Climate change (LG test)

Climate change (LG test)

Overview

Climate change will be the challenge of our generation.  To transition our economy, based around fossil fuels and carbon since the Industrial Revolution, presents a staggering test of resolve for both industry and wider society.

The effects of climate change are often less visible than other environmental impacts, but will be experienced most keenly by future generations without dramatic societal changes to slow global temperature rises.  A multi-faceted approach by industry, investors and governments is required, and businesses should be looking to move beyond good intentions and start to achieve real results. 

The economy’s focus is shifting to sustainable models across the board: renewable energy will replace fossil fuels, electric vehicles will eventually overtake petrol and diesel cars, air and ground heat will replace gas boilers. Businesses face risks, directly from failure to adapt and indirectly from changing customer and consumer appetites, but the opportunities for sustainable businesses should not be overlooked. 

As governments set ambitious climate targets, we anticipate a move from the current transparency and reporting regimes to more demanding statutory restrictions and obligations.  Current and proposed carbon and energy efficiency reporting and transparency regimes are likely to increase in scope and gain additional regulatory teeth. Ultimately, traditional businesses will need to pivot to more sustainable activities, and innovative solutions will play a key role in this transition.

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Key Issues

Overview

Climate change mitigation

The UK has had a legally-binding commitment to reduce greenhouse gas emissions since 2008. In 2019, it increased that commitment to achieve net zero emissions by 2050. The EU, on behalf of the whole bloc, will follow suit in 2020 with a draft EU Climate Law published in March 2020. A raft of multinational companies from Tesco to BP have separately pledged to achieve net zero carbon emissions by 2050, while Amazon has pledged to achieve this by 2040 and Microsoft aims to be "carbon negative" by 2030.

Emissions reductions can seem relatively easy to achieve – for example, a solar installation on a factory rooftop – but claims made about the benefits of such measures can be misleading and difficult to navigate, as highlighted by prominent activist Greta Thunberg who accused some countries of "creative carbon accounting". The optics of emissions reduction can be severely skewed by countries investing significantly in overseas carbon offsetting projects, whilst failing to take aggressive action on domestic emissions.

The EU has proposed a controversial "carbon border adjustment", essentially an import tax, to discourage carbon offshoring. The UK centre-right think tank, the Centre for Policy Studies, has also supported such a tax for the UK's carbon-intensive sectors such as steel, coal and electricity production. The amount of 'carbon leakage’ through offshoring over the last few decades has been significant and masks the heavy impact of consumer-driven developed economies on the climate.

Legislation requiring emissions reduction has historically been described as fragmented. A more holistic approach will be needed to achieve temperature increases below 2% or 1.5%, as evidenced by the European Green Deal, the EU’s flagship climate change project. Renewable energy targets for both power and transport must be more ambitious, new buildings [link to section below under Resources on Energy-efficient buildings] must be more efficient (and existing buildings renovated to improve efficiency), durable, sustainable and recyclable products will need to become the norm (complying with voluntary standards as well as mandatory energy efficiency rules), and the entire food chain will need to be addressed, from sustainable farming practices to influencing consumer choices.

Emissions trading

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Overview

Climate change adaptation

All business sectors will be impacted by climate change in some way. Adapting to climate change is not just a matter for the agricultural sector seeking to manage wetter or hotter conditions, nor town planners seeking to control developments on flood plains or in coastal areas. According to the EU Commission, economic losses affecting all business sectors from climate and weather extremes between 1980 and 2017 totalled around EUR12 billion per year, only around a third of which were insured.

 

Businesses will increasingly be expected to build climate resilience into their operating policies and describe how they will respond to specific physical climate risks. In the manufacturing sector, for example, this may mean contingency planning for supply chain disruption, particularly where there is a high dependency on imports. The dangers of over-reliance on global supply chains were dramatically illustrated by the COVID-19 crisis.  The infrastructure sector will be challenged to ensure that networks, structures and materials can withstand more extreme weather events, more frequently. All companies will need to consider how their property portfolio is placed to withstand physical risks.

 

Investors and financial advisers will be looking at mandatory or voluntary disclosures [link to section below on Climate risk reporting and disclosures] to identify where capital will be safest.

Risks and opportunities

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Best practice

Overview

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An appropriate climate change response depends on the nature of the business. Incremental steps towards a goal in several areas can have a significant impact, cumulatively, on a long term basis. Change brought about by sustained effort over a period of time will be evident as a result of mandatory and voluntary reporting schemes. Key measures include the following:

 

  • Ensure that current climate change/sustainability-focused policies (i) are fit for purpose, (ii) comply with climate change and energy efficiency rules, (iii) represent legal baseline targets (iv) are dependent on the business's ambition, stretch goals, and (v) are reviewed on a regular basis.

  • Consider which areas of the business could easily be adapted to ensure better emissions performance: Is the business purchasing (or could it install) renewable energy? Does its travel policy strike the right balance between onsite relationship-building and unnecessary business travel? Do employee-facing policies require simple measures such as turning off lights or activating energy-saving modes on computers, where appropriate?

  • Consider supply chain emissions, particularly if the EU's carbon border adjustment tax comes into effect. Should procurement policies take account of supplier performance, or the performance of products/services purchased (e.g. minimum energy efficiency standards for hardware or data centres).

  • Investment criteria will need to integrate sustainability factors at a more rapid pace in light of tightening regulatory requirements.

Legal and regulatory overview

Overview

Our work

Overview

As governments, investors and the markets push for change, the most immediate challenge from a legal perspective is achieving a broad understanding of the rapidly-changing regulatory landscape.  As the UK and EU commit to a carbon-neutral future, we expect to see a raft of new regulations as well as voluntary, market-led schemes contributing towards meeting the 2050 goals.

We help clients to comply with their legal obligations in relation to climate change, energy efficiency and carbon reporting, to formulate appropriate responses to the increasing demands of investors, shareholders and customers in understanding these risks, and in finding ways to transition to more renewable and clean technologies. 

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