Environmental Law News Update
June 11, 2018
In this latest Environmental Law News Update, Charles Morgan, Laura Phillips and Mark Davies consider new priorities identified by the Environment Agency, a promise by Thames Water to pay £120m to customers for inadequate management of leakages, and recommendations from the Environmental Audit Committee for Mandatory Climate Risk Reporting by 2022.
Environment Agency Identifies its New Priorities
To its statutory purpose (s.1, EA 1995), functions (s.2, EA 1995), aims and objectives (s.4, EA 1995), duties (various, EA 1995) and powers (various, EA 1995), the Environment Agency has now added a (non-statutory) updated statement of its ambition, vision (“to create a better place for people and wildlife”), principles (“put people and wildlife first”, “focus on the 20% that makes 80% of the difference” and “support local priorities”) and culture. These are set out in its recent publication “Creating a better place: Our ambition to 2020”.
The publication expresses its support for the Government’s recent 25 Year Environment Plan, launched in January 2018. There is a strong and welcome emphasis upon the Environment Agency’s sense of local involvement and a statement of planned improvements in areas including targets for 2018/19 for water quality, control of pollution, flood and coastal defence and creation of new habitats. The consequences of climate change are high on the agenda.
Whilst none of it is written in terms that are likely to provide material for legal practice, the short publication makes interesting reading. It is to be found here
Thames Water to pay £120m to customers for inadequate management of leakages following Ofwat investigation
Thames Water has agreed to pay a total of £120m to customers over the next two years (£65m plus £55m in early payment of automatic penalties incurred from missing its commitment to cut leaks) as a result of Ofwat’s findings that it has breached its legal obligations in relation to its management of leakage reduction. It has also committed to improvement measures to meet the performance commitments set by Ofwat for the remainder of the 2015-20 period.
In light of the agreement Ofwat proposes to impose a nominal penalty (under section 22A (1) (a) of the Water Industry Act 1991 (“WIA”)) of £1 in respect of the breaches.
Ofwat is the economic regulator of the water sector in England and Wales. It has powers and duties under the WIA to regulate performance (including setting performance commitments) and to investigate and enforce against water companies and water supply licensees.
Ofwat’s investigation determined that Thames Water had breached its duties under section 37 of the WIA (the duty to maintain an efficient and economical system of water supply within its area) and the condition of its water license requiring it to have adequate management resources and systems of planning and control in relation to its management of leakage. It found that the breaches, which resulted in the company’s failure to meet its commitment to reduce leakage in 2016-17, which were “largely due to how Thames Water designed and implemented its contractual arrangements for reducing leakage” were negligent, rather than deliberate and that Thames Water had “insufficient oversight and control” of its leakage performance.
The details of the investigation and findings are here in the notice of the proposed penalty.
The Environmental Audit Committee Recommends Mandatory Climate Risk Reporting by 2022
On 4 June 2018 the House of Commons Environmental Audit Committee published its Seventh Report of Session 2017-19, ‘Greening Finance: embedding sustainability in financial decision making’. The report will be of interest to businesses, their investors, including pension funds, and regulators alike.
The report notes that ‘Sectors and companies that do not make a timely low-carbon transition may face costly regulatory or legal action as the world implements the Paris Agreement’, but that currently, ‘many financial institutions, businesses and regulators continue to ignore the financial risks and opportunities associate with climate change and other sustainability issues’.
What the report proposes as a measure to solve the reluctance of the UK investment chain to engage with the impact that climate change and other environmental problems pose to our economy is to make climate reporting (on both risk and opportunity) mandatory on a ‘comply or explain’ basis by 2022.
The basis for the mandatory reporting requirement is, it is argued, already to be found in section 172 of the Companies Act 2006, which requires disclosure by companies of climate change risks where they are financially material under section 414C (insofar as their strategic reports must contain ‘a description of the principal risks and uncertainties facing the company’).
What the report goes on to propose is that Government guidance should be issued to make the obligation under section 172 more apparent in relation to climate change risk reporting, whilst also amending the Financial Reporting Council’s ‘Corporate Governance Code’ and ‘UK Stewardship Code’ and the Financial Conduct Authority’s listing rules to highlight the same.
The UK are sadly behind the times in this area with France having already implemented mandatory climate change related reporting by way of its much-heralded Article 173, which came into force in January of 2016. Article 173 includes a requirement to report on how environmental, social and governance (ESG) factors are incorporated into investment policies; whilst this is not yet a mandatory requirement for investors in the UK, the advent of the Non-Financial Reporting Directive means that investors would be wise to consider their position regarding ESG, and the need to report on it.
The full report can be downloaded here.
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