ESG Market Alert – December 2021

Hogan Lovells

Hogan Lovells

[co-author: Russell Clay]

In this alert, we provide a round-up of the latest developments in ESG for UK corporates.

This alert provides updates on new developments including:

The Environment Act 2021 – now in force

The Environment Act 2021 came into force on 17 November 2021, and forms part of a new legal framework for environmental protection, given that EU law no longer applies in the UK post-Brexit. The purpose of the Environment Act is to ensure greater resilience, traceability and sustainability are built into the UK legal framework, particularly in relation to supply chains.

Additional regulations will apply the Act to businesses with turnover above a yet to be specified threshold (drafts of which are expected by October 2022). They will require greater due diligence from businesses, and make it illegal for UK businesses to use key commodities if they have not been produced in compliance with local laws protecting forests and other natural ecosystems. Relevant businesses will therefore need to be more transparent about where they source key commodities from, and those that fail to comply will be subject to fines, with the precise level yet to be set.

The Environment Act will also deliver:

  • The ability to introduce regulations to prevent illegal deforestation through controls on the UK's international supply chain
  • Long-term targets to improve air quality, biodiversity, water, and waste reduction and resource efficiency.
  • A target on ambient concentrations of PM 2.5, the most harmful pollutant to human health.
  • A target to halt the decline of nature and biodiversity.
  • Environmental Improvement Plans, including interim targets, and Environmental Principles embedded in domestic policy making.
  • A cycle of environmental monitoring and reporting.
  • A new Office for Environmental Protection to uphold environmental law.

Further details of the Environment Act can be found here.

Consumer Protection and Greenwashing: A UK and EU Perspective

The UK and the EU adopt different approaches to challenging "greenwashing" claims for products and services. The EU initiative is complex and detailed while the UK approach is light touch and is not supported by technical materials or prescribed methodologies for businesses to follow.

The UK’s proposal has now been published, whilst the EU are currently finalising their proposal with a view to publishing it in early 2022.

The UK

On 20 September 2021 the UK’s CMA published its Green Claims Code (the "Code"), which contains principles and guidance to help businesses ensure that their environmental claims are compliant with consumer protection law. The CMA and other bodies (for example, Trading Standards Services) can bring court proceedings in relation to the Code.

The new Code potentially impacts any company which makes claims of positive environmental impact in relation to its products or services. The CMA has announced that it will begin a review of misleading green claims in January 2022 but may take action beforehand where there is evidence of breaches of consumer law.

The EU

The EU’s initiative will require companies to substantiate claims they make about the environmental footprint of their products or services by using standard methods for quantifying them, so that consumers can compare products and services and verify claims made about them. These are separate from the EU Taxonomy Regulation that will determine which financial investments can class themselves as environmentally sustainable. We will update you on these once the proposal has been finalised.

What’s new in market practice?

We are increasingly seeing the introduction of ESG policies in corporate transaction documents. The policies often include responsible ESG framework commitments pertaining to the entire corporate group, and the policies are also issued to group employees to ensure compliance.

Companies subject to these emerging ESG schedules are often required to provide specific documentation, information and data in relation to energy supply arrangements, energy consumption or greenhouse gas emissions or other environmental or social (including health and safety) impacts and other ESG initiatives. The requirements have also included quarterly Board reports on a range of key performance indicators (often agreed between investors and/or stakeholders and the company at regular intervals).

We expect to see more ESG clauses and schedules included in key documents as the market develops, and will continue to report on these practice developments.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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