The European Green Deal and its potential impact on UK businesses

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The European Green Deal and its potential impact on UK businesses

The European Green Deal and its potential impact on UK businesses

Following the UK’s withdrawal from the EU bloc at 23:00 on 31 January 2020, talks will ensue with the EU which will determine what sort of relationship the UK and EU will have after the transition period ends on 31 December.  

MEPs have made it clear that divergence from bloc rules will make trade relations more difficult, so there is a strong possibility the UK will attempt to retain alignment with our closest and largest trading partner by adopting many EU laws and regulations. 

One such area where it’s likely we will retain alignment is with regards to climate change and our efforts to tackle this pressing global issue.

To this end, the EU recently introduced their “Green Deal” – which aims to halve the bloc’s emissions by 2030 and to achieve net-zero carbon by 2050.  To achieve these targets the EU will be adopting a number of measures, many of which may be adopted by the UK in the future.

Using corporate governance to embed sustainability

One such measure the EU will seek to enforce is the embedding of ‘sustainability’ into corporate governance.  The EU believes that too many companies are currently focusing on short-term financial performance rather than focusing on long-term development and sustainability.  The EU will seek to amend governance rules so companies begin to switch their focus and in turn their environmental impact.

Similarly, the EU will also increase the obligations on companies to disclose data relating to their climate and environmental impact.  The intention here is to provide investors with as much data as possible and to sway investors to make sustainability a key factor when deciding where to invest their money.

The EU will also seek to develop a new standardised ‘natural capital’ accounting practice within the EU and internationally.  Natural capital accounting is the process of calculating the total stocks and flows of natural resources and services in a given ecosystem or region.  By standardising this practice the EU hopes to ensure appropriate management by companies of environmental risks and mitigation opportunities. 

Making it easier to identify sustainable investments

The EU is seeking to make it easier for investors to identify sustainable investments and to give them assurance that the investments are credible. 

One way they are doing this is by implementing an EU “Ecolabel” which will be applied to financial products.  The EU Ecolabel will be designed to promote the use of the most environmentally friendly products.  Labelling schemes can be particularly useful for retail investors who would like to invest in sustainable activities and will facilitate them when making their investment choices.

Another way in which the EU intends to focus investments on sustainable activities is by developing an EU green bond standard.  A technical expert group on sustainable finance has been set up to look into this, whose work will continue until September 2020, following which the European Commission will decide on how to adopt this new bond.

Integrating climate and environmental risks into financial systems

The EU is seeking to make changes to financial systems in order to integrate and better manage climate and environmental risks.  This means better integrating such risks into the EU prudential framework and they will be reviewing and assessing the suitability of the existing capital requirements for green assets. 

The EU will also be examining how their financial systems can help to increase resilience to climate and environmental risks, in particular when it comes to the physical risks and damage arising from natural catastrophes.

As this is ongoing, we do not yet know what this will look like – so watch this space.

Tax reforms

Finally, the EU is looking to amend the tax regimes across member states (which the UK may indeed mirror) in an effort to promote resilience against climate shocks and to assist with the transition to a greener economy.

The EU believes the way taxes are implemented can send the right price signals and will provide the right incentives for sustainable behaviour by producers, users and consumers.

The EU will seek to make tax reforms which remove subsidies for fossil fuels and which shift the tax burden from labour to pollution.

The European Council are currently reviewing proposals for amending value added tax (VAT) rates, with the intention that VAT rates will be used to assist in reaching their environmental ambitions, for example by supporting organic fruit and vegetables.

Next steps

Many of the reforms are still in the pipeline (the EU is currently reviewing its environmental and energy state aid guidelines, the Regulation on the EU Ecolabel and will shortly review the Non-Financial Reporting Directive in order to give effect to many of the above measures), and it is not yet certain whether the UK will implement these in our own legislation.  However, it seems unlikely that the UK will reject these measures given the global focus on climate change, so we could see such policies implemented in the not so distant future.

These reforms could have a significant impact for financial institutions and companies providing investment opportunities for investors. For example, investment companies will need to consider such points when compiling their information memorandums as they may need to increase their disclosures on climate and environmental data so that investors are fully informed about the sustainability of their investments.

What we do know is that the EU is aiming to present its sustainable finance strategy in the third quarter of 2020, so we will keep an eye on these developments and the direction the UK is going and keep you informed.

If you would like to discuss any of the issues raised in this article, or if you need any advice, please contact Sean Halliwell or give us a call on 0345 070 6000.

Alternatively, click here to find out what our Corporate team can help you with.

This article was prepared by Harnaek Rahania.