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Environment 2017: Trends & Conclusions

Interviewees reported that their practices are busy as environmental issues ascend the list of priorities for businesses, investors and regulators alike. Traditional areas such as water, waste and land contamination are a considerable source of work around the world, although many practitioners in the US and Europe have reported a shift towards consumer safety and product-related matters taking up a larger proportion of their practice. Clients are now approaching due diligence with a greater emphasis on risk management, rather than the traditional focus on asset-based liabilities, and there is a much greater engagement with risk at the board and investor level.

Due diligence, compliance and corporate reporting

Companies report a growing appreciation of the importance of stewardship over environmental issues. Globalisation is “inevitable and of increasing importance” and is a major factor pushing companies towards supply chain due diligence as environmental problems are not isolated, and the globalised marketplace necessitates a more holistic and international approach towards environmental impact by businesses.

This is not without its problems: sources around the world report due diligence work becoming increasingly complex; multinationals are also concerned about the extent of their legal liability as questions are raised over the reasonable scope of their responsibility for subsidiary companies. This has presented opportunities for law firms operating in the space, as they strive to develop new due diligence products to meet client needs and enable them to comply with their environmental obligations. UK sources report that the market is in a stage of disruption caused by firms and consultants, and this provides the opportunity to innovate to address holes in existing offerings.

Transparency requirements and corporate reporting are also increasingly coming to the fore in jurisdictions around the world. US practitioners report more supply chain regulatory activities than they have seen in the past, couched in terms of market access requirements rather than the previous emphasis on corporate responsibility. Meanwhile in South Africa, interviewees state that lawmakers have been busy amending and adding to existing legislation to create more stringent obligations in relation to environmental compliance, which has produced a “robust and enduring body of environmental legislation”. Market commentators observe that the global pace of regulatory intervention is increasing and gathering momentum, illustrating that “environmental, social and governance (ESG) is starting to enter the mainstream”.

Lawyers told us that clients are becoming increasingly proactive in legislative development. For instance, in the US, the Trump administration has withdrawn or reconsidered many environmental regulations, and affected companies are currently participating in challenges and debates concerning the regulatory matters relevant to their businesses. In Brussels, one source notes a new phenomenon in Europe, whereby companies, trade associations and green associations are becoming engaged in discussions during the legislative development phase, rather than just waiting for new legislation to be issued and then simply responding to it.

Regulators are encouraging businesses to pay greater attention to environmental impact issues by adopting an increased focus on self-reporting. This is very prominent in Europe, where German and French governments and businesses are particularly active in this space. The EU has also introduced the non-financial reporting directive, which makes reporting on social and environmental impacts mandatory for large companies. The wording of the provisions is vague, yet they are viewed as a good starting point and platform for improvements in corporate behaviour. Sources report that India and China are also becoming increasingly interested in corporate reporting as the social and environmental impacts of corporate behaviour in the country are highly visible. There are expectations for mandatory reporting on climate change to be introduced in China before long.

Self-reporting strikes the balance between regulatory intervention and government resource constraints. Voluntary reporting standards play a highly significant role in holding corporations to account by offering frameworks for environmental reporting. There are currently numerous reporting guidelines, although lack of a standardised framework. Market sources foresee that over time the market may see greater consolidation, more sector-specific guidelines and reporting moving into the digital realm in order to aid efficient reporting and benchmarking. However, there are also limitations as, in the words of one interviewee, “Reports are only as accurate as the information within them.” The Volkswagen emissions scandal is cited as an example: the company’s sustainability report received accolades yet, despite the report’s technical accuracy, did not disclose the “defeat device” software that cheated emissions tests by altering the engine’s performance. Issues such as this highlight the need for more scrutiny in self-reporting, and greater evidential requirements.

There has been a marked shift to using social and environmental reporting as a means to inform corporate decision-making. One interviewee stated, “The effectiveness of integrated reporting requires integrated thinking, which can only be achieved through institutional buy-in to environmental commitments.” Interviewees have noticed a considerable uptick in clients’ proactivity in this space, which has been influenced by a number of factors. At the forefront of this movement are clients who have embedded sustainability into their company ethos, and it is an integral value underpinning all their business operations. Others are motivated by the desire to be ahead of the curve, in recognition of the fact that consumers are becoming increasingly concerned about ESG issues, which can secure a competitive advantage.

Company reputation is also becoming an increasingly important issue as the market puts pressure on businesses to comply. This is evidenced by the increasing prevalence of ESG matters in marketing materials as a means to drive value. Forward-thinking organisations realise that environmental issues have major economic consequences, as non-compliance with regulations can lead to fines and problems with placing products on the market. There is also a risk of litigation, and NGOs are taking a proactive role in tackling investor behaviour in this way, particularly in the US and Europe. Lawyers cited the fundamental importance of not having a conviction for environmental malpractice from a court or environmental protection agency if companies are to compete successfully in tender processes.

There has been a “huge upswing” in prosecutions for environmental crimes in South Africa. This includes regulatory and compliance matters, and in 2014 the Naphuno Regional Court in Limpopo sentenced the managing director of a clay mining company to five years in prison for causing damage to the environment. In the UK, sources report that the Environment Agency is also showing a keen interest in individual culpability, although there are certainly difficulties to pinpointing criminal liability in large organisations.

Investors are also engaging significantly with companies over environmental issues as fund managers have responded to client demand for ESG and responsible investment. Sources say beneficiaries, asset owners and investment managers are pushing hard in this direction. There has been a surge in ESG adviser appointments within private equity companies. Investors realise that good ESG has a competitive advantage, so many are structuring investment fund portfolios to consider these matters. This illustrates the pivotal role for non-financial information in investment decision-making. Policymakers are also increasingly interested in how investors are using information and sources expect to see investor reporting guidelines in the future. The European Commission has established an expert group on sustainable finance, which sources say illustrate the EU’s clear ambition to identify what it can do to drive investors towards sustainable outcomes.

Europe and Brexit

The UK’s decision to leave the European Union has sparked a substantial degree of uncertainty among businesses. Its impacts are potentially disruptive to business operations and have led to an increasing demand for advice across Europe. Regulatory uncertainty is causing particular difficulty for product manufacturers, as there is a significant time lag, sometimes of several years, between products being designed and produced and the time they reach the consumer market. This means that products may not be compliant should the UK adopt a different standard of obligation. This is a business-critical issue due to the huge cost ramifications for non-compliant products.

Practitioners in the UK do not expect Brexit to “guillotine” EU regulations, although many do foresee a gradual erosion in certain areas over time. Brexit will also present the UK with the practical challenge of applying EU law without access to EU agencies. A large chunk of EU environmental law is expected to transition into UK domestic law, including rules surrounding biodiversity.

In the interim period, lawyers are placing increasing an emphasis on international treaties, particularly international obligations and structures surrounding shipments of waste, pollution and the carriage of goods. This area is expected to remain fairly buoyant as, if EU law is no longer applicable, clients and lawyers will look to the next obligation that applies.

Some interviewees take the view that Brexit poses an opportunity for the UK to “stretch its environmental net more broadly” as Britain’s departure from the EU will open up new markets to the east and in Asia. New trade agreements will be negotiated, which, in the past, have been used to implement new environmental clauses. Sources report concern over the review process surrounding international trade agreements, as they are not currently subject to parliamentary scrutiny before being passed into UK law.

The EU Registration, Evaluation, Authorisation and restriction of Chemicals (REACH) regulation is a source of a great deal of work across Europe and this is expected to continue. European jurisdictions, including Belgium and Spain, are very focused on waste and the circular economy, and practitioners report a lot of movement to keep this on target. Clients are keenly interested in the circular economy and practitioners have seen many waste dealers incorporating it into their operations and have also undertaken a significant amount of advisory work to determine what is classified as waste and how it can be transferred between countries. In the UK, interviewees foresee a gradual relaxation of waste regulations following Brexit, including of the circular economy.

In Europe, the climate change market has been less active over recent years, and suffered particularly after the financial crash of 2008. It is not a large market in the region and it sees a limited number of specialists in this area. Practitioners in Belgium report a decrease in contractual work as industrial clients show less appetite for “exotic” mechanisms of conducting carbon-related projects. There has also been a “slight relaxation” in the market following the EU Commission’s decision to continue free allowances under the EU emissions trading system, which is important for industrial clients.

Lawyers, corporates and NGOs alike are waiting in anticipation for what will follow the Paris Agreement’s entry into force last November. Since COP 21, regulators also report a huge corporate interest in climate, and NGOs cite it as a key moment in time to gain sign-ups to reporting standards as the business movement gains momentum.

USA

Infrastructure projects have been a source of activity for environmental practitioners in the US following an increasing trend towards the construction or rebuilding of existing projects. President Trump plans to spend huge sums on infrastructure development in the country, so this is likely to be a significant area of activity going forward.

Energy generation remains at the “front and centre” of the market as the plummeting cost of solar and wind power generation has led to a rapid increase in construction activity for those facilities. One commentator observed that Trump’s policies may “somewhat dampen the momentum for more renewable energy, but market forces are a much more important factor and those will continue to drive the growth of solar and wind”. The low price of oil and gas has reduced the amount of work in those areas due to a slowdown in major projects, and the coal industry continues to struggle with many of the largest players in bankruptcy.

The attitude of the Trump administration is leading to large volumes of work as clients scramble to understand and adapt to the situation. Interviewees reported that the legal market remains strong as, despite the drop in federal regulatory activity, there is still plenty of work to be done in the area.

US environmental and climate change policy is undergoing a “fundamental change” at the federal level. Practitioners do not expect to see any new federal regulations, and are seeing existing regulations being withdrawn, reconsidered, softened or repealed. Companies impacted by these regulations are participating in the discussion surrounding the challenges they cause and their potential replacements. However, sources “do not expect the administration to be successful in rewriting major pillars of environmental legislation such as the Clean Water Act, as this is unlikely to get through Congress”. What is being seen is the administration trying to de facto scale back these pillars by cutting funding to environmental agencies. As a result, sources have seen reduced activity from the US Environmental Protection Agency and the Environment and Natural Resources Division of the US Department of Justice.

Interviewees note that it may be easier for the regulated community to obtain permits under the current administration; however, as the federal government creates a void in environmental protection, public interested groups are scaling up their activities to address this gap, so corporates are expecting to see more challenges from NGOs, private claims and citizen suits under legislation such as the Clean Water Act.

Withdrawal from the Paris Agreement is another aspect of the administration’s attempt to weaken and repeal climate change law. Interviewees expect multiple lawsuits challenging this, brought by plaintiffs from the environmental community and states that favour regulation.

The locus of climate change regulation is undergoing a fundamental shift as state and local governments take up the initiative in response to the pause in federal activity. States that favour action on climate change have already indicated that they will step up their efforts, this movement being led by California and New York. States relying on coal power and producing high emissions from the power sector tend to be those that oppose regulation, so the weakening of federal regulations is likely to cause a gap here. The federal government is also expected to occupy a less active role in enforcement matters, and commentators voice concern over lack of financial support for state enforcements as funding cuts will put states in a position where they have to “do more with less”.

Legal Marketplace Analysis

Practitioners around the world reported a greater volume of litigation in their jurisdictions. In Belgium, broad areas of environmental law have become more litigious, including soil pollution, noise and nuisance. For example, in contrast to their position five to 10 years ago, Belgian courts have become increasingly willing to grant damages for noise pollution. The Brussels Court of Appeal recently awarded residents living near Liège Airport huge compensatory damages for Wallonia’s failure to restrain the nuisance and to conduct an environmental impact assessment for the airport’s development. Environmental impact assessments are an increasing focus of administrative litigation in Belgium. Finland is an intensive jurisdiction for administrative litigation as almost all permits can be appealed by NGOs, neighbours and stakeholders. It is also quite common in the market for companies to appeal authority permits. South Africa is becoming increasingly litigious in this space, and the US is expecting more citizen suits in light of changes introduced by the Trump administration.

Global firms continue to grow in size. Environmental issues are global and often cross-border and such firms are seeing bigger and more complex mandates. There is also a gradual increase in specialist boutiques in jurisdictions including England and Poland. In the US, sources describe the boutique market as “relatively saturated” and competition remains steady. South Africa also sees a few boutique firms in the environmental space and the majority of large firms have an environmental department. The boutiques are regularly engaged in complex matters, although practitioners also report client demand for a “one-stop shop” approach. This is advantageous for environmental groups in large firms, which can acquire vast volumes of work from clients engaging their firm’s services for other corporate and M&A matters.

Political instability around the world is impacting the legal market. In the US the change of administration is leading to a great deal of advisory work. In DC in particular, practitioners note a large number of firms working in the litigation and regulatory space and expect regulatory changes to be a source of large volumes of dispute work. Meanwhile in South Africa, interviewees report that political difficulties have not significantly impacted their workflows which are “probably as good as they have ever been”. In Europe, practitioners are responding to the uncertainty caused by the UK’s decision to leave the EU. The volume of advisory work in this space is expected to increase as the terms of the UK’s exit become clearer.

Conclusion

Environmental law issues have come to the fore as regulators and businesses become increasingly conscious of their impacts. The growing volume and complexity of regulations, both at the international and domestic level, has produced more work for lawyers as they help clients navigate the regulatory landscape and ensure compliance. The risk of reputational damage and the huge financial consequences for non-compliance have resulted in a more proactive approach to risk management among companies. Practitioners have seen an upswing in the use of environmental reporting to inform corporate decision-making in recognition of the fact that good environmental governance may drive company value, and this is expected to continue in the future under increasing pressure from regulatory authorities and the public.

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