A practical use case of climate to the balance sheet with Clyde & Co
How do we bring climate to the balance sheet?
Clyde & Co has been at the forefront of legal thinking on how existing accounting standards (IAS 37 & IAS 38) create the framework for recognizing climate liabilities and assets.
Join the Climate Liabilities and Assets Initiative for a discussion with leading experts shaping this debate:
Paddy Linighan, Clyde & Co
Luke Baldwin, Nature Broking
Andrew Watson, Rethinking Capital
Mika Morse, Climate Liabilities and Assets Initiative
Thomas Annicq, Climate Liabilities and Assets Initiative oneshot.earth
Together, we’ll explore how constructive obligations under IAS 37 and recognition of intangible assets under IAS 38 can flip the “upside-down incentives” in today’s accounting—and unlock decision-useful information for boards, investors, and markets.
This is a critical conversation for boards, CFOs, investors, lawyers, and auditors who want to understand how accounting for climate is possible today, creates better outcomes, and why it matters for the transition.
Clyde & Co — Putting “Climate on the Balance Sheet”
Who/what
Global law firm: ~500 partners, ~3,000 legal professionals, ~5,500 staff across ~70 offices; single global partnership model.
Commitment: Net zero by 2038.
Operating reality: A material share of revenue depends on clients with decarbonization expectations (in the top-25 clients alone, 19 have carbon-reduction plans; 17 have net-zero/SBTi targets). Talent attraction/retention (early-career “ze/lennials”) also pushes credibility.
The trigger (why now)
March 2022: A major client contract hard-wired short-term decarbonization targets into Clyde & Co’s supplier terms. This collapsed the “2050 horizon” into a 3-year deliverable, reframing the board discussion from cost of action to cost of inaction (lost revenue in the multi-millions).
Governance & authenticity
As a law firm advising on climate risk and litigation exposure, greenwash risk had to be near-zero. They paired the ambition with an operational roadmap (initially with Carbon Intelligence, now Accenture).
Program structured around three pillars: (i) DEI/wellbeing/pro bono/social impact, (ii) environmental sustainability & biodiversity (relevant here).
Strategy architecture (two coordinated tracks)
Decarbonize operations (Scopes 1–3)
Scope 1–2: renewables, energy retrofits, facilities upgrades.
Scope 3: business travel program redesign and supplier engagement (purchased goods/services) incl. switching to more sustainable vendors—recognizing real switching costs.
Secure removals/credits for residuals
Build a forward portfolio of high-integrity removals to cover the hard-to-abate tail in 2038—buy earlier, hold, and retire later.
Rationale: hedge future price spikes, fix supply, provide early liquidity to quality projects (brings the climate intervention forward in time).
Financing signal
Sustainability-linked credit facilities (SLLs):
KPIs: combined Scope 1+2 and Scope 3 emissions targets (plus a DEI KPI).
Outcome: interest-rate step-downs for meeting KPIs; aligns treasury with the transition plan and showcases credibility to banks/investors.
Accounting model (IFRS path using today’s standards)
1) Liability recognition — IAS 37 (Constructive Obligation)
The public 2038 net-zero commitment + internal transition plan create a constructive obligation.
Measurement: expected tonnes across the transition × a shadow carbon price (firm already uses one for planning). This yields a provision over time, not a one-off hit.
Why it matters: surfaces the true obligation and unlocks asset recognition for the matching actions.
2) Capitalize matching transition activities — IAS 38 (Intangibles)
Expenditures incurred to meet the obligation are recognized as intangible assets at cost, when they generate future economic benefits and meet identifiability/ control criteria.
Examples in scope at Clyde & Co:Internal decarbonization program costs (team and systems dedicated to delivering the plan).
Energy retrofits/efficiency measures (to the extent they qualify as intangible or are capitalized under other applicable standards).
Contracted project development/enablement spend tied to meeting the commitment.
Effect: removes these from “pure expense” treatment and better matches cost with benefit timing.
3) Carbon credits/removals held for own use — IAS 2/IAS 38 interplay
Purchased today for future retirement against the 2038 obligation → treat as inventory for own consumption(held at cost; expensed on retirement, not on purchase).
Business logic:
Hedge carbon price risk and supply risk.
Avoids penalizing current-period profit for actions undertaken for future obligations.
Creates line-of-sight from commitment → inventory → retirement (and disclosure).
4) Future economic benefits (management view)
Avoided external cost imposition (shadow carbon price), resilience to regulatory shifts, improved lender/investor perception (credit profile), revenue protection (supplier qualification with key clients), and talent retention effects.
Practical mechanics (how Clyde & Co is executing)
Plan-first: Quantify the 2038 residuals after internal abatement pathway; set staged purchase program for removals to match expected residuals, with quality guards (methodology, permanence, additionality, legal title).
Hedging cadence: Laddered forward purchases/ offtakes to smooth price exposure and assure deliverability; periodic impairment testing and quality re-verification.
Internal cost capture: Stand-up of a decarbonization team and systems tracked to the obligation; clear capitalization policy (what qualifies; when to expense).
Controls & audit trail: Procurement/contract terms to ensure control and identifiability (title to credits, retirement rights, substitution clauses, recourse on reversal where feasible).
Disclosure: Narrative bridge from commitment → obligation → assets/inventory → retirement; sustainability-linked debt KPIs cross-referenced.
Why this is compelling (board/investor lens)
Converts a “cost center” into a matched obligation/asset picture that doesn’t unduly depress current EBITDA.
Protects revenue by meeting client supplier criteria and reduces financing costs via SLLs.
Introduces discipline and comparability: tonnes, timing, cost, quality, and retirement are all auditable.
Scales the market for high-integrity removals by bringing funding forward.