Our quarterly UK policy briefing aims to highlight the latest developments in UK climate policy relevant to NEDs. The period since our last briefing has seen a number of key events on the international climate policy stage, with the UN Climate Conference, COP28, held in December 2023, and both the World Economic Forum Annual Meeting and the 60th session of the Intergovernmental Panel on Climate Change (IPCC-60) held in January 2024. These discussions have put a spotlight on the UK’s domestic climate policies and also raised questions about its ongoing commitment to climate leadership.
Against this backdrop, there have been a number of policy developments within the UK that NEDs need to be aware of. These are outlined below.
Key takeaways for non-executive directors (NEDs)
Key developments in the UK policy landscape that NEDs need to know about
- With the largest number of participants in its history, leaders from over 200 nations met at COP28 to conclude the Global Stocktake and commit to a ‘transition away’ from fossil fuels and a tripling of renewable energy capacity by 2030 - giving businesses a clear signal to consider incorporating renewable energy into business operations, and determine how they may be supported through regulation and financing to do so.
- In the run-up to COP, UK businesses took the lead in pressing for action. In September, a coalition of 11 UK professional organisations, including the London Institute of Banking & Finance, sent an open letter to Prime Minister Rishi Sunak, emphasising that the world is far from meeting Sustainable Development Goals (SDGs).
- In November, Business Declares submitted a letter to the Prime Minister from over 2,000 business leaders to boost climate action at COP28. The letter urged greater investment and incentives in clean energy, aiming to half further decline by 2030
- Similar action from seven UK supermarkets working with WWF, followed in December, calling on the Prime Minister to introduce deforestation legislation, as was committed to in the 2021 Environment Act.
- On ‘Built Environment Day’ at COP28, the UK Green Building Council released a Progress Report claiming the built environment must decarbonise nearly twice as fast by 2025 in order to meet the UK’s net zero targets. Highlighting major policy gaps, the report called upon the built environment industry to take stock of what is needed to ensure that these emissions reduction targets are put back on track.
- These efforts from across the business community are examples of the increasing pressure being placed on the UK Government to reassess its recent green measure rollbacks and restore the UK’s position as a leader in climate action.
- The Climate Change Committee has released a report on the key outcomes and next steps for the UK coming out of COP28. It notes that achieving the 68% greenhouse gas (GHG) emissions reduction target by 2030 (part of the UK’s Nationally Determined Contribution under the Paris Agreement), will require the rate of emissions reduction outside of the electricity sector to quadruple from that of recent years. It also states that: “Addressing these gaps in a transparent way remains one of the most important ways for the UK to show climate leadership.”
- You can read the Climate Governance Initiative’s roundup of key outcomes from COP28 for board directors here.
- A week before COP28, Jeremy Hunt delivered his Autumn statement, outlining plans to speed up expansion of the electricity transmission network and almost £1 billion in funding for clean energy manufacturing.
- However, the business community has voiced concerns about the proposed level of investment. According to KPMG: “If this is the long-awaited response to the Inflation Reduction Act, and other support packages such as the EU’s Green Deal Industrial Plan, then fiscally it falls short of the $379bn on offer in the US. Time will tell if this is enough to convince investors that the UK is still a good place to invest. We are in a global race for green investment so we cannot be complacent and rely on past progress to entice global investors to the UK.”
- As part of the £960 million Green Industries Growth Accelerator, more than £200 million in government funding was announced specifically to support colleges and universities in offering more training opportunities in key industries, with a focus on green skills.
- Investment is expected to address skills specific to regions of the UK, in line with those identified in Local Skills Improvement Plans (LSIPs). As part of these plans, employers are encouraged to share what resources they need in order to access skills currently identified as lacking.
- Growing investment in green upskilling sits alongside initiatives such as the UK Battery Strategy, released in November 2023, setting out a 2030 vision for the UK to have a globally competitive battery supply chain that supports the net zero transition. There is also the Contracts for Difference (CfD) Sustainable Industry Reward scheme that would provide greater revenue to companies pursuing offshore renewable energy projects which have a broader sustainability impact, including upskilling.
- In December 2023, the UK Government announced that it will implement a UK Carbon Border Adjustment Mechanism (CBAM) by 2027. The CBAM will place a carbon tariff on a number of the most emissions-intensive industrial goods imported to the UK.
- According to the UK CBAM Factsheet, CBAM liability will lie directly with the importer of goods, in an effort to address “carbon leakage risk to support decarbonisation” from a customs-oriented perspective. The liability will be calculated based on the GHG emissions intensity of the imported goods and the gap (if any) between the carbon price applied in the country of origin and the carbon price that would have been applied if the good had been produced in the UK. It is reported that the aim is for “comparative coverage” with the UK Emissions Trading Scheme (UK ETS).
- Further details on the delivery of the UK CBAM are subject to consultation in 2024, so it will be important for NEDs to continue to monitor developments in legislation. There are significant opportunities for businesses that are currently making preparations for the implementation of EU CBAM—alongside other corresponding sustainability reporting measures—to harmonise data collection and reporting processes.
- It was reported in November that the UK Government is expected to release formal proposals for regulating the ESG ratings industry early this year, following three months of consultation in 2023. This move follows the European Commission’s proposal for new rules for ESG rating providers which was announced in June 2023.
- Regulation is proposed as a method for addressing potential conflicts of interest and inequities within the ESG ratings industry, as there are concerns that “companies can influence ratings by spending more on consultants and other services that can help scores.” Regulatory intervention could establish greater consistency and reliability in ESG data services, which would have welcome benefits across the business community, and on ESG efforts more widely.
- These proposals accompany the Financial Conduct Authority (FCA)’s confirmation of a new package of Sustainable Disclosure Requirements in November 2023. As part of this package, the FCA will introduce: an anti-greenwashing rule, product labels based on clear sustainability criteria, and naming and marketing requirements to minimise misrepresentation of the sustainability impact of products. These measures are led by an ambition to improve trust in the UK’s sustainable investment market. Investment companies (and their NEDs) in particular will need to review and consider their courses of action.
- Following the consultation on its proposed updates to the UK Corporate Governance Code, which ran from May-September 2023, the FRC announced in November 2023 that it would take forward only a small number of the 18 proposals set out in the consultation.
- The FRC explains that “the UK approach clearly differentiates from the much more intrusive approach adopted in the US,” although there is concern this is used as justification for the UK Government to no longer deliver on its promise of comprehensive corporate governance reform.
- The 2024 UK Corporate Governance Code was released on 22 January 2024. A reference document outlining the main changes made to the Code is available here. Some of the key changes (which come into effect from 1 January 2025) include:
- A new requirement for governance reporting to “focus on board decisions and their outcomes in the context of the company’s strategy and objectives. Where the board reports on departures from the Code’s provisions, it should provide a clear explanation.”
- Provision 29 has been amended to require board declarations on the effectiveness of all material internal controls, including financial, operational, compliance, and reporting controls, as well as the company’s risk management framework. A summary of how the framework has been monitored, the effectiveness of material controls and any ineffective controls, is expected to be included in a board’s annual report.
- A number of provisions relating to Audit Committees have been removed, as these now sit within the Audit Committees and the External Audit: Minimum Standard.
- In November 2023, the Transition Planning Taskforce (TPT) launched its consultation on sector-specific guidance documents for preparers and users of climate transition plans, in an effort to provide additional guidance on interpreting the disclosure framework. The draft versions of the guides are available here.
- The consultation closed in December 2023, and feedback will be integrated into the final versions of TPT Sector Deep Dives for seven specific sectors: Asset Managers, Asset Owners, Banks, Electric Utilities & Power Generators, Food & Beverage, Metals & Mining, and Oil & Gas.
- In his speech to Parliament on the occasion of the State Opening of Parliament in November, King Charles announced legislation mandating annual North Sea oil and gas licensing as part of the Offshore Petroleum Licensing Bill. This bill passed its second reading on 22 January 2024. If the bill goes on to become law, licensing rounds will go ahead each year, “so long as the UK remains a net importer of oil and gas and if emissions from UK-based production remain lower than those associated with imports.”
- NEDs should be aware that there has been significant opposition to the bill from both climate scientists and campaigners. Organisations including Green Alliance believe the Government “missed a vital opportunity to set out a positive agenda” for delivering a greener future in the speech, in the leadup to COP28.
- This follows the Climate Change Committee (CCC)’s October 2023 response to UK climate policy rollbacks announced in September, in which it expressed concerns about the pace of change required to meet the UK’s climate goals, particularly in terms of phasing out fossil fuels.
- As of December 2023, the Government is undergoing a Transition Finance Market Review, which was a commitment announced in the 2023 Green Finance Strategy. The review intends to look at how higher emitting UK companies may be better supported in accessing the capital needed to decarbonise and deliver net zero ambitions, in particular looking at the role of sustainability-linked debt and transition bonds in scaling up transition financing. Results of the review are expected by July 2024.
- In its January 2024 policy paper, the Grantham Research Institute on Climate Change and the Environment calls for an increase in annual public investment by the equivalent of at least 1% GDP (£26 billion) in key sectors such as energy, transport and housing, in order to fix the UK’s productivity growth problem and achieve transition goals.
- November 2023 research by Phoenix Group reports that the UK pension industry alone could invest up to £1.2 trillion in climate solutions by 2035, which represents half of the total capital investment required to achieve net zero—invoking a real call to action for the industry to act upon this potential and develop new business models to unlock transition finance at scale.
- The duties under the Environmental Principles Policy Statement (EPPS), which was announced by the Department for Food and Rural Affairs (Defra) in January 2023, are now legally obligated as of 1 November 2023. Under the EPPS, government ministers and officials now have a legal duty to be guided by EPPS and its five environmental principles when making policy. These principles are those set out in the Environment Act 2021: the integration principle; the prevention principle; the precautionary principle; the rectification at source principle; and the polluter pays principle.
- Having been in development for some time, the business community has long welcomed the implementation of EPPS, with the Executive Director of the Aldersgate Group explaining: “If implemented consistently and ambitiously, this change will provide businesses with a stable and coherent policy environment that enables them to invest to prevent environmental harm and deliver much-needed environmental improvements.”
- The Office for Environmental Protection is responsible for monitoring EPPS’s implementation across government and is expected to report to Parliament in Autumn 2024 on progress made.
- In its December review of the UK Government Resilience Framework, the Government announced that it will conduct its first annual survey of public perceptions of risk, resilience and preparedness.
- The survey looks to inform the Government’s approach to engaging publicly on risk, with results expected to be available in 2024.
- Alongside informing legislation, these results may be of use to businesses looking to better position themselves in line with public perceptions of climate risk in the UK.
- In January, the London Climate Resilience Review, commissioned by the Mayor of London, published its interim report. Findings confirm that London and the UK are “underprepared” for major climate impacts, including severe flooding, extreme heat and wildfires, with a “lethal risk” to the most vulnerable communities. The report recommends that the Mayor should lead collaborative work with local authorities and the private sector to set out a clear strategic vision for climate adaptation in London by 2030.
UK 2024 Election-watch
The Labour Party’s Green Investment Plan
- In our last issue, we looked at the rollbacks to climate policy made under Rishi Sunak’s Conservative government. This issue we focus on Labour’s Green Investment Plan.
- The Green Investment Plan was announced in 2021. It outlines an ambition to provide £28 billion per year of investment into transitioning to a greener economy, with plans such as insulating homes and building low-carbon infrastructure.
- The spending plan has been attacked by the Conservative party, and subject to revisions since it was launched – including caveats that the level of investment would be ramped up over time, and that any spending would need to meet Labour’s fiscal rules.
- As of Feb 8, it was announced that Labour was ditching the £28bn spending commitment, although the party insists that the Green Prosperity Plan, which includes creating a publicly-owned green power company, is not being ditched altogether.
- Business leaders have been among those urging the Labour leader to stick by the policy, with Jürgen Maier, the former UK head of Siemens, stating that: “The £28bn is not a cost, it’s an investment. If you make this investment, business will return to the UK.”
- The questions this raises for NEDs in the run-up to the election are strategic ones. In addition to considering how political uncertainty will be reflected in corporate risk management activities, NEDs might want to consider how the business community can positively engage with policymakers to encourage them to stand by, or enhance, progressive environmental policy.
Looking ahead
- We will continue to monitor UK party policy positions as the general election gets closer.
- We hope to report on the Government’s finalised Green Taxonomy, expected to be released early in 2024. The taxonomy will provide clarity on activities eligible for labelling as ‘green’ or ‘transition’ finance.
- We will report on the Chancellor’s Spring Budget and what it means for the UK’s green economy.
