Climate Change Regulation 2022

Last Updated June 13, 2022

UK

Law and Practice

Author



1 Crown Office Row provides expert advocacy and advice to a diverse range of clients. It is recognised as one of the leading sets in the UK, particularly in the fields of civil and public law. Members practise in a broad range of civil law specialisms including health law, public law, professional discipline, professional negligence, inquests, public inquiries, human rights, environmental law, immigration, tax and multinational torts. The set is at the forefront of the rapidly developing area of environmental law. Members appear in civil, regulatory and criminal proceedings and advise on transactional work, particularly environmental warranties and indemnities, involving UK and international risks. Clients include claimants, industry and regulators. 1 Crown Office Row is a member of the UK Environmental Law Association.

The United Nations Framework Convention on Climate Change

The global multilateral climate change legal regime is set out in the United Nations Framework Convention on Climate Change (1992) (UNFCCC). This international environmental treaty unites the majority of the world’s countries through a collective agreement that climate change is a vital issue which must be addressed. The UNFCCC seeks to combat climate change by stabilising emissions of greenhouse gasses (GHGs).

There are several main commitments under Article 4 of the UNFCCC that parties to the agreement are obliged to carry out in order to mitigate climate change. These include the following:

  • To develop and provide a regularly updated national inventory of GHG emissions and removal by carbon sinks (carbon sinks remove carbon dioxide from the atmosphere and include vegetation and the ocean. These updates are to be reported to the annual UNFCCC Conference of the Parties (COP).
  • To draw up and implement national programmes which set out measures for mitigating climate change.
  • To develop and transfer technologies to reduce GHGs.
  • To conserve and enhance carbon sinks.
  • The Integration of climate change into social, economic and environmental policy.
  • Information sharing and training.

The Kyoto Protocol and the Paris Agreement

The Kyoto Protocol (1997) imposed legally binding commitments on certain parties to the UNFCCC in order to achieve GHG reduction targets. The Paris Agreement was adopted by 196 Parties at COP 21 on 12 December 2015. It sets out two main objectives:

  • to combat climate change by ensuring that by the end of this century global temperatures do not increase by more than 1.5°C above pre-industrial levels and;
  • to achieve zero net emissions by the second half of this century.

Under Articles 3 and 4 of the Paris Agreement, Parties are obliged to make and communicate “nationally determined contributions” (NDCs). These are national climate change action plans that set out a signatory’s objective to address climate change. NDCs demonstrate a signatory’s highest level of ambition towards meeting the goals of the Paris Agreement.

The UK is a signatory to the UNFCCC. The UK ratified both the Kyoto Protocol and the Paris Agreement. The Greenhouse Gas Emissions (Kyoto Protocol Registry) Regulations 2021 (SI 2021/511) came into force in the UK on 1 May 2021. These regulations provide a clear legal basis for the UK to operate the new UK Kyoto Protocol registry separate from the EU software platform following Brexit.

The UK's Ten Point Plan

In November 2020, Boris Johnson, the UK’s Prime Minister, set out a Ten Point Plan for a green industrial revolution. The Ten Point Plan detailed a number of targets for investment in sustainability and developments to the economy to support a Green Industrial Revolution by 2030. The aim is that by achieving these targets, the UK will be able to achieve net-zero GHG emissions by 2050.

In December 2020, Boris Johnson announced that the government would increase the UK’s GHG reduction target to reduce emissions by 68% by 2030. This target is the latest part of the UK’s NDC under the Paris Agreement. In December 2020, the UK government published the:

  • Adaptation Communication to the UNFCCC;
  • NDC Communications to the UNFCCC; and
  • Biennial Finance Communication to the UNFCCC 2020.

These publications demonstrate the UK’s obligations to adopt primary negotiation issues such as mitigation, adaptation and finance pillars of the Paris Agreement.

The United Kingdom actively encourages the creation of environments and partnerships that will provide financial and technical enabling mechanisms to other nations in order to aide them to take action on adaptation, loss and damage. In September 2019, the UK launched its Call for Action on Adaptation and Resilience at the United Nations Climate Action Summit. The UK built on this and launched the UN Group of Friends on Adaptation and Resilience. This platform allows members to share knowledge and best practices in connection with climate change.

The UK co-operates with a wide range of global partners to determine how to deliver climate finance in a responsive manner. As part of the UK’s G7 Presidency in 2021, the UK encouraged members to increase commitments to the financing of international adaptation and resilience.

COP 26

In October and November 2021, the UK, in partnership with Italy, hosted the UNFCCC COP 26 in Glasgow. The outcome was the Glasgow Climate Pact and the completion of the Paris Handbook.

The Glasgow Climate Pact formalised the agreements between almost 200 countries that the 1.5°C target of the Paris Agreement remains in sight and that action on dealing with climate impacts will increase dramatically. This can only be achieved if every country delivers on what they pledged at COP 26.

The Glasgow Climate Pact will drive global action through four main pillars:

  • reducing emissions (mitigation);
  • helping those already impacted by climate change (adaptation);
  • enabling countries to deliver on their climate goals (finance); and
  • working together to deliver even greater action (collaboration).

Decisions related to the above fall under three UN climate treaties: the COP, the Kyoto Protocol and the Paris Agreement. The Glasgow Climate Pact is manifested across all three.

Glasgow Financial Alliance for Net Zero (GFANZ)

Spearheaded by Mark Carney, former Governor of the Bank of England and the UN Special Envoy for Climate Action and Finance, the Glasgow Financial Alliance for Net Zero (GFANZ) was launched at COP26.

GFANZ, which consists of 450 banks, insurers and asset managers across 45 countries, aims to unite net-zero financial sector-specific alliances from across the globe into one industry-wide strategic alliance. GFANZ is a practitioner-led forum for leading financial institutions that are collaborating on substantive, crosscutting issues that will align financing activities with a net-zero global economy.

The role of UK financial institutions party to GFANZ is continually evolving and being scrutinised. On 30 May 2022, the UK Parliament’s Environmental Audit Committee announced that it would be examining issues within UK financial institutions, including a firm’s policies on fossil fuels, on investment in renewable energy technologies and on a firm’s wider view of their geopolitical impact.

The United Kingdom consists of four regions – namely, England, Wales, Northern Ireland and Scotland – each with their own devolved decision-making administrations within certain areas.

In England, environmental regulation is governed by the Department for Environment, Food and Rural Affairs (DEFRA). This central government department acts on behalf of the UK (representing all four regions of the UK) in an international setting. However, the devolved administrations have chosen to domestically legislate on environmental and climate regulation for local matters.

The Northern Ireland Environment Agency is an executive agency that operates within DEFRA. The purpose of this body is to enhance Northern Ireland’s environment, delivering health and wellbeing benefits and supporting economic growth. This is different to the values promoted by Natural Resources Wales, which seeks to stimulate the interests of its own natural resources, namely timber and forest products. There is less emphasis placed on environmental and climate regulation which may stem from the geographical and socio-economic fact that Wales is the smallest devolved power.

In contrast, Scotland is the largest devolved power and exercises a significant amount of power. This is evidenced in their referendum attempts to become an independent country. On 1 October 2021, Environmental Standards Scotland (ESS) was established as the new environmental governance body for Scotland. This emerged from the UK Withdrawal from the European Union (Continuity) (Scotland) Act 2021. The purpose of this is to prevent enforcement gaps arising from the UK leaving the EU. Scotland continues to make it clear that it wishes to remain closely aligned with the EU following Brexit.

The Climate Change Act

The Climate Change Act 2008 is the UK’s legal foundation for its approach to addressing and responding to climate change. The main objectives are:

  • to make the UK’s voluntary national targets for the reduction of GHG emissions legally binding;
  • to provide a long-term framework for UK climate change policy; and
  • to enable the UK to drive international negotiations on a post-Kyoto Protocol agreement.

The Climate Change Act 2008 applies to the whole of the UK, including the devolved administrations, subject to the provisions set out in Section 99. The Kyoto Protocol informed the Climate Change Act. Under the Climate Change Act, it is the Secretary of State’s duty to ensure that the UK’s net carbon account for 2050 is at least 100% lower than the 1990 baseline, in line with the Kyoto Protocol target.

The UK maintains a commitment to international and national targets for reducing GHGs: signatories to the Kyoto Protocol were required to cut GHG emissions by 18% by 2020. In order to achieve this, the UK government recognised the need to implement domestic frameworks to reduce GHGs.

Earlier policy laid the groundwork for the materialisation of the Climate Change Act. The Department of Energy and Climate Change (DECC) was created in 2008.

In July 2016 the functions of the DECC were transferred to the Department for Business, Energy and Industrial Standards (BEIS). The BEIS leads on policy for reducing emissions and is responsible for promoting action on climate change domestically and internationally. This meets the mitigation requirement under Article 4 of the Paris Agreement which provides that developed countries party to the Agreement will undertake economy-wide reduction targets.

Future UK Climate Change Policy

The UK’s climate change policy continues to evolve.

On 11 January 2018, the government published A Green Future: Our 25 year plan to improve the environment (25-year plan). The 25-year plan is directly informed by the national and international multilateral legal regime and makes the following commitments:

  • to ensure the UK continues to lead the world in delivering on climate change commitments – this includes fulfilling environmental aspects of the UN Sustainable Developments Goals in compliance with the UNFCCC Paris Climate Agreement;
  • to implement sustainable and effective National Adaptation Programmes, which are required under Section 58 of the Climate Change Act 2008;
  • to introduce a reporting framework for businesses; and
  • to assist the UK in introducing a Forest Carbon Guarantee scheme.

The 25-year plan commits DEFRA to helping developing nations protect and improve the environment.

Climate change matters are formally legislated in the UK under the Climate Change Act 2008 which takes the form of primary legislation. Various Statutory Instruments, which represent secondary legislation have been and continue to be made under it. Adaptation policies impose a duty upon the Secretary of State to lay reports before Parliament, at least once every five years, containing an assessment of the risks for the UK of the current predicted impact of climate change. Following advice from the Committee on Climate Change, the Secretary of State must present a programme to Parliament setting out how the government proposes to adapt to those risks.

There is room for improving the Climate Change Act 2008. While the framework of the Climate Change Act 2008 has, on balance, contributed to positive action on adaptation, in practice the delivery of adaptation policies has been slow as it is under-prioritised in comparison to mitigation policies. Adaptation goals are difficult to quantify, unlike the government’s endeavours in relation to the reasonably straightforward metric of UK-wide GHG emissions.

There are delays in policy introduction and subsequent action due to the lack of clear timelines for policy development. For example, in July 2016 the government proposed legislation for the UK’s Fifth Carbon Budget. The policy programme for meeting the Fifth Carbon Budget, the Clean Growth Strategy, was not published until 12 October 2017.

The BEIS is the department responsible for climate change policy in the UK. The BEIS is a ministerial department supported by other agencies, public bodies and the Committee on Climate Change (CCC). The CCC is an executive non-departmental public body. The CCC advises the UK and the devolved administrations on emissions targets, reports to Parliament on progress made in reducing GHGs and makes preparations for the practical effects of climate change.

The Environmental Permitting (England and Wales) Regulations 2016, SI 2016/1154 sets out the framework for environmental permits, enforcement actions and offences, public registers and the powers and functions of the regulator.

The Environment Agency has published guidance on completing a risk assessment on adapting to climate change as part of the EP Regulations application procedure in England: EA: Adopting to climate change: risk assessment for your environmental permit (3 October 2019).

Where the framework for climate change schemes under the Environment Agency has been disregarded, the Environment Agency can apply to enforce sanctions.

From 1 October 2013, directors of a listed company must report a company’s annual GHG emissions in the directors’ report as per the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013 SI 2013/1970. The extent of reporting required is influenced by:

  • the size and nature of a company;
  • whether the company is a UK or non-UK company; and
  • the amount of energy the company consumes.

The Companies (Directors’ Report) and Limited Liability Partnerships (Energy and Carbon Report) Regulations 2018 (SI/2018/1155) implement the government’s policy on streamlined energy and carbon reporting.

There are certain UK policies and legislation that are specifically applied to dealing with climate change mitigation. Following the UK’s exit from the EU, the UK Emissions Trading Scheme (UK ETS) replaced the UK’s participation in the EU Emissions Trading Scheme (EU ETS).

The UK ETS Authority regulates the UK ETS. The UK ETS is set out in The Greenhouse Gas Emissions Trading Scheme Order SI2020/1265.

The purpose of the UK ETS is to limit the total amount of carbon that is emitted. As emissions decrease, this will contribute to how the UK meets its 2050 net-zero target. The UK ETS applies to energy intensive industries, the power generation sector and aviation. It applies to regulated activities that emit GHGs. Schedules 1 and 2 of the Greenhouse Gas Emissions Trading Scheme Order 2020 set out the activities that fall within the scope of the UK ETS.

By autumn of 2022, the UK ETS aims to launch a new digital permitting, monitoring, reporting and verification (PMRV) system which will allow organisations to view their permit and obligations under the Greenhouse Gas Emissions Trading Scheme Order 2020.

In June 2021, the UK government published Climate change adaptation: policy information. This sets out the UK’s approach to dealing with climate change adaptations policies. The UK’s Climate Change Risk Assessment (CCRA) sets out climate change related risks and opportunities.

The CCRA provides the National Adaptation Programmes in England, Scotland, Wales and Northern Ireland with relevant information.

The Adaptation Committee of the CCC provides advice to the government in connection with the CCRA. The Climate Risk Independent Assessment is published by the CCC and the government responds to this advice accordingly in the subsequent annual CCRA.

The National Adaptation Programme (NAP) sets out the actions that the government will take to adapt to the challenges of climate change over a five-year period. The NAP applies only to England and runs from the period 2018-2023. It covers:

  • the natural environment;
  • infrastructure;
  • people and the built environment;
  • business and industry; and
  • local government sectors.

The devolved administrations have their own adaptation programmes.

The Scottish Climate Change (Scotland) Act 2009 imposes a duty on ministers to set out a climate change adaptation programme following each CCRA. The CCC’s most recent evaluation of the first Scottish Climate Adaptation Programme was in 2019.

The Welsh government has two key pieces of climate change legislation: The Environment (Wales) Act 2016 and the Well-being of Future Generations (Wales) Act 2015. Both of these Acts include parts that are important to climate change adaptation.

The UK Climate Change Act 2008 makes a provision in Northern Ireland for the Executive to publish a Climate Change Adaptation programme after the publication of each CCRA.

The UK’s Adaptation Communication to the United Nations Framework Convention on Climate Change sets out how the UK is preparing for the effects of climate change domestically and how the UK will support other countries in dealing with climate change.

The Adaptation Action Coalition, building upon the 2019 UN Climate Action Summit, was formed in January 2021 by the UK, in partnership with Egypt, Bangladesh, Malawi, the Netherlands, Saint Lucia and the United Nations Development Programme. It aims to accelerate adaptation globally and to achieve a climate resilient world by 2030.

The UK hosted COP 26 in partnership with Italy from 31 October to 12 November 2021. During this conference the rules relating to Article 6 of the Paris Agreement were adopted and finalised into the Paris Rulebook.

Article 6 sets out how international carbon markets involving governments should function – that they should support the transfer of emission reductions between countries and should incentivise the private sector to invest in climate-friendly resolutions.

The adoption of the Paris Rulebook ensures that the Paris Agreement, in particular Article 6, is fully operational. The UK participates in the carbon market that is evolving under Article 6.

The UK permits the participation in the voluntary carbon market (VCM). The UK Voluntary Carbon Markets Forum was established in April 2021. This Forum is a mechanism to action the recommendations of the global Taskforce for Scaling Voluntary Carbon Markets.

The UK has demonstrated its support of the VCM through its backing of the Voluntary Carbon Market Integrity Initiative (VCMI). The VCMI is a multi-stakeholder platform that aims to achieve credible net zero-aligned participation in the VCM and achieve the goals of the Paris Agreement.

On the 5 May 2022, the VCMI published: The Future of Voluntary Carbon Markets, a report outlining the essential components of a well governed and efficient market that can achieve the net-zero objective. The key developments referenced in the report include: how VCMs propel the net-zero target, what future VCM ecosystems may look like, and examples of how UK expertise is helping to deliver VCMs.

On 14 June 2022, the VCMI unveiled a globally standardised benchmark for the voluntary use of carbon credits which categorises businesses into Gold, Silver or Bronze categories, depending on their climate achievements.

On 14 July 2021, the European Commission presented a legislative proposal on the Carbon Border Adjustment Mechanism. The CBAM is a measure to ensure that imported goods pay a price for their carbon footprint that is comparable to the price paid by EU domestic producers under the EU ETS. Initially, the CBAM will only apply to cement, fertilisers, iron and steel, aluminium and electricity.

The UK is exposed to the impacts of the CBAM following Brexit. This is because the UK is a significant exporter of iron, steel and aluminium. However, the UK will not necessarily be subject to additional charges. The UK now has the UK ETS and this could, in principle, be linked to the EU ETS.

Alternatively, the UK could enforce its own CBAM or an equivalent carbon pricing on relevant products. The administrative burdens on UK exporters who are already having to deal with the implications of Brexit are likely to increase.

On 4 April 2022, the Environmental Audit Committee (the “Committee”) published a report on developing a UK CBAM. The Committee believes that a unilateral CBAM would be an effective solution to conjoining the UK to the EU ETS. At the time of writing (July 2022), the UK government has not made any announcements about a UK CBAM or linking the UK and EU ETS.

The Task Force on Climate-Related Financial Disclosures (TCFD) is an industry-led initiative created to develop recommendations for voluntary climate-related financial disclosures.

From April 2022, the UK has introduced mandatory TCFD-aligned reporting requirements for the private sector. It is the first G20 country to make it mandatory for its largest businesses to disclose their climate-related risks and opportunities. These mandatory requirements apply to over 13,000 of the largest UK-registered companies and financial institutions, in line with recommendations from the TCFD.

This mandate aims to increase climate-related engagement between investors and companies. Another benefit is that by measuring their climate impact, risks and opportunities, businesses may be compelled to increase their environmental initiatives and accelerate action.

The influence of the TCFD on UK policy will have an effect on investment and operational decisions. The TCFD framework provides the opportunity to test an organisation’s strategy’s resilience. Climate-related scenarios can provide companies with a way to make more informed strategic plans to manage risks and opportunities.

It is becoming increasingly evident that directors can be liable for climate change impacts, either on their companies, or of their companies. Directors are now under a positive duty to consider climate change risks within their existing director’s fiduciary duties, as set out in the Companies Act 2006.

Climate change risks are no longer merely potential, they are real and foreseeable on the basis of:

  • the increasing certainty of climate science;
  • the material physical impacts from extreme weather and other chronic impacts which are confidently being linked to climate change; and
  • the Paris Agreement, which sets clear goals to limit global warming.

The foreseeability of climate risks makes them inappropriate to ignore from the perspective of a director. Assessing and determining the materiality and responses required are a fundamental part of a director’s duty of due care and diligence.

Potential Breach of Duty at Royal Dutch Shell plc

On 15 March 2022, ClientEarth,a shareholder in Royal Dutch Shell plc, announced its intention to pursue an action in the UK courts against Shell’s Board of Directors. ClientEarth’s claim is that the board of Royal Dutch Shell plc has breached its duties under Sections 172 and 174 of the Companies Act 2006 because they failed to manage climate change risk or prepare Shell for the transition to net zero in line with the Paris Agreement. This is the first example of an activist shareholder applying established general principles of company law to the ESG arena in the courts of England and Wales.

If the court finds that there has been a breach of statutory duties, this could give rise to “greenwashing” claims being brought by Shell’s shareholders under section 90 or 90A of the Financial Services and Markets Act 2000. This is an indication of the developing jurisprudence relating to climate change.

Mandatory climate-related disclosures will apply to most UK-registered companies by the end of 2023. Company directors should inform themselves of all relevant developments on an ongoing basis and take proactive steps to meet their evolving obligations.

At present, shareholders cannot be liable for a company’s breaches of law.

A parent company will only be liable to a third party for breaches if the parent company itself has been involved in the breaches, or directed its subsidiary to breach the law.

This is an evolving landscape where the overwhelming emphasis is on encouraging the responsibility of all stakeholders to take steps to mitigate climate change.

ESG reporting is a requirement in the UK following the mandatory TCFD-aligned reporting requirements that were introduced on 6 April 2022.

Climate-related due diligence in corporate transactions is now commonplace due to the increasing impact of climate risk in everyday business life.

At the time of writing (July 2022), the absence of an accepted standard for climate risk due diligence is an obstacle to its implementation in M&A and finance transactions.

In October 2021, the BEIS published its Net Zero Strategy: Build Back Greener. The Net Zero Strategy sets out the UK government’s vision for a decarbonised economy by 2050, the policies that the UK will implement to meet its carbon budget under the Climate Change Act 2008 and achieve its nationally determined contributions under the Paris Agreement.

The Net Zero Strategy outlines several key policies that will assist in decarbonising power, fuel supply and hydrogen. In particular:

  • the UK will commit to fully decarbonise its power system by 2035;
  • the UK will deliver 40GW of offshore wind by 2030, with additional onshore, solar and other renewables; and
  • the UK will move towards 1 GW of floating offshore wind by 2030.

The above list is not exhaustive.

In October 2017, the government published the Clean Growth Strategy (CGS). The CGS contains policies and proposals that will accelerate the pace of clean growth through the uptake of renewable energy. The CGS provides that the government will invest GBP177 million to reduce the cost of renewable energy.

As part of the CGS the government will improve the route to market for renewable technologies and negotiate a sector deal for offshore wind energy. In March 2019, the Offshore Wind Sector Deal set targets to ensure that UK companies play a leading role in the global market. The Offshore Wind Sector Deal is a partnership between the UK government and the offshore wind industry.

As part of the Spring 2021 Budget, the government published its Offshore wind manufacturing investment scheme: investment programme: guidance.

The UK supports the “greening” of the financial system and welcomes climate-friendly investment. The government recognises that in order to achieve emission reduction targets, it must encourage investment in sustainable industries/endeavours and green technology.

In 2019, the government published the Green Finance Strategy, which set out the policy commitments to align UK financial flow with a low-carbon world. The Green Finance Strategy informs investors and consumers about the environmental sustainability of corporations and financial markets. The government’s Greening Finance: A Roadmap to Sustainable Investing(the “Roadmap”), published in October 2021, continues to strengthen the Green Finance Strategy.

The Roadmap is an important mechanism for outlining the expectations that the government has for the UK pensions and investment sectors. It highlights that investors should actively monitor, encourage and challenge companies to promote long-term, sustainable value generation and exercise stewardship discipline in cases where a company fails to transition towards net zero.

The Financial Conduct Authority (FCA) is a financial regulatory body in the UK that operates independently of the UK government. In June 2021, the FCA published its Consultation Paper Enhancing climate-related disclosures by asset managers, life insurers, and FCA-regulated pensions providers CP21/17. The FCA proposed that climate-related risks and opportunities should be even more transparent to potential investors. This was elaborated on in the FCA’s Strategy for Positive Change, which was published on 3 November 2021 (last updated on 12 April 2022).

The FCA’s Policy Statements: Enhancing climate-related disclosures by asset managers, life insurers and FCA-regulated pension providers PS21/24 and Enhancing climate-related disclosures by standard listed companies PS21/23, introduce recommendations consistent with those of the Task Force on Climate-Related Financial Disclosures, established by the Financial Stability Board in 2015 to create consistent climate-related financial risk disclosures for use by banks, companies and investors in providing information to stakeholders.

1 Crown Office Row

Temple
London
EC4Y 7HH

+44 20 7797 7500

+44 20 7797 7500

london@1cor.com www.1cor.com
Author Business Card

Trends and Developments


Author



1 Crown Office Row provides expert advocacy and advice to a diverse range of clients. It is recognised as one of the leading sets in the UK, particularly in the fields of civil and public law. Members practise in a broad range of civil law specialisms including health law, public law, professional discipline, professional negligence, inquests, public inquiries, human rights, environmental law, immigration, tax and multinational torts. The set is at the forefront of the rapidly developing area of environmental law. Members appear in civil, regulatory and criminal proceedings and advise on transactional work, particularly environmental warranties and indemnities, involving UK and international risks. Clients include claimants, industry and regulators. 1 Crown Office Row is a member of the UK Environmental Law Association.

Climate Change Policy and Litigation in the UK

Climate change is a subject businesses and individuals ignore at their peril. Extreme weather and natural disasters are affecting many parts of the word. The time for action is now. The United Kingdom continues to lead global developments in response to climate change. Some of the key areas of focus are discussed below.

Increasing climate-related policies and laws

Most jurisdictions have made an attempt to address climate change in their policy and legislative frameworks. There are around 2000 laws and policies related to climate change globally; some of them government policies, others legislative acts. The UK is a prolific legislator on climate change among the international forum of the G20 nations and continues to lead the way in standard-setting on climate change.

In 2019, the UK enacted its net-zero emissions law (The Climate Change Act 2008 (2050 Target Amendment) Order 2019 No 1056) which commits the UK to a legally binding target of net zero emissions by 2050.

On 18 November 2020, the Department for Business, Energy and Industrial Strategy published a ten-point plan for a green industrial revolution, which sets out the approach of the UK government to support a post-COVID economy in a green and sustainable way as well as accelerate the UK’s path to net zero.

Climate governance

Climate focused corporate governance is rapidly becoming a key focus for businesses. There is no single piece of legislation or regulation in the UK that addresses environment, social and governance (ESG). The main sources include:

  • the Paris Agreement on Climate Change 2015 (which came into force on 4 November 2016);
  • the UK Corporate Governance Code 2018 (UKCGC);
  • the Companies Act 2006;
  • the UK Stewardship Code 2020 (UKSC); and
  • the Climate Change Act 2008.

The result of ESG being derived from several legislative and regulatory sources is that the UK’s ESG legal landscape is fragmented. This fragmentation results in a broad spectrum of laws and regulations.

The UKCGC and the UKSC are integral parts of the UK’s corporate governance regime.

The UKCGC provides that companies must report on how they have assessed opportunities and risks relevant to the future success of their business.

Businesses will need to assess the systemic risk of climate change and develop appropriate strategies for managing it. Climate-focused corporate governance will continue to evolve. The younger, “millennial”, investors, consumers and broader stakeholders are generally climate change-focused and support businesses with a strong climate element in their corporate governance strategy.

In the class action climate change case of Milieudefensie et al v Royal Dutch Shell ECHLI: NL:RBDHA:2021:5339, in 2021, the question of whether Royal Dutch Shell had an obligation to reduce CO₂ emissions across its entire group through the corporate policy of the group was considered. The Hague District Court recognised that corporate entities must protect human rights, including the right to a clean environment. The Court found that Shell was obliged to reduce the emissions of the group’s activities by 45% (net) by 2030 relative to 2019 through the group’s corporate policy. The reduction obligation relates to the group’s entire energy portfolio and the aggregate volume of all emissions. While only applicable in the Netherlands, the case could (and is likely to) have wider implications across the globe, including in the UK.

On 15 March 2022, ClientEarth, a shareholder in Royal Dutch Shell plc, announced its intention to pursue an action in the UK courts against Shell’s Board of Directors. ClientEarth’s claim is that the board of Royal Dutch Shell plc has breached its duties under Sections 172 and 174 of the Companies Act 2006 because they failed to manage climate change risk or prepare Shell for the transition to net zero in line with the Paris Agreement. This is the first example of an activist shareholder applying established general principles of company law to the ESG arena in the courts of England and Wales.

Businesses wishing to operate in the UK should refer to the UK proxy voting guidelines for 2022, published by the Institutional Shareholder Service (ISS). The ISS is a provider of corporate governance and responsible investment solutions. The proposed changes include:

  • a policy on board accountability on climate, including mitigating risks related to climate change to the company and the wider economy;
  • case-by-case votes on management proposals that request shareholders to approve a company’s climate transition action plan; and
  • case-by-case votes on shareholder proposals that request the company to disclose a report providing greenhouse gas emission levels and reduction targets.

Competition law issues

In March 2022, the Competition and Markets Authority (CMA) published a response on how the UK competition and consumer regimes could support the UK’s net zero and climate change goals. The CMA intends to produce further guidance for businesses on how to improve legal certainty surrounding sustainability agreements.

In order to further its wider objective of supporting the UK’s transition to a low-carbon economy, the CMA launched its Sustainability Taskforce, which is dedicated to sustainability issues. The CMA’s Sustainability Taskforce will:

  • lead engagement with stakeholders, government and partner organisations;
  • develop formal sustainability guidance for businesses; and
  • contribute to overall organisational strategy on sustainability and the wider national discussion of environmental issues.

Financial stability risks from climate change

In his speech titled “Breaking the tragedy of the horizon: climate change and financial stability” (September 2015), Mark Carney identified three key areas of risk to financial stability from climate change:

  • physical risk;
  • liability risk; and
  • transition risk.

Elisabeth Stheeman, a member of the Bank of England’s Financial Policy Committee (FCP), built on this and outlined the significance of physical risk and transition risk in her speech of 3 May 2022. She pointed out that:

  • physical risks can arise from damage to property and infrastructure as well as disruption to business supply chains – this affects the safety and soundness of financial institutions by reducing asset values or lower profitability for companies; and
  • transition risk arises from the move towards a net-zero economy and is a product of changes in climate policy, technology and shifting consumer preferences – the implied change in energy costs has already had an effect on many businesses, even before the sharp rise in global prices following Russia’s invasion of Ukraine.

Climate change is a systemic risk to businesses that seek to operate in the UK as climate-related risks have the potential to destabilise capital markets and cause disruption to the wider UK economy and beyond. Businesses cannot diversify away from their exposure to climate change, in a globalised or de-globalised world.

The Bank of England plays a key role in stabilising financial risks stemming from climate change in the UK. The role of the FCP has evolved and it is now focusing on assessing and mitigating the financial risks that businesses may face as a result of climate change.

The FCP undertakes climate-related “sand box” scenario exercises and stress tests to assess the resilience of organisations to different climate risks. This is a key component in assessing and managing systemic climate risk. Co-operation and ongoing dialogue between business and regulators is at the heart of this evolving landscape. 

Climate change-related litigation

Climate-related litigation in the UK is increasing. ESG litigation has not yet taken off significantly in the UK but developments in the USA and other jurisdictions indicate that this is a trend that may become increasingly relevant in the UK.

Current legal concepts and frameworks surrounding climate change are being stretched and adapted to try to accommodate the existing and emerging risks related to climate change. Litigation is increasingly being used as a mechanism to shape jurisdictional responses in this area. Claims are framed across a range of legal actions, including fiduciary duty, contractual obligations, financial regulatory frameworks and planning regimes.

There have been several noteworthy legal challenges in relation to climate change in the UK. For example, in R (on the application of Friends of the Earth Ltd and others) v Heathrow Airport Ltd [2020] UKSC 52, the issue was whether the decision of the Secretary of State for Transport to allow an application for a third runway at Heathrow Airport was unlawful. The Respondents argued that the decision was unlawful because it did not take into account the UK’s climate change commitments under the Paris Agreement.

In May 2020, the UK Supreme Court found that there was no need for the Secretary of State for Transport to have originally considered the Paris Agreement. The runway expansion will now go through the process of a development consent order and the government will have the final say. However, the Supreme Court judgment identified that there is an issue surrounding the need to designate national policy frameworks that contribute to the achievement of sustainable development.

In Packham v Secretary of State for Transport [2020] EWCA Civ. 1004, the Court of Appeal considered whether the high speed 2 “HS2” railway project had adequately considered the expected and unexpected emissions of greenhouse gases leading up to 2050 and beyond in accordance with the Paris Agreement and Climate Change Act 2008. The Court found that the government had adequately considered the relevant climate factors arising from the project before and after 2050.

While both of the above cases were unsuccessful in the courts, they sparked widespread public outcry in relation to climate change concerns. Arguably, this has a greater impact on the operations involved than the outcome of the legal challenge.

Climate change levy

The Finance Act 2000 introduced the Climate Change Levy (CCL) in the UK. The CCL is a carbon tax that adds 15% to the energy bills of businesses and public sector organisations. It is levied on non-domestic consumers of certain energy suppliers. The CCL is aimed at encouraging businesses to use less energy and to focus on renewable sources of energy.

The levy applies to businesses within the industrial, public services, commercial and agricultural sectors, charging them on “taxable commodities” for heating, lighting and other power usage. 

The CCL is governed by a number of regulations, the main ones deriving from the Climate Change Levy (General Regulations 2001 (SI 2001/838) (the “CCL General Regulations 2001”). The CCL is imposed on “taxable supplies” of “taxable commodities”. Businesses and consumers should familiarise themselves with “taxable commodities” listed in paragraph 3 of Schedule 6 to the Finance Act 2000.

The four categories of taxable commodities are:

  • electricity;
  • natural gas as supplied by a gas utility;
  • petroleum and hydrocarbon gas in a liquid state (including petroleum gas); and
  • solid fuels.

On 3 March 2021, the UK government published a policy paper, Changes to Rates for the Climate Change Levy for 2022 to 2023 and 2023 to 2024. The cost of the CCL for businesses will rise. There will also be one-off costs for familiarisation with the rate changes and updating systems to reflect the new rate.

In short, climate risk is increasingly a part of business risk. The assessment, reporting and mitigation obligations continue to evolve and merit close monitoring.

1 Crown Office Row

Temple
London
EC4Y 7HH

+44 20 7797 7500

+44 20 7797 7500

london@1cor.com www.1cor.com
Author Business Card

Law and Practice

Author



1 Crown Office Row provides expert advocacy and advice to a diverse range of clients. It is recognised as one of the leading sets in the UK, particularly in the fields of civil and public law. Members practise in a broad range of civil law specialisms including health law, public law, professional discipline, professional negligence, inquests, public inquiries, human rights, environmental law, immigration, tax and multinational torts. The set is at the forefront of the rapidly developing area of environmental law. Members appear in civil, regulatory and criminal proceedings and advise on transactional work, particularly environmental warranties and indemnities, involving UK and international risks. Clients include claimants, industry and regulators. 1 Crown Office Row is a member of the UK Environmental Law Association.

Trends and Development

Author



1 Crown Office Row provides expert advocacy and advice to a diverse range of clients. It is recognised as one of the leading sets in the UK, particularly in the fields of civil and public law. Members practise in a broad range of civil law specialisms including health law, public law, professional discipline, professional negligence, inquests, public inquiries, human rights, environmental law, immigration, tax and multinational torts. The set is at the forefront of the rapidly developing area of environmental law. Members appear in civil, regulatory and criminal proceedings and advise on transactional work, particularly environmental warranties and indemnities, involving UK and international risks. Clients include claimants, industry and regulators. 1 Crown Office Row is a member of the UK Environmental Law Association.

Compare law and practice by selecting locations and topic(s)

{{searchBoxHeader}}

Select Topic(s)

loading ...
{{topic.title}}

Please select at least one chapter and one topic to use the compare functionality.