Regulatory Outlook: Environment

Current issues

Environment Bill 2019-20

The Environment Bill 2020 was re-introduced to Parliament on 30 January 2020.

This piece of legislation largely reflects the previous bill which fell in the wake of the 2019 General Election. It will establish the core frameworks for environmental governance and regulation post-Brexit. Notably, it does not place a legal obligation on the UK to retain the environmental standards of the EU.

Businesses should be particularly aware of the focus on extended producer responsibility and the introduction of a biodiversity net gain scheme for developers, both of which will place increased obligations on relevant businesses.

Resources and Waste Strategy

The government’s current Resources and Waste Strategy sets out a timeline for eliminating “avoidable” waste by 2050. This timeline sets out specific governmental targets for 2020.

For 2020, the timeline establishes the government’s intention to review and consult on the UK’s regulations governing:

  • batteries;
  • waste electrical and electronic equipment; and
  • the essential packaging requirements.

These consultations are likely to extend producer responsibility and shift the associated costs within supply chains towards their source.

Plastic tax

In early 2019, the government published a consultation on the introduction of a plastic packaging tax. The tax will target businesses that produce or import plastic packaging that contains insufficient levels of recycled content.

Further details of the tax were to be revealed by the 2019 Budget, which was cancelled as a result of the 2019 General Election. The next budget is scheduled for 11 March and should clarify the applicable liability and exemptions under the tax.

The consultation indicates that liability is likely to arise at the point of production. However, it does not rule out charging at other points of the supply chain, meaning all businesses should take note of the forthcoming announcements.

Disclosure of climate-related risks

In its previously published Green Finance Strategy, the government set out an expectation that all listed companies and large asset owners disclose climate-related risks by 2022. The Green Finance Strategy also sets out the government’s intention to explore “the appropriateness of mandatory reporting” obligations.

The Financial Conduct Authority has previously announced that it will publish its own consultation in early 2020 to propose disclosure rules on a “comply or explain” basis for all regulated businesses.

Although the current disclosure obligations on large companies is voluntary, the shift towards mandatory reporting has been signalled. Relevant companies should be aware of their disclosure obligations and have in place systems for compliance.

Post-Brexit Emissions Trading System

The departure of the UK from the EU on 31 January means that the continued participation of UK companies in the European Union Emissions Trading Scheme (EU ETS) must be decided upon.

Until January 2021 (the end of the transition period), UK participants will remain in the EU ETS. In a previous consultation, the government set out its intention to establish a separate UK scheme linked to the EU ETS via a linking agreement.

However, if no such agreement is obtained then the government will need to consider alternative carbon pricing options.

UK emitters should be aware that there will be no change to their participation in the EU ETS this year, but should be mindful of the forthcoming trade negotiations which will determine the future of carbon pricing in the UK.

In Focus | Responsible business

Which aspects of responsible business are driving the regulatory agenda?

De-carbonisation

In the context of climate change, a core facet of responsible business is the reduction of a business’s carbon footprint. The Streamlined Energy and Carbon Reporting regime (SECR) was launched in April 2019. The framework is intended to encourage energy efficiency and reduce the carbon emissions of businesses. Under the scheme, large unquoted companies, large limited liability partnerships and quoted companies need to report on greenhouse gas emissions and energy use.

The reporting obligations apply to the first annual report of a qualified entity after 1 April 2019, which means that most companies will need to comply with the SECR from early 2020 onwards. For more on the SECR see our Insight.

Biodiversity

Responsible businesses need to operate in a manner that not only preserves the natural environment but enhances it. In order to ensure that businesses help maintain the quality of their local eco-systems, the Environment Bill 2020 includes a new planning condition that requires developers to provide a biodiversity net gain of 10% as part of projects. The government’s intention is that any deterioration of biodiversity caused by a development will be offset by an obligation placed on developers to enhance the local environment.

Are responsible business considerations having an impact on the tools that regulators are using?

De-carbonisation

The Environment Agency (EA) is encouraging environmental responsibility among UK businesses through voluntary environmental disclosures. While qualifying entities face mandatory disclosures under the SECR, the EA encourages all companies to voluntarily report on emissions and energy use. The March 2019 Environmental Reporting Guidelines suggest that all companies can “benefit from lower energy and resource costs, gain a better understanding of exposure to the risks of climate change and demonstrate leadership” through voluntary reporting. Similarly, while qualifying entities are not required to report information about their suppliers and consumers, they are encouraged to do so in order to provide investors with greater information about climate-related risks.

Biodiversity

In January 2020, the Department for the Environment, Food and Rural Affairs published guidance for businesses about taking a natural capital approach, as part of a drive to encourage businesses to enhance biodiversity. The natural capital approach is a method by which businesses may identify and derive value from their natural assets. Biodiversity represents an overlooked component of natural capital and the government believes that the voluntary adoption of this approach by businesses will enhance biodiversity in the UK.

Which of the recent or upcoming developments are based on international consensus or agreements?

De-carbonisation

International treaties have informed the UK’s commitment to achieving net zero by 2050 and by extension its de-carbonisation policies for this target. While the UK is legally required to achieve a net zero target under the amended Climate Change Act 2008, international agreements have encouraged the government to bind the UK to this target under domestic legislation. Most notably, the UK signed up to the Paris Agreement in 2015 and will host the 26th Conference of the Parties (known as COP 26) in November 2020.

Biodiversity

The recent focus on biodiversity and natural capital is driven in part by international agreements. The UK is required to “halt biodiversity loss” and protect terrestrial ecosystems under the United Nations Sustainable Development Goal 15. Similarly, the UK signed up to the Convention on Biological Diversity at the 1992 Rio Summit. As part of the convention, the UK must meet 20 targets for the improvement of biodiversity by 2020.

Waste and pollution:

The Environment Bill 2020 includes the power for the government to ban the export of plastics to countries who are not members of the Organisation for Economic Co-operation and Development. This power mirrors the UK’s existing obligation under the Basel Convention. As of 2019, plastic was added to the convention, which controls the movement of hazardous waste between countries and prevents plastic from being exported to countries most vulnerable to plastic pollution.

What are the main challenges for businesses in complying with these developments?

De-carbonisation:

While recent regulatory developments (such as the SECR) allow a degree of discretion for businesses, there is a risk that mandatory obligations may soon follow as the UK pursues its net zero target. A significant challenge for businesses will be to begin implementing compliance mechanisms despite the absence of mandatory regulations. Businesses may struggle to justify the voluntarily disclosure of potentially sensitive information to their investors. However, a significant transition period will be required to implement the systems for carbon-related disclosures into a large company. The balance of being appropriately prepared for mandatory compliance whilst fulfilling short-term interests will be a challenge for many businesses.

Biodiversity

Compliance with the 10% net gain to biodiversity may represent a significant cost for businesses. Developers may need to invest in non-traditional design techniques to help achieve the net gain on-site. Otherwise, developers will need to consider off-site offsetting or the purchase of statutory biodiversity units to satisfy the gain. Developers and by extension investors will be faced with increased development costs as a result of the new requirement.

Dates for the diary

11 March 2020 The government is expected to deliver the Budget and the National Infrastructure Strategy.
31 March 2020 The end of enhanced capital allowances for companies in respect of technologies on the Energy Technology List and the Water Technology List.
1 April 2020 The government’s Transport Decarbonisation Plan is expected to be published.
June 2020 The Committee on Climate Change is expected to publish an appraisal of the UK’s de-carbonisation progress.

 

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