of retrofitting to meet net zero requirements. If green mortgages are repositioned to incentivise investment in improving the energy efficiency (and therefore the EPC rating) then perhaps fewer landlords would be leaving the buy-to-let market? And maybe lenders could have fewer mortgage prisoners with poorer value stock on their hands? This, again, will be a big focus in the negotiation pre-exchange and I can see this being a significant reporting interest for lenders.

Climate risks — be they physical, transition, or liability risks — are already affecting the value of land and buildings in England and Wales. The impact these risks have on values, be they caused by flooding, coastal change or extreme weather conditions, is only going to increase in severity, frequency and geographical extent. As well as the economic effects on property values, climate will begin to affect an owner’s ability to sell a property or insure it.

David Kempster is a director at Groundsure


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