Monday 20/05/2019

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Brexit: what’s the impact with regards to sustainability?

Responsible Investment Strategist

Brexit has made many headlines, both before and after the outcome of 23 June 2016. Although there is still a lot of uncertainty with regard to the consequences and exit arrangements, in particular the deadline, we can already look at the potential impact of environmental, social and governance commitments made by the UK, especially the impact on the climate change agreement reached in Paris in December of last year.

The listed objectives should be considered with regard to the reference year 1990.

The commitment to the UN Climate Conference (COP 21) in Paris was made at the level of the European Union.

In addition to the 2020 objective[1], the EU has defined its objective for 2030. It boils down to a 40% reduction of greenhouse gases, a 27% improvement of energy efficiency and a 27% share of renewable energy in the primary energy supply. This objective has been defined including the United Kingdom, and revolves around two main axes: the reduction of greenhouse gases and the share of renewable energy in the energy supply. Although the United Kingdom is behind on the latter element, it is doing well on the former and its exit from the EU impacts the commitment made for 2030.

Compensation

Indeed, although the UK is no longer part of the aggregated EU statistics, the EU will be obliged either to lower its commitment or to ask the remaining members to put in more efforts by means of compensation. As a matter of fact, according to HSBC calculations, in order to obtain a 40% reduction of greenhouse gases, Member States should contribute to an additional 7.6% reduction. It may seem derisory divided among 27 states. However, as some large emitters are resisting, it is no easy task. Moreover, the exit from the UK would lead to a redistribution of the voting rights in the European Parliament. Therefore, the number of large emitters who are climate sceptics, in particular the Eastern European bloc, would rise. This compromises the commitment to work harder and make more investments in order to decarbonize their energy systems.

Although that nonetheless happened, we may also assume there is a larger impact for companies and industries active in the Member States which are obliged to contribute to the energy transition. We may even go a step further and assume there will be some delocalisation to countries which are less strict in terms of emissions. That corresponds to what we see on the fiscal level... as the countries offering the most...

The EU may also announce a downward revision of its commitments, which would be a very negative message given the importance of the matter and the sense of urgency.

Outperformance

However, the United Kingdom, with or without the EU, may also show a strong commitment to climate change. We should indeed stress that in 2008 the country adopted the Climate Change Act, which remains valid up to now and aims to reduce greenhouse gas emissions by 80% by 2050. Next, there is a national committee on climate change which is focused on the country’s commitments in terms of reducing greenhouse gas emissions and improving energy efficiency. As mentioned earlier, the UK has achieved impressive results in that domain. Between 1990 and 2014, the country’s energy consumption fell by 10% while its GDP increased by 65%. By means of comparison, the 28 EU Member States have seen their consumption fall by 4% on average while their GDP has grown by 49%. Last but not least, the UK can ratify the Paris climate change agreement individually, just like any other country.

However, with regard to renewable energy, the country still has some efforts to make and does not pose any risk that the EU objectives will be delayed. In fact, renewable energy represented just 6.93% of the primary energy supply in the United Kingdom compared to 12.53% for the European Union in 2014. The evolutions, in particular the government’s commitment towards increasing nuclear power and gas, suggest that the country will reach neither the 2020 objectives nor the 2030 objectives.

The many uncertainties which remain over Brexit also raise several questions on the potential impact with regard to the environmental commitment, in particular the Paris climate agreement, which is considered to be a historic achievement to raise awareness about the carbon risk.

Although there are also uncertainties in this domain and several scenarios can be envisaged, we should acknowledge that the main risk in the short term is that the EU’s ratification of the climate change agreement will be delayed. As a reminder, the agreement that was reached in December of last year will only enter into force if it is ratified by at least 55 parties representing at least 55% of the planet’s global emissions. Although 197 parties have adopted it today, the ratification of late June only involved 19 parties representing 0.18% of global emissions. The EU had to account for 28 Member States and 12.1% of emissions and therefore needed to be an important contributor to a successful ratification. Brexit delays this ratification and therefore jeopardises the objective of the 55 parties and 55% of emissions. Although the climate is not a priority in the discussions about the exit arrangements, climate change remains a challenge today and requires a global, ambitious and swift response.


[1] The EU is committed to a 20% reduction of greenhouse gas emissions, a 20% improvement of energy efficiency and a 20% share of renewable energy in the energy supply.

 

 

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