Resources

All global economies share an unshakable reliance on natural resources. Global population growth is continuing to drive more intensive industrial and agricultural operations, often in countries with few regulatory checks and balances.

The sustainable development agenda requires us to manage our use of the rapidly-diminishing supply of natural resources to preserve them for future generations and developing countries, and to mitigate and where possible, reverse the environmental damage caused by the depletion of those resources.

The imperative to move to a more sustainable approach in our use of resources is driven by consumers, legislators, shareholders and investors. The universal challenge is to ensure access to affordable, reliable, sustainable, modern energy, while progressing towards a global energy system with net-zero GHG emissions. While some businesses are already adapting their operations and finding innovative solutions to this challenge, the moving regulatory landscape will require careful navigation to avoid liability and make the most of the emerging opportunities.

Now Reading

Key issues

Energy and conventional fuels

With a significant proportion of EU emissions coming from coal (particularly coal-fired power plants), phasing out coal is one of the most cost-effective methods of achieving emissions reductions. Many countries have set phase-out deadlines for the use of coal, with Belgium coal-free since 2016, the UK Government aiming to bring forward plans to close all coal-fired power stations by 2024 rather than 2025, and plants in Spain and Germany also closing incrementally.

The Energy White Paper, published in December 2020, sets out ambitious plans to decarbonise the UK's energy system over the next 30 years in order to meet the Government's Net Zero target, replacing fossil fuels with clean energy technologies such as renewables, nuclear and hydrogen technologies, as far as possible. The Ten Point Plan announced a new £1bn Net Zero Innovation Portfolio which aims to reduce the cost of the transition to Net Zero and accelerate the commercialisation of low-carbon technologies.

At EU level, to assist with the move away from coal-based energy, and to mitigate the economic and social impact of this transition on coal-producing regions, the EU has proposed a "Just Transition Fund", with EUR17.5bn expected to be directed towards a range of activities from investments in clean energy to assistance for job seekers. Scotland has established a Just Transition Commission to ensure that it maximises economic and social opportunities while following its own pathway to net zero by 2045. Despite numerous calls for it, and a clear recommendation from the Climate Change Committee, there is so far no sign of a UK-wide "just transition" strategy.

Renewables and clean tech

The are many opportunities for innovators in the clean tech sector. The EU has promised that 35% of Horizon Europe (successor to Horizon 2020) funding will be available for climate innovation projects, and with investors keen to "green" their portfolio, both early-stage and more mature businesses with effective product and service offerings stand to benefit. Post Brexit, under the terms of the Trade and Cooperation Agreement, UK researchers will remain eligible for Horizon Europe funding although the UK will no longer have any influence over the programme.

Mining and metals / raw materials

With the majority of raw material supply chains operating on an international scale, there is increased pressure on manufacturers to demonstrate that raw materials are from sustainable sources. Cobalt, for example, is a vital component in rechargeable batteries which will be crucial in the development of future battery-powered technologies, and it is estimated that roughly 65% of the world's cobalt is mined in countries where accusations of child labour and dangerous working conditions are widespread. Until now, regulators have generally adopted a light touch approach in this area: key requirements in the EU Conflict Minerals Regulation, which came into force on 1 January 2021 (and as part of our EU "retained law", has direct effect in the UK despite the UK's exit from the EU), apply only to importers, and not those using materials sourced from conflict zones. The UK will have limited scope to diverge from these EU rules in the future, having explicitly committed to promote the OECD Due Diligence Guidance on conflict minerals as part of the Trade and Cooperation Agreement. Consumers, investors and NGOs are increasingly requiring companies to play their part in eradicating socially-unacceptable working practices in their supply chain. Read more on the EU Conflict Minerals Regulation here.

Circular economy

Reducing waste and easing pressure on raw materials makes development of a circular economy one of the fundamental cornerstones of a sustainable economy. 90% of biodiversity loss and water stress is caused by raw material extraction and material processing, according to the European Commission.

The Commission first proposed circular economy measures back in 2014, with the new Circular Economy Action Plan published by the Commission on 11 March 2020, aiming to address resource consumption and reduce environmental pressures driven by consumption. Reusing and recycling are key to tackling global waste issues, and stronger legislative requirements on waste management and reparability are setting more ambitious targets for plastic recycling and reducing waste from electrical and electronic equipment.

The Circular Economy Action Plan confirms the EU's intention to halve municipal waste by 2030 and proposes "right to repair" rules. Stricter eco-design measures covering phones, tablets and laptops will set technical standards to ensure that these goods consist of changeable and repairable parts. Some companies will face restrictions on material use for the first time; consumer-facing businesses are already under pressure to reduce over-packaging, plastic use, or hazardous substance content. Modifications made in response to such pressure should be supported by lifecycle analysis, to avoid unintended consequences such as increased shipping costs (and carbon emissions) from use of heavier packaging materials. In making mandatory corporate filings or voluntary CSR reports on the adoption of such measures, it also pays to get the messaging right in relation to measures taken.

In July 2020, the UK published a statement of intent for UK implementation of the measures set out in the EU Circular Economy Action Plan post-Brexit, referred to in that statement as the Circular Economy Package. The line-by-line transposition plan that accompanied the UK's statement shows that the UK will replicate almost all of the EU's new Circular Economy Action Plan, including a limit of 10 per cent municipal waste to landfill by 2035, a ban on separately collected waste going to landfill or incineration and restrictions on the materials that can be sent for landfill or incineration. With this commitment, plus the Resources and Waste Strategy, 25 Year Environment Plan and Environment Bill set to make the UK a resource-efficient, high recycling nation.

Energy-efficient buildings

Buildings are responsible for approximately 40% of energy consumption and 36% of CO2 emissions in the EU, making them the single largest energy consumer in Europe. By improving energy performance in buildings, the EU can more readily achieve its energy and climate goals. The EU has set binding targets of at least 32.5% energy efficiency by 2030 (relative to a ‘business as usual’ scenario). Businesses can significantly reduce their wider carbon footprint by choosing energy-efficient offices and other premises. Future developments in energy efficiency are likely to include more ambitious efficiency targets under the Energy Performance of Buildings Directive (EU 2018/844), and additional measures focused on renovation of existing housing stock as well as the efficiency of new builds.

Here in the UK, the Government's Ten Point Plan for a Green Industrial Revolution sets out the Government's ambition to renovate buildings to make them more energy efficient and replace fossil fuel heating systems.

Decreasing the energy consumption of appliances and energy-intensive business operations are, relative to some other sustainability goals, low-hanging fruit for many businesses. Tech giants, including Google, Facebook, Amazon and Microsoft, are some of the biggest buyers of renewable energy to help power their data centres; they and other tech firms accounted for almost a quarter of the renewable energy sold to global companies in 2018. Tech firms' own products are also subject to a range of mandatory and voluntary energy efficiency measures, with green public procurement policies and consumer purchasing habits all driving appliance efficiency improvements.

Back to Climate change, environment and resources

Risk and opportunities

Risks

As the both UK and EU commit to a carbon-neutral future, we expect to see a raft of new regulations as well as voluntary, market-led schemes contributing towards these ambitious goals for 2050, and the prospect of financial penalties for less energy/carbon efficient activities. The UK Government has already deployed a range of financial mechanisms to discourage fossil fuel production, including the climate change levy, tax on hydrocarbon oils and payments for failure to meet the renewables obligation, and more are expected (such as closure of the tax loophole for red diesel in the 2020 Budget). And as disclosure obligations increase, asset managers should consider carefully how to manage current and future resource consumption in their portfolio businesses and their own, as well as their strategy on investments in carbon-intensive industries.

Opportunities

Financial penalties for the least energy/carbon efficient activities are balanced against financial incentives for the most efficient, such as an exemption from vehicle excise duty for vehicles capable of zero emissions. Investment in renewable energy, on a large-scale or individual business basis, makes good commercial sense as prices become comparable with brown power. Capex investments in energy-saving measures or clean technologies (not dependent on finite resources) should lead to opex savings and higher confidence around the longevity of business operations.

Back to Climate change, environment and resources

Best practice

Best practice for the conventional fuel and mining/raw materials industries will differ greatly from the approach to be taken by companies involved in renewable energy production or circular economy businesses:

for operators involved in oil, gas, mining and other raw material production and supply, robust risk and impact assessments, supplier due diligence and business continuity planning are all important. Companies may need to conduct conflict analysis and take specific measures to address the heightened risks associated with operations based in conflict-affected areas
for operators involved in clean and renewable energy production, questions over how 'clean' initiatives actually are remain a problem. Taking steps to audit and review supply chains and operations processes will assist in avoiding claims of 'greenwashing' and will reassure investors

Investors, lenders, asset managers and other financial intermediaries should look closely at how these risks are understood and managed by their portfolio companies, and develop and maintain appropriate investment policies in line with both legal requirements and investor expectations by:

implementing robust diligence processes aimed at assessing the sustainable resources credentials of a target company
incorporating sustainable resource factors into business and risk decisions, ensuring that lending contracts, investment agreements and other contractual arrangements meet ESG criteria which are regularly reviewed to ensure they reflect current legal requirements and appropriate best practice

Back to Climate change, environment and resources

Our work

With ongoing advisory mandates across all types of generation as well as in the supply, transport, water, distribution, district heating, and social infrastructure sectors, and extensive experience in both environmental laws and corporate governance and international risks, we are uniquely placed to assist clients in understanding and navigating ESG and sustainability-related risks and opportunities.

a number of residential and commercial multi-utility infrastructure partnerships with cutting edge district heating and smart meter schemes
establishing UK challenger energy supplier which focusses on and promotes green energy
the purchase and subsequent sale of a major UK decentralised energy generator

the acquisition of two combined heat and power plants as well as the majority stake in the Immingham CHP plant, one of the largest in Europe
the development and subsequent sale of over 100MW of domestic and commercial solar energy projects
commercial arrangements between a green-tech company that uses cryogenics to generate a highly-sustainable liquefied natural gas (bio-LNG) from organic waste, and a biogas facility, in respect of the delivery and maintenance of a bio-LNG production unit

Back to Climate change, environment and resources