Carbon finance specialists emerging

For some time now, securities lawyers have been trying to position themselves as the go-to lawyers on carbon trading.

“When it comes to the actual trading, that makes sense,” says Dianne Saxe, an environmental lawyer in Toronto. “But before you can sell something you have to understand it, create it, and have it recognized, and that’s where the environmental lawyers fit in.”

Indeed, offsets are emerging as a powerful financing instrument, particularly to cover capital investment. But offsets have no inherent value. They are no more than an artificial obligation to reduce emissions expressed in a legal document called an offset.

As such, they represent a new kind of right. But evaluating and valuing that right is a complicated process sure to engender a new kind of lawyer: the carbon finance specialist.

“You can’t understand carbon finance without understanding both the developing domestic and international regulatory framework,” says Barbara Hendrickson of McMillan LLP. “You’ve also got to understand how credits are produced and traded, as well as the various cap and trade systems that emerge.”

Lawyers must also have a grasp of the existing standards for quantifying the value of an offset, whose quality is dependent on how rigorous the quantification of the underlying reduction turns out to be.

That’s why Gray Taylor of Toronto, rather than his firm’s securities lawyers, has been in charge of the emissions trading mandates earned by Bennett Jones LLP. These include a $1-billion purchase of offsets from a Chinese company by financial institutions like Goldman Sachs Group, Inc. and Barclays Bank.

“It was almost like an underwriting transaction,” says Taylor, leader of the firm’s climate change and emissions trading group who started out as a corporate commercial lawyer and became an environmental transaction lawyer before emerging in his current incarnation. 

“After all, an emissions trading transaction ends with a closing book that looks like any other book. But there’s a big difference between running this kind of transaction and a normal securities transaction.” 

It should be no surprise, then, that the large Alberta-based business law firms have a head start on carbon-based expertise. It is because these firms have impressive rosters of ongoing clients in the energy business (primarily oil and gas but also power), energy companies are among the most problematic emitters in Canada, and Alberta had Canada’s first legislated emissions trading market, that Bennett Jones, Burnet Duckworth & Palmer LLP, and Macleod Dixon LLP find themselves among the vanguard here.

In analyzing the carbon finance legal market, however, it’s important to bear in mind the difference between the corporate commercial lawyer who becomes a carbon finance lawyer and the energy or environmental lawyer who moves into carbon finance.

The corporate commercial group has always shifted with the times in the sense that the service it provided was unifying commercial legal and business principles and objectives in whatever industry it was that happened to present itself in the form of a mandate.

The core expertise of these lawyers was in quarterbacking a deal.
The specialists-turned-business-lawyers, on the other hand, tend to stick to doing the deals that emanated from the industries - or related industries, as in the case of energy lawyers - that were the subject of their specialties.

When it comes to carbon finance, it’s a little too early to tell which of the quarterbacks at which of the business law firms will emerge as the significant players. But what is clear is that the vast majority of business law firms in this country are jockeying for position, and doing so aggressively.

Among other things, they are seizing on strategic possibilities. Fasken Martineau Dumoulin LLP, for example, has partnered with the Montreal Climate Exchange, a joint venture between the Montreal Exchange and the Chicago Climate Exchange and the first regulated environmental market in Canada.

Fasken, like other firms, is vying not only for the big carbon finance deals that will eventually emerge, but also for brand reputations that will see them poised as the lawyers of choice for potential clients facing the host of emerging carbon finance issues.

“Carbon offsets are a new asset class in respect of which clients don’t want to forego value or overlook liability,” says Lisa DeMarco, who leads Macleod Dixon’s Toronto energy practice and is heavily involved in emissions trading issues.

DeMarco comes from a background that combines energy law with environmental law.
“That worked out perfectly because at its core, carbon constraint and carbon finance are primarily energy productivity issues, not environmental law

issues,” she says. “The question for clients is how much bang they’re going to get for their energy conservation efforts and how few bucks they can spend to do it.”

And it works the other way too. At Farris Vaughan Wills & Murphy LLP, Elizabeth
Harrison has extended her general corporate, M&A, and financing practice into the renewables and emissions trading aspects of cleantech.

“More and more clients want to be part of this movement and get in on the carbon market,” she says. “They know that failure to consider the new economic parameters will get them in trouble.”
That’s because the legal issues surrounding carbon finance are myriad.

“Whether you’re talking about financial institutions, energy companies, multinationals, or power developers, they all have varied needs relating to carbon finance,” DeMarco says.

“You have entities that are worried about securities climate change disclosure compliance, you have emissions trading market intermediaries and cleantech hedge funds, and you also have domestic and international governments who need outside counsel.”

The point is that carbon finance engages a wide range of practice areas.
“Apart from corporate commercial and environmental lawyers, you need IP, IT, real estate, carbon finance, energy, securities, tax, and banking lawyers,” DeMarco says.

Which is why cleantech and carbon finance practice groups tend to be broadly based.
“Cleantech is an investment industry label that’s been used as an umbrella for a variety of different activities,” says Cheryl Slusarchuk, a technology lawyer who leads McCarthy Tétrault LLP’s climate action group in B.C.
McCarthy created the group two years ago by combining the firm’s technology lawyers (to handle funding and IP) with the environmental group (to deal with carbon trading) and the power industry group led by David Lever (renewables and big physical infrastructure projects).

Cleantech’s pervasiveness also explains why so many non-billable hours are going into cleantech practice marketing.

“Cleantech and carbon finance take up all of my business development time,” Hendrickson says. “We’re just waiting for a proper regulatory regime to evolve in Canada, which is when all that work should start to pay off.”

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