Environmental Law News Update

In this latest Environmental Law News Update, Stephen Hockman QC, Christopher Badger and Ana Kantzelis consider a rebuke for the UK’s lack of progress towards improving air quality in the European Commission’s most recent Environmental Implementation Review, a report from the Bank of England on the financial risks of climate change and coverage of a recent meeting of UNCITRAL WG III Investor-State Dispute Settlement Reform.

UK rebuked for lacking improvement in air quality

On 5th April, the European Commission published its ‘EU Environmental Implementation Review 2019’ in respect of all Member States, including the UK. The report is structured first by considering thematic areas including ‘Turning the EU into a circular, resource-efficient, green and competitive low-carbon economy’, ‘Protecting, conserving and enhancing natural capital’ and ‘Ensuring citizens’ health and quality of life’ before moving on to looking at implementation tools including taxation and governance.

Back in 2017 the main challenges for the UK had been identified as a need to improve air quality in urban areas, to tackle water quality (in particular water pollution caused by nitrate from agricultural use) and to improve nature protection. In the most recent review, the European Commission has reported on progress:

• On air quality in urban zones there has been no change to the compliance situation with regard to the high number of zones with exceedences above the EU air quality standards for nitrogen dioxide, albeit that in 36 out of 37 non-compliant zones, the latest data shows that there has been some improvement. Air quality in the UK continues to give cause for severe concern and it is noted that persistent breaches of air quality standards have severe negative effects on health and the environment.
• On water quality, diffuse pollution, notably from nitrates, remains an issue in parts of the UK.
• There has been some improvements in nature protection, notably on the protection of the harbour porpoise, but the protection of offshore birds is still a challenge and there is no overall protection strategy for dispersed species to date.

Other interesting aspects of the review include:

• The UK has gone from 5th to 11th on the EU’s ‘Eco-innovation Scoreboard’. The main drivers are the growing market demand for eco-industry and clean-tech sector products, building and construction sector and investment in renewable energy. However, the main barriers are the cost of virgin versus secondary materials, difficulty in accessing financing and capital investment and the fact that mainstream accounting procedures do not favour circular business models.
• Recycling accounts for 44% of municipal waste. The UK has been stuck at this level for the past few years and further efforts are needed to hit the 50% target for 2020 and subsequent post-2020 targets. Landfill tax is one of the highest in Europe. The plastic bag charge is estimated to have taken 15.6 billion plastic bags out of circulation.
• Road transport is responsible for over 35% of NOx emissions.
• The ecological status/potential was less than good in two thirds of surface water bodies, demonstrating that the UK still has a long way to go to meet the objectives set down in the Water Framework Directive.
• Environmental taxes account for 2.39% of GDP in 2017. There is a potential for shifting taxes from labour taxes to consumption taxes for the benefit of the environment.
• The UK spent EUR 17.6 billion on environmental protection in 2016, a decrease of 13% from 2015. 77.8% of these payments were allocated to waste management activities. The review identifies that there are existing environmental financing gaps, in particular in the area of water quality, which is delaying the correct implementation of EU environmental law and policies.

The full report can be found here

Bank of England warns on financial risks of climate change

In an open letter published on 17 April, the Bank of England has warned of the potentially catastrophic financial risks caused by climate change. As part of the Network for Greening the Financial System (‘NGFS’) the BoE has contributed to a report designed to translate commitments to act on climate-related financial risks into concrete action through four specific recommendations.

First, to integrate the monitoring of climate-related financial risks into day-to-day supervisory work, financial stability monitoring and board risk management. Supervisors are encouraged to set expectations to ensure financial firms are adequately addressing the financial risks from climate change, including by conducting scenario analysis to assess their strategic resilience to climate change policy. Firms are encouraged to take a long-term, strategic approach to the consideration of these risks, and to embed them into their business-as-usual governance and risk-management frameworks.

Second, lead by example, specifically central banks are encouraged to integrate sustainability into their own portfolio management.

Third, collaborate to bridge the data gaps to enhance the assessment of climate-related risks. Public authorities should share and if possible make publicly available any climate-risk data.

Fourth, build in-house capacity and share knowledge with other stakeholders on management of climate-related financial risks. An important element to achieving consideration of climate risks across the financial system is to support internal and external collaboration.

The full report can be found here

One factor that is highlighted in the report is the need for additional guidance on the materiality assessment in order to help firms comprehensively capture the climate-related risk factors to be considered and disclosed. The members of the NGFS collectively pledged their support for the recommendations of the Task Force on Climate-related Financial Disclosures and encouraged all companies issuing public debt or equity as well as financial sector institutions to disclose in line with those recommendations. Given the almost universal support for the work of the TCFD, why is there as yet still no internationally consistent environmental disclosure framework?

Recent meeting of UNCITRAL WG III Investor-State Dispute Settlement Reform

Following our piece on environmental considerations in IIAs in last week’s blog, this week we cover a recent meeting of the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform, held in New York on 1-5 April.

One of the most common dispute resolution mechanisms for IIAs is ad hoc arbitration under the rules of the United Nations Commission on International Trade Law (UNCITRAL). UNCITRAL is the core legal body of the UN system in the field of international trade law, with a mandate to “further the progressive harmonization and unification of the law of international trade.”

You can read the report here. WG III is comprised of 60 voting member states, 103 non-voting states, 2 state entities, 6 inter-governmental organisations and 55 non-governmental organisations, and is currently entrusted with a broad mandate to work on possible reforms to the Investor-State Dispute Settlement (ISDS) system.

In recent years, a growing number of countries and civil society groups have been frustrated with the current ISDS system, and have voiced their concerns in these ongoing ISDS reform discussions.

One the main agenda items at the New York session was third-party funding, which refers to cases where financial support is provided to the claimant investor from a third party, typically a litigation fund. Third-party funding is an increasingly common feature of international arbitration, however, concerns have been expressed, particularly by some developing countries, about a lack of regulation and transparency, and the potential that it has the potential to drive costly and speculative claims. WG III has begun to canvass possible ways to address these concerns, such as required disclosures and rules on third-party funding. It was concluded that it would be desirable for reforms to be developed by UNCITRAL relating to the definition of, and use or regulation of, third-party funding in ISDS.

Delegates also discussed “other concerns not already covered by the broad categories of desirable reforms already identified,” as agreed at the November negotiating session. Topics included in this category included: consideration of means other than arbitration to resolve investment disputes; dispute prevention methods; the requirement to exhaust local remedies before bringing claims; third-party participation; counterclaims; calculation of damages; and the phenomenon of “regulatory chill”. It is interesting, and perhaps a missed opportunity, that some particularly controversial items which have previously been raised by a significant number of observers and countries as concerns have been included in this catch-all “other concerns” category. For instance, it was agreed that the link between ISDS and regulatory chill would not be discussed at this stage as a separate concern of the Working Group.

Delegates also discussed proposals for developing a work plan for upcoming deliberations on phase three of the WG III mandate. A particularly interesting institutional reform option outlined was the European Union’s proposal for a multilateral investment court (MIC). The European Commission submitted this proposal to the UNCITRAL process in January, accompanied by a separate submission for a work plan leading up to an MIC.

The next meeting of WG III will be in Vienna between 14-18 October 2019.

We published April’s Environmental Law Podcast recently – a monthly round-up of the latest developments in environmental law.

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