Brexit: Operational Risk & Environment

Brexit and Environmental, Product and Chemical Laws

'Traditional' Environmental Laws Likely to Remain Largely Unchanged

In the immediate aftermath of the Brexit vote, there was widespread concern that there could be a 'roll-back' of various environmental protections upon Brexit. This may have been premature as it has since emerged that the Great Repeal Bill is intended to, as far as possible, transpose existing EU laws - including environmental protections - into UK domestic law with effect from 'Day-1'. Given DEFRA's mission statement is "be the first generation to leave the environment in a better state than it found it"; that to date it seems that there is no particular clamour in industry for essential environmental protections to be rolled back; and the international and political implications of any such changes, significant roll-backs in 'traditional' areas of environmental law (e.g. point source emissions regulation, pollution and water quality, habitats regulation) appears unlikely in the medium term.

In addition, EU legislation in these areas, whilst vast, tends to be set out in EU Directives. Generally speaking, these lend themselves more easily to retention in UK domestic law – not least because there is an existing body of local implementing legislation. This is not to say there will not be significant challenges. Issues include the interpretation and relevance of extensive cross-references to technical EU criteria, guidance and recommendations; the status of key ECJ judgments (an issue for 'waste' laws in particular); legislative skills and resources given the EU has dominated policy-making in this area; and potential for intra-UK variances to emerge from the devolved nature of environmental matters in the UK. Post-Brexit, businesses may face significant difficulties in interpreting the precise nature of these 'de-coupled' environmental obligations. Our Operational Risk & Environment team has been providing cutting edge advice on legal developments in these areas for a number of years and can help guide you through these legal and practical complexities.

Complexities of Product and Chemical Regulation

Far more complex are those areas of environmental law that overlap with product and chemical regulation. To maximise harmonisation of rules, EU Regulations are particularly prevalent in product-related areas such as medicines, pharmaceuticals, food law and chemicals. This is because the systems often involve various EU institutions taking an active role (e.g. the European Medicines Agency or the European Chemical Agency) and relate to the free movement of goods between member states; and as such a high degree of legal consistency across the community is critical. However, those same considerations make the transfer of those EU Regulations into UK law extremely complex. A good example of this is the 'REACH' Regulation (Regulation (EC) No 1907/2006 of the European Parliament and of the Council on the Registration, Evaluation, Authorisation and Restriction of Chemicals). REACH cannot be simply 'cut and pasted' into UK law – it was written to apply within the EU only, and will need technical amendments to work within the UK context. The fabric of institutions and systems, and data arrangements, may also need to be replicated in the UK (or access to the EU systems agreed). All of this will create significant obstacles, administrative complexities and added cost across pan-EU supply chains. There is no simple solution to these issues and they are, in the words of Thérèse Coffey (Under Secretary of State at DEFRA) "consuming a lot of grey matter".

Preparation and Engagement

Businesses in sectors exposed to these issues (i.e. engaged in the manufacture, supply, use or cross-border trade in chemicals, products, pharmaceuticals or medical devices) would be well advised to – if they are not already doing so – begin considering their supply chains, agreements and business resilience plans for the regulatory impact of Brexit. Businesses who engage the earliest will be most likely to be able to influence a favourable outcome, and best prepared for an unfavourable outcome.

Our Operational Risk & Environment team is in ongoing discussions with public figures and industry on these matters, including inputting into environmental audit committee investigations and submissions, and are well placed to assist on the above. We would be happy to provide further detail on these issues on request.

Brexit and the Energy Sector

The highly regulated and complex energy sector is yet another area characterised by a preponderance of EU legislation, the significant implications of Brexit, and a high level of uncertainty.

The Energy Market

As with many areas of the 'single market', a number of EU Directives and Regulations (as part of the Third Energy Liberalisation Package in 2009 in particular) have led to a liberalised and highly harmonised EU gas and electricity market. Again, unpicking the UK from this will involve significant challenges.

In some areas the UK is likely to continue to take a broadly similar approach to the EU – for example the EU requirements as to the 'unbundling' of ownership, requiring the separate ownership and operation of electricity/gas transmission systems from generation, production and supply, is very much an embedded feature of the UK market. However the UK's approach to the complex web of EU network codes, requirements as to inter-connector operation, approvals and cross-border energy management, and transmission system operating parameters will require considerable thought and work to separate in a compressed timetable. The approach to the single energy market in Ireland is also an open question.

Climate Change and Opportunities

Where Brexit leaves the UK in terms of its approach to climate change remains to be seen – but it is likely to be more a change of path than a change of course. Whilst the UK will depart from the binding emission reduction targets of EU law, its own domestic targets under the Climate Change Act 2008 are already arguably stricter than the EU targets. Furthermore, the UK will remain bound under the Paris Agreement and other international conventions on climate change (although unpicking its commitments from the EU's will be yet another challenge).

Indeed, the UK may wish to take advantage of new opportunities – for example, if it is not subject to EU state aid rules, it may feel it is free to be more innovative in incentives / subsidies offered to low carbon schemes (albeit recent cuts to renewable incentives indicate this may not be an immediate priority). It will however need to tread carefully given the WTO constraints on use of state subsidies.

The reduced availability of funding from EU institutions may also impact the deployment of capital intensive renewable energy projects. There are a number of EU initiatives to promote investment in energy infrastructure which represent an important source of funding for UK projects (the EU low carbon transition budget, for example). The UK is also likely to lose membership of, and funding from, the European Investment Bank (investment by the bank into energy projects in the UK in 2014 alone accounted for nearly EUR 3.5bn).

Membership of the EU ETS

And then there is the open question of the EU Emissions Trading Scheme ("EU ETS"). It is assumed that the UK will wish to retain some form of carbon pricing and trading mechanism (indeed the UK set-up the predecessor to the EU ETS, it has been a key proponent of carbon pricing since, and will be conscious of its international commitments). However, the EU ETS has had its issues and, post-Brexit, the UK would be free to set up a domestic carbon market with its own rules. This would involve significant complications – the status of existing surpluses held by UK companies would need to be dealt with, and the new system would be an added administrative burden. A larger market also encourages greater liquidity. For those reasons it may be that the UK would prefer to remain within the EU ETS, but this will be subject to agreement with the EU (although the EU is keen to expand its carbon market – and is currently negotiating the inclusion of Australia and Switzerland in the EU ETS) and may not be viable if the UK is unwilling to accept any form of ECJ jurisdiction in this area.

Further discussion

The resolution of these issues will have profound implications on the regulatory and commercial environment and conditions for both greenfield energy projects, and M&A involving existing projects.

The Operational Risk & Environment team has deep experience in this sector, advising a range of clients on these types of issues and future change in law risk, across new build and established projects. Please do contact us if you would like to discuss further.

Other Operational Risks Arising from Brexit

There are a range of other commercial regulatory and operational risks that will need to be taken into account, and will have fundamental impacts on the risk management of businesses across the spectrum.

Examples include:

• disruption to export licensing: for example, export licenses are currently required for military goods and "dual-use" products emanating from non-EU countries. Affected companies will need to ensure that red tape does not impede their exports and that licenses can be obtained without undue delay, otherwise UK firms stand to lose business to EU competitors who can supply immediately;
• de-coupling sanctions regimes: for example, EU sanctions against Russia do not prohibit EU firms from dealing with EU subsidiaries of blacklisted Russian firms. After Brexit, UK firms (including financial institutions) may not be able to deal with such UK subsidiaries. More generally, the UK's approach to policy and mechanics of such trade control and sanction issues remains to be seen; and
• changes which may arise in ESG reporting: given that the UK's Modern Slavery Act 2015 (along with a more general push for corporate transparency) was championed by Theresa May, it is likely that we will see (if anything) a ratcheting up of corporate reporting obligations in this area, irrespective of Brexit. Other areas of ESG reporting, such as energy auditing, are based on EU driven initiatives and may be affected given the ongoing government review into the simplification of business energy and carbon reporting schemes. However, in view of the wider trend towards increased transparency in sustainability reporting, the nature of the matters that need to be reported may remain substantially the same.

Our Operational Risk & Environment team are advising clients on these increasingly complex and ever-present issues on a daily basis, and are well placed to assist further.