Since the COP26 summit and the publication of the UN’s report on climate change, there is a renewed focus on environmental issues. In light of this increased attention, Simon Carroll, partner in B P Collins LLP’s environment and dispute resolution practices and Alex Zachary, partner in its environment and corporate and commercial practices, explain what potential risks and opportunities lie ahead for businesses.
COP26, the 26th annual global summit under the UN Framework Convention on Climate Change, which B P Collins LLP attended, was the first major gathering of almost 200 nations and world leaders to consider the goals set by the agreement at COP21 in Paris almost six years ago, when a 2020 deadline was set for countries to propose how they planned to tackle climate change.
Despite predictions that our planet will become warmer by 3° to 4°C by 2100, resulting in rising sea levels and large areas of land becoming uninhabitable, it has become clear that few nations are getting close to the level of action required to reduce expected temperature growth to the 1.5°C goal. Many COP26 commentators were left disappointed at the progress made at the summit, despite the government’s efforts to change the narrative focus to one of “keeping 1.5°C alive”, and focusing aims like ending deforestation and a reliance on coal – arguably more achievable goals.
The UK government has developed its “Net Zero Strategy”, which although arguably not entirely sufficient, has gone further than many countries. Now that plan must be put into action, and the repercussions of this for the business community are expected to be huge.
New environmental regulations
There have been 2,110 environmental regulations passed on a global level over the past 74 years, however, over 2,000 of these have been introduced since the first COP in 1995. As such, COP26 will undoubtedly play a major role in shaping new environmental laws. Even when the summit was taking place, the Environment Bill received Royal Assent in Parliament, bringing the Environment Act 2021 into force. Business leaders will be obligated to get on board with policies that help the countries they operate in hit their emissions targets, while at the same time, safeguarding jobs and further driving economic growth and prosperity. As businesses thrive on certainty, the sooner there is a clarification on environmental related policies, the better.
Before the UK left the EU, there were treaty-level rules governing what the UK government could do in supporting certain industries over others. Although sometimes criticised, EU rules provided a clear check on what constituted lawful and unlawful aid, aiming to ensure that national governments didn’t breach competition rules. But Brexit has allowed the UK to walk away from those rules and make up their own, and those expected to come into force in 2022 may well prove to be considerably watered down. This regime change could well lead to commercial opportunity, but equally, may also lead to disruption in certain industries and established businesses, with new businesses entering a particular market after taking advantage of new, green subsidies.
‘Green’ finance to rocket
Many investors are already investing in green assets, as there is a belief that they will deliver excellent returns in the future. As investment in greener companies and markets continues to grow, business models posing a danger to the environment may well be at risk. Businesses should be on the lookout for any green financing arrangements – both those that may benefit them, and those which won’t. This is likely to be a chance to avail of new sources of capital as existing ones become no longer available.
Power of the green pound
Consumer behaviour is being increasingly influenced by notions of sustainability and climate friendliness, and with COP26 in the limelight many people are now more acutely aware of the impact of climate change. As a result, many consumers are willing to pay a premium for green products and services. Companies have a chance to grow revenues by responding to this appetite for sustainability. (Indeed, many already do so by communicating their carbon footprint on packaging or making eco-friendly or recyclable claims.)
However, that isn’t seen across all sectors. Consumers are conflicted in some areas, not least in the pensions industry. Although they might invest in an electric car, would they prioritise investing their pension contributions in green firms, risking the returns they might get when they retire? Some may do; but for many, that may be a step too far at the moment. As pressure grows, particularly on larger businesses, to publish climate data and be held accountable, we may start to see a shift in that approach.
Clampdown on greenwash
The green pound will encourage more businesses to produce more sustainable products and services, but it won’t just be these that come under greater scrutiny, it will also be the businesses that produce them, their supply chains, and the claims they make in advertising as well.
With an increase in sustainable branding in the marketplace, the Competition and Markets Authority (“CMA”) recently published its “Green Claims Code” for businesses intending to make environmental claims. The guidance has been issued to help businesses avoid misleading consumers. Further to publishing the Green Claims Code, the CMA also announced that it will carry out a full review of misleading green claims (commonly known as ‘greenwashing’) at the start of 2022, and those in breach of the rules could face action from the CMA.
This is an area that will continue to develop as businesses strive to become more environmentally friendly and attempt to differentiate themselves from their competitors. As new policies are formulated following COP26, and both the CMA and Advertising Standards Authority carry out reviews of environmental claims, closer scrutiny of company claims are expected. Businesses that fall foul of these rules could face extensive fines and their reputation could take a nosedive.
More innovation and new business models
Increased regulatory risks for high-emission assets, rapidly developing technology, the falling cost of capital for green investments, and the rising cost of carbon emissions will likely generate new opportunities for business owners, such as the development of new products and services, and new business models. For example, in the construction sector, building materials like concrete could be replaced with alternatives that recycle plastic or glass – and business owners and workers in this sector, along with many other industries, will have to adapt quickly in order to remain competitive.
While environmental issues matter to many business owners, it’s completely understandable that the day-to-day running of the business often takes precedence. However, those that do pay close attention to the impact of COP26 will be able to tap into emerging trends and become more competitive as a result. Adjusting your business to address climate change brings both commercial opportunities and risks. Those that seize the former and mitigate the latter will undoubtedly thrive in the future, whilst also protecting the environment for the next generation.