Regulatory lawyer Bill Dunkerley, at Pannone Corporate, looks at the practical steps that businesses can take to future-proof themselves against this growing area of compliance.
The Environment Act 2021 is a massively wide-ranging piece of legislation which touches upon numerous issues, including air quality, biodiversity and waste.
There has also been a significant increase in public awareness around sustainability, the pursuit of Net Zero and – almost overnight – growth in climate change litigation.
How is this all likely to evolve over the coming months and years?
The circular economy will accelerate
Historically, many non-consumable goods have been promoted (and purchased) with a take-make-use mentality, meaning items are discarded once their perceived use is exhausted.
However, the more recent trend – which the Environment Act is eager to encourage – is the move towards a circular economy in which items are recycled, reused and/or re-purposed.
Whilst many of the relevant sections of the Act relating to this issue are yet to come into effect, there has already been a noticeable change in high street behaviour, with many retailers promoting ‘dress for hire’ schemes, for example.
Greenwashing claims will expand to all sectors
Although not specifically mentioned in the Act, sustainability and climate change litigation is a growing risk for all businesses.
It’s not restricted to one specific cause of action but includes all proceedings which challenge an organisation’s environmental credentials, together with marketing statements alleged to have greenwashed or over-stated environmental performance.
Initially such claims proceeded against governments and businesses in the fossil fuel sector but have recently expanded to include food producers and the fashion industry.
The construction industry is one sector not currently under the spotlight, and we predict that 2023 will see not only a general increase in climate change litigation, but also challenges to construction operators over their environmental performance and use of sustainable building products.
All sectors are vulnerable to such claims and businesses need to be aware of their own environmental impact to enable them to mitigate any potential actions against them.
Environmental class actions will increase
To date, much of the climate change litigation has been brought by activist groups. However, we anticipate that as consumers become more attuned to the environmental impact of their actions and purchases, they will also seek to challenge and question the veracity of corporate environmental assurances.
For example, the UK’s Competition and Markets Authority has previously launched two separate investigations into the fashion and FMCG sectors, principally to assess the veracity of claims and labels related to sustainability. The results are awaited, but legal mechanisms already exist for class actions against businesses where consumers consider they have been mis-sold, or where a business has misrepresented its environmental performance.
Increasing importance and prevalence of ESG scores
Environmental, social and governance scores have existed for many years, although historically they have been used by financial institutions to benchmark their performance against competitors and to assess the likelihood of default by a business.
We predict that 2023 will see a rapid increase in their prevalence and importance across multiple sectors. For example, the European Parliament voted at the end of 2022 to pass the Corporate Sustainability Reporting Directive, which serves to make ESG scores part of companies’ annual reporting processes. The Directive also requires a far greater volume of data to be actively obtained as part of that process, including a specific focus on sustainability initiatives and audits.
This is a seismic development for EU-based businesses, as it effectively places their sustainability and environmental credentials on an equal footing with their annual financial reporting procedures. It’s inevitable that ESG scores will increase in importance during M&A deals, and likely be a key influencer in investment decisions: consumers will require clear and unambiguous confirmation that their investments have verifiable ‘green’ credentials.
It is likely that similar methods of audit will increasingly be used across sectors to score an organisation’s compliance, for example during tender processes whilst it may be some time away, we anticipate that environmental scores will eventually be attached to businesses in the same way that efficiency ratings attach to white goods.
We have already seen the initial shoots of this development in the UK with the previously proposed Food Labelling (Environmental Sustainability) Bill.
Carbon accountability systems
Several aviation companies already provide details of the carbon impact of individual flights, and we predict that 2023 will see this concept spread across industries, including retail, hospitality and construction.
Carbon scores will become increasingly omnipresent and a key driver of consumer behaviour. It may be that carbon limits are placed on businesses, and potentially individuals, as further drivers of change. Similar initiatives have already been introduced by banks offering card accounts with an in-built carbon tracker. These developments may in time dovetail with ongoing consultations regarding the programming of digital currency.
Escalation of the war on plastic
The Government has stated its desire to eliminate avoidable waste by 2042. This will not be achieved overnight, but measures are already well underway with the successful introduction of the plastic carrier bag charge in 2015, and confirmation that single use plastic cutlery will be banned from this October. Other single-use products will undoubtedly be added to the prohibited list in due course, with single-use drinks containers, wet wipes and plastic packaging likely to be high on the agenda.
The new Plastic Packaging Tax and the Extended Producer Responsibility regulations impose waste management cost obligations on businesses for their packaging. While the aim is to incentivise durability, repairability and recycling, and move away from disposal as the default option at a product’s end of life, the additional costs will almost certainly be passed on through the supply chain.
Businesses need to start considering now whether any of their produced items can be redesigned using environmentally friendly components, or re-packaged in a way that supports environmental targets.
Deposit Return Schemes (DRS)
While the UK has never had a wide-ranging DRS, there are clear environmental benefits. The Environment Act makes provision for such schemes, with Scotland due to introduce its own DRS in March 2024, including a premium on single use drinks bottles which will be refunded on return.
The Government has expressed support for a similar scheme in England, however, this looks uncertain following a damning National Audit Office report.
However laudable the aims, the logistics (not to mention the environmental impact of collection and processing of returned items) are likely to be immense. Items need to be transported to recycling facilities, questions remain over storage prior to return, as well as implications for online retailers. In addition, such schemes must be consistent across the UK or risk arbitrary division.
We predict further discussions around the scope of DRS over the next few years and anticipate it will be expanded to include clothing and other items hired for temporary use, playing a major role in the move away from private ownership towards item reusability between individuals.
How can businesses prepare?
Environmental concerns are nothing new for business, but in the future, environmental objectives will be promoted onto an equal, and in some cases elevated, position compared with other usual business concerns.
The direction of travel is clear so organisations may want to review their overall environmental impact and investigate what more could potentially be done. It would be a good idea to look at this task now, before being compelled to do so, to secure the best positioning to meet expected growth in this area. For example, current priorities focus on sustainability claims and non-recycled plastics usage, so organisations may want to address these two issues and consider alternatives to plastics.
Businesses will want to showcase their environmental credentials, avoid falling foul of class actions or CMA investigations into sustainability claims, or demonstrate that their products are in some way ‘better’ for the environment than their competitors. To do this, they need access to clear data which supports their environmental impact and position. They also need to understand how their procedures and measures correlate with, and help promote, the key aims of the Environment Act and Net Zero targets.
These requirements will not happen overnight and could require cultural change within businesses. Changes need to flow from the top and can’t be treated as a tick-box exercise. The emphasis on sustainability requires a new mindset and shift in focus, where the aims of a circular economy are prioritised and actively promoted.