Legal briefing | 28 Jun 2024 |

Travers Smith's Sustainability Insights: UK sustainability policies of the future

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A regular briefing for the alternative asset management industry.

It remains hard to predict what the results in the recent European Parliamentary elections will mean for sustainability initiatives in the EU, but the lurch to the right won’t help an incoming European Commission to continue to blaze the trail on environmental and social issues. A pause in new sustainability regulation already seemed inevitable, even before the results were in, but only time will tell whether there will be a rollback in certain areas. It's important to remember that – despite their significant and well-publicised gains – so called populist and hard right politicians still only control a minority of the seats in the European Parliament, and changes to existing EU rules are not quick and easy.

Meanwhile, the UK may be about to buck an international trend. On 4 July, Britain will elect a new government, and the opinion polls look very bad for the ruling Conservative Party. A victory for Labour seems highly likely. While much of Europe appears to be moving to the right – possibly including France this weekend – the UK is shifting to the left.

So, assuming there is a change of government next week, can the UK expect a change of direction on sustainability initiatives?

The short answer is no – the two major parties largely agree on the UK's sustainability strategy, at least if one goes by their public statements in recent years. However, what might change is the urgency with which key initiatives are pursued.

Many firms and industry associations have been frustrated by the current UK government's stop-start approach to some key sustainability measures in recent years. For example, a letter to the Prime Minister in August last year – written by the UK Sustainable Investment and Finance Association, and signed by 36 financial institutions – expressed concerns at the government’s "recent public statements and policy signals, which risk undermining the UK’s leadership in the clarity, certainty, and confidence of policymaking toward meeting the UK's commitment to net zero".

To be fair, a lot has been achieved in the UK in recent years. In June 2019, the government legislated for a 2050 net zero emissions target. In 2021, it set two additional interim targets to decarbonise the power system and reduce emissions by 78% by 2035. Although many other countries have set net zero targets, they are not all legally binding – and a 2021 net zero strategy set out some important policy initiatives to deliver on the UK's ambition. Other environmental initiatives also hold promise – for example, the requirement for certain new developments to demonstrate net biodiversity gains is genuinely radical.

But – possibly because of a mini-backlash in some quarters of the electorate – other concrete measures have been slower to emerge, including some that were first announced several years ago. The UK's SDR and labelling regime for the financial sector – Britain's answer to the EU's SFDR – will come into force in stages, but is several years later than its EU counterpart. Perhaps the UK has used that time wisely, to devise a regime that will stand the test of time better than SFDR – which is already under review.

There are less convincing excuses for the slow progress of the UK version of the EU's Taxonomy – to which the UK first committed before it left the EU, but on which progress has been glacial. An expert group appointed by the government to help develop the Taxonomy issued a "closing statement" in October 2023, looking forward to a consultation on the Taxonomy in Autumn 2023 – but, in June 2024, we are still waiting. In February this year, the UK Parliament's Environmental Audit Committee complained about the government's "continued dither and delay" on this and other initiatives, listing a number of missed deadlines.

So, if Labour is elected next week, what will change?

The Labour Party's manifesto commitments are relatively light on environmental matters, although the manifesto does reiterate two important initiatives that are already part of UK government policy. An incoming Labour government would mandate UK-regulated financial institutions – including banks, asset managers, pension funds, and insurers – and FTSE 100 companies to develop and implement credible transition plans that align with the Paris Agreement. It would also introduce a UK carbon border adjustment mechanism (CBAM), which would no doubt resemble the EU's recently introduced scheme and build on the outcome of a government consultation that concluded last year.

        
    
"… the Labour party's ambition in these and other areas will be tempered by its laser-like focus on growth and competitiveness as a pathway to funding future public service improvements and, of course, by the lack of public funds available for subsidies and tax breaks."

In other respects, the Labour agenda is also aligned with existing policy. In January, the Labour Party set out its ambition for the UK to become a global hub for green financial activity, expressing support for the green taxonomy, with a commitment to inject new urgency into this initiative and to mandate reporting, and a commitment to integrate ISSB sustainability reporting standards into UK law. Industry associations have in fact welcomed the Labour party's intention to push forward the current green finance strategy with more urgency, rather than to re-write it – and that greater urgency would be welcome.

Other public statements do suggest that a future Labour government might go a little further, but even here they are in step with policy proposals previously announced by the Conservatives. For instance, Labour has been in favour of due diligence obligations, backed by fines, for companies trading in goods that contribute to de-forestation – such as palm oil, soy and beef – similar to the EU's Deforestation Regulation. The current government introduced similar measures in 2021, but has not progressed them.

A review of the UK's Modern Slavery Act could lead to more substantive obligations to investigate and prevent adverse human rights impacts, perhaps building on the 2019 government review of the 2015 Act, which was followed by a draft law that never made it to the statute book. Company law reform could also be on the cards, with changes to directors' duties that reflect the objectives of the campaign for a Better Business Act.

Other potentially helpful plans include an overhaul of the planning system to make it easier to get permission for green energy installations, a new National Wealth Fund that will invest in renewables and crowd-in private sector capital, and a plan to re-instate the 2030 phase out of new combustion engine cars. A new publicly owned company, Great British Energy – to be headquartered in Scotland – could also generate further investment in renewables, although details are so far rather scant.

The Labour party's ambition in these and other areas will be tempered by its laser-like focus on growth and competitiveness as a pathway to funding future public service improvements and, of course, by the lack of public funds available for subsidies and tax breaks. Labour has already had to row back on a pledge to invest £28 billion a year on green projects, although it remains committed to some of the initiatives. In reality, pressure on the public purse will mean that the current government's reliance on market-based solutions will continue.

All of which means that the business lobby is likely to remain an influential voice as the UK's green strategy evolves, and the alternative asset management industry – which the BVCA has argued is a "partner for growth" – will have a key role to play in working with any incoming government.