The start of a New Year is a good time to take stock as to what we can expect in European environmental law and policy over the next 12 months. Unlike previous years, 2020 is already shaping up to be a momentous year at both a European and member state level particularly as regards climate change.
We have to go back some way to remember a time when there was so much political focus on environmental and climate issues. How much of this focus translates into granular legislative proposals in the near term remains to be seen. However, it is clear from policy makers in the Commission and national governments that they are looking to take some major initiatives. For operators in, and investors into, the EU, the landscape is likely to become much more complex and, for many, the ability to quickly adapt to a rapidly evolving regulatory and political framework will be essential.
Whilst predictions on environmental policy driven in part by political events come with the usual caveats, we share below our thoughts on the major themes for the year ahead.
- Expect climate change to dominate the political agenda. There is now considerable momentum behind the EU’s commitment to be climate neutral by 2050. We have been promised by the new EU Commission President, Ursula von der Leyen, that 2020 will see the introduction of a new ‘Climate Law’ which legally commits the EU to a binding target of achieving greenhouse gas (GHG) emissions neutrality by 2050. This is more symbolic than substantive but it is likely to create the context in which the EU drives significant legislative change over the next decade. Expect to see more detailed Commission proposals in the summer on reaching a 50-55% reduction in GHG emissions (compared to 1990 levels) by 2030 and changes to the EU Emissions Trading System (ETS) to include emissions from the maritime sector and a reduction in the number of free allowances allocated to the aviation sector, as well as the possible inclusion of emissions from buildings.
The pressure will also be on the Commission and European governments to make meaningful progress at the UN’s COP26 meeting hosted by the UK in Glasgow at the end of the year. This follows COP25 in Madrid in December 2019 which, for many, was a disappointment due to the lack of agreement over the detailed rules for the functioning of international carbon markets which the EU, amongst others, considers to be key in creating incentives for climate action. Expect the UK Government, as hosts of COP26, to be very keen to preside over a climate conference where significant progress is made particularly as the UK heads into a post-Brexit world.
- We will discover how achievable Ursula von der Leyen’s ambitious Green Deal actually is. As discussed in our December briefing, the EU’s Green Deal sets out the Commission President’s environmental and climate agenda. It does not lack for ambition. However, it’s a high-level policy document with much of the detail to follow in a stream of proposals and strategy documents over the coming years (see the Annex to the Communication). It may not be all plain sailing for the new President and the Commission’s Executive Vice-President and head of climate policy, Frans Timmerman. There is a significant amount on the EU’s agenda over the next 12 months (including Brexit) and there are already divergent views on a number of the proposals. The President has done the easy bit and the next few months will give us an early indication as to how deliverable the deal actually is.
- The EU will position itself as the global leader on environmental and climate issues. As reflected in the Green Deal, we should be under no illusion that the EU sees itself increasingly as the global leader in driving global environmental standards and addressing climate change. For now, the EU is also looking eastwards for opportunities to develop greater co-operation with China built around planned summits in Beijing and Leipzig. We may therefore find a growing alignment across a number of key areas between the EU and China as the US takes a more unilateral approach. China is likely to exercise a growing influence on international climate discussions particularly in the lead-up to COP26.
- The focus on reducing plastics will accelerate. There are a number of proposals in the pipeline on the production and reduction of plastics. These will build on the EU’s 2018 Plastics Strategy and the Single-Use Plastic Directive, focusing on areas such as micro-plastics, packaging and single-use. There will also be measures aimed at increasing targets for the use of recycled content in certain plastics. As part of the EU’s proposed new Circular Economy Action Plan, we expect to see a major focus on the plastics sector amongst others.
To help plug gaps in the EU’s 2021-2027 budget, there is also speculation that the EU may adopt a plastics levy targeting producers. Separately, the UK is also proposing to introduce a new tax from 2022 on the production and import of plastic packaging with less than 30% recycled content. Detailed proposals on the tax are expected in the coming year.
- Enhanced corporate disclosure of environmental and climate risks. The last five years have seen major changes to the corporate reporting requirements concerning environmental and climate risks. These have principally been focused on listed and large unlisted companies alongside certain public interest entities (banks and insurers amongst others). However, we remain at the beginning of the journey. There is significant focus amongst investors and central banks across Europe on delivering better quality and more comprehensive data on environmental and climate impacts and this is set to continue in 2020. On climate, this will increasingly focus on how resilient businesses are to physical and transition risks arising from climate change. Expect to see the continued drive for enhanced disclosure, with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations emerging as the leading global climate change reporting framework. The Commission proposes to review the Non-Financial Reporting Directive this year to encourage greater disclosure of climate-related information by companies and financial institutions and changes are already proposed through the Taxonomy Regulation. For companies not directly caught by these requirements, the trickle-down effect is inevitable.
- Greater clarity on the EU’s industrial priorities. We are anticipating the publication of the EU’s Industrial Strategy and Circular Economy Action Plan in the first half of the year. The Industrial Strategy is expected to provide more granular detail as to the direction of travel for the EU’s planned green and digital transformation. The new Circular Economy Action Plan is designed to provide a policy framework to stimulate markets for climate neutral and circular products both in the EU and, importantly, beyond. The Action Plan will include a “sustainable products” policy designed to support the environmental design of products based on a common methodology and set of principles. This may also lead to extended producer responsibility (EPR) regimes at a time when many member states are reviewing their EPR regimes across a range of product areas. The new Circular Economy Action Plan should also give us an idea of those sectors being given immediate focus - textiles, construction, electronics and plastic have already been identified as priorities.
- Emergence of a new framework to drive public and private investment into renewables and other low-carbon technologies. The Commission has estimated that achieving the current 2030 climate and energy targets will require €260 billion of additional annual investment. Alongside other measures, it proposes to publish a renewed Sustainable Finance Strategy in the second half of 2020, which is expected to set out further details on measures to direct investment and minimise the risk of stranded assets. The Commission is calling for climate and resource front runners to develop breakthrough technologies by 2030. Priority areas include clean hydrogen, fuel cells and other alternative fuels, energy storage and carbon capture and storage and utilisation. Alongside the Strategy will be proposals for a Just Transition Mechanism and Fund (circa €100 billion), which will be utilised to support those member states and regions most affected by the climate transition. These measures will be watched closely by existing and potential investors in Europe’s renewables infrastructure and other low-carbon technologies in the years ahead.
- A revamp of Europe’s chemicals policy. EU chemicals policy encompasses more than 40 pieces of legislation and, in recent years, has been the subject of three major evaluations. The Green Deal proposed a new strategy for sustainability in chemicals but provides no details on what this will contain. There is also likely to be a focus on the risks arising from endocrine disruptors, hazardous chemicals in products (including imports) and environmentally persistent chemicals.
- Roll-out of plans for a carbon border adjustment mechanism. Rather than proposing an outright carbon border tax in the Green Deal, the Commission has proposed a more cautiously worded “carbon border adjustment mechanism” for selected sectors “should differences in levels of ambition worldwide persist”. The aim is to ensure that European products are not at risk of carbon leakage or disadvantaged by more carbon-intensive imports from countries outside the EU bloc that have less stringent standards. The Green Deal Communication states that the measure will ensure that the price of imports reflects more accurately the carbon content. It also proposes that any such measure would be an alternative to the current measures designed to address the risk of carbon leakage in the EU ETS, such as the free allocation of allowances. It is widely accepted that drafting a mechanism that complies with WTO rules and does not antagonise the EU’s largest trading partners is no easy task. Whilst we do not expect to see detailed proposals until 2021, we should expect plenty of focus on this globally over the next 12 months.
- Investors will continue to flex their muscles on ESG matters. The buzz-acronym for many investors in 2019 was ESG. This reflected significant interest amongst funds and other investors in the environmental and climate performance (and vulnerability) of their assets. We can expect this to accelerate through 2020 (and beyond). There is a plethora of policy, legislative and central bank initiatives in the pipeline that will drive investors to better understand, report on and label their investments from an environmental and climate perspective. We are also likely to see the continued rise of climate-related AGM resolutions being tabled by institutional investors and asset managers actively engaging with their portfolio companies as a way of driving corporates and financial institutions to further report on and address climate risks.
- Significant growth in green financial products. We have already seen a significant rise in the number and value of green bonds and green/sustainable loans over recent years. This trend is expected to accelerate such that it may become the norm for many debt instruments to have some environmental or sustainable criteria attached to them. The development of a comprehensive regulatory framework for these products is lagging behind market developments but we expect this to change over the next few years.
The Taxonomy Regulation, which is at the heart of the EU’s Sustainable Finance Action Plan, is part of a wider package of EU legislation designed to help reorient capital to more sustainable, climate-neutral investments and address concerns over ‘greenwashing’. The Regulation is expected to be adopted in 2020 and will provide a framework for determining how certain financial products can be classified as “environmentally sustainable”. We also expect further announcements about an EU green bond standard and an EU ecolabel for retail investment products.
This year should also see the Bank of England issue further details for plans to conduct its first ever climate change stress test of the UK’s financial system in 2021. The resilience modelling will be against three climate scenarios and apply a 30-year modelling horizon. This will require large banks and insurers to look closely at the vulnerability of their corporate customers to climate change physical and transition risks. The European Banking Authority, in its Action Plan on Sustainable Finance published in December 2019, is also calling for a climate change stress of EU banks, starting with a sensitivity analysis involving a voluntary group of banks in the second half of 2020.
- Brexit will have very little effect in the near term. After the election of a Conservative Government with an 80 seat Parliamentary majority in December 2019, it appears certain that the UK will now formally leave the EU on 31 January 2020. However, it is proposed that the UK will enter into a transition period to run until 31 December 2020. During this phase, the UK will no longer be an EU member state but it will continue to be treated as such in the vast majority of areas. The UK will continue to participate in the EU Customs Union and Single Market (with all four freedoms) and comply with EU policies. Any changes to EU law will automatically apply to and in the UK unless provided otherwise. At the end of the year, this arrangement will likely come to an end and, whilst the EU/UK withdrawal agreement allows for this period to be extended for up to two years, the UK Government has committed to not seek any such extension. As a result, at least in the near term, very little will change and we don’t anticipate there to be any material divergence between the UK and the EU-27 over the next 12 months.
We should, however, keep a close eye on trade negotiations between the UK and EU during the course of this year. It would appear highly optimistic for there to be a new and substantive trade agreement in place by 31 December 2020. The more likely result will be a framework agreement and pathway to a more comprehensive agreement negotiated over a number of years. In any event, we would anticipate that environmental and climate matters will be at the political heart of those trade negotiations, partly for policy reasons and partly because of the EU’s overriding concern that the UK does not become a low-regulation hub. It remains to be seen how Boris Johnson’s new Government will approach these issues and what its domestic environmental programme will look like.
If we see meaningful political activity in each of these areas, it could be one of the busiest years for European environmental and climate policy makers for decades. It is quite clear that Europe is serious about its vision to be climate neutral by 2050 and there is a growing recognition that the steps needed to achieve these aspirations need to be taken now. This could indeed prove to be “Europe’s man on the moon” moment that President von der Leyen has called for