In this month’s round-up of the latest developments in ESG for UK clients, we cover:

• Future of new UK oil and gas projects thrown into doubt after landmark Supreme Court decision
• EU election shockwaves: Green Deal goes grey
• New Green Claims Directive aims to introduce verification requirement for green claims
• ESMA securities regulator to be handed new green rating powers

Future of new UK oil and gas projects thrown into doubt after landmark Supreme Court decision

On 20 June 2024, the Supreme Court ruled in favor of anti-oil and gas campaigners who argued that a council’s decision to approve drilling for oil in Surrey was unlawful. The Supreme Court ruled that the wider environmental impact of emissions from burning fossil fuels must be considered in planning applications for new extraction projects.

The case, which centered around an oil drilling project at Horse Hill in Surrey, was brought by a local campaigner who argued that the environmental impact of the project should have taken into account not just the carbon emissions created in extracting the oil, but the pollution created when eventually burning oil from the site as fuel. Conversely, Surrey County Council, who granted planning permission for the project in 2019, argued that the law did not require it to consider “downstream” emissions as part of the environmental impact assessment for its planning application.

The Supreme Court justices ruled in favor of allowing the appeal, quashing the decision to grant planning permission for the site.

In response to the Supreme Court’s decision, the energy industry has warned that consideration of future carbon emissions makes it difficult to justify new projects, whilst climate campaigners claim that the ruling could mean other existing oil, gas, and coal projects in the UK will need to be reviewed.

EU election shockwaves: Green Deal goes grey

The recent European Union (“EU”) parliamentary elections have sent shockwaves through the sustainable investing sector, raising questions about the future direction of the EU’s ambitious climate and sustainability goals.

The 2024 elections saw a significant shift toward right-wing and populist parties, creating uncertainty around the EU’s previously robust commitment to its Green Deal and broader sustainability agenda. This political shift stands in stark contrast to the 2019 EU elections, which were heralded as a “green wave” due to substantial gains made by the Green parties. This time, however, the Greens suffered significant losses, reflecting a notable voter disenchantment with the perceived economic costs and lifestyle changes associated with the green transition.

The gains by right-wing and populist parties, known for their skepticism towards the EU’s climate policies, signal potential changes in the legislative priorities of the European Parliament which might mean that the fate of the EU Green Deal hangs in the balance as support for Green Deal initiatives could wane under the new political configuration, leading to potential scaling back or re-prioritization of funds.

For ESG investors, these political developments are crucial. The political decisions made in the EU have far-reaching implications for markets and industries worldwide. Investors who prioritize sustainability need to closely monitor these changes, as they could impact the viability and profitability of green investments. Adjusting investment strategies to account for this new political reality will be essential for managing risk and ensuring continued alignment with sustainability goals.

New Green Claims Directive aims to introduce verification requirement for green claims

The European Council has adopted its negotiating position on the Green Claims Directive, which aims to introduce a verification requirement for green claims and harmonize requirements for sustainability and environmental labels.

The Green Claims Directive aims to combat greenwashing and create a more unified approach to environmental claims across the EU by:

1. Introducing a requirement for environmental claims to be verified by an independent third-party expert for which certifications of conformity will be recognized across all EU member states.
2. Creation of a simplified procedure for certain types of environmental claims, which only requires completion of a technical document.
3. Granting an exemption for products regulated under environmental labelling schemes that meet EU-wide standards.
4. Placing restrictions on the establishment of new environmental labelling schemes to harmonize schemes across the EU.

In practice, the Green Claims Directive will require companies to substantiate explicit environmental claims and will work in tandem with the Greenwashing Directive which focuses on tackling generic environmental claims. However, it is worth noting that while the Greenwashing Directive came into force in March 2024, the Green Claims Directive will likely only be passed in the next legislative cycle, where we may see the dynamics of a newly constituted EU Parliament come into play (see the EU election shockwaves: Green Deal goes grey section of this alert). For further information on the changes introduced with the Greenwashing Directive, please see our March ESG Market Alert.

ESMA securities regulator to be handed new green rating powers

The European Commission recently introduced new regulations targeting providers of ESG ratings. Describing the current ESG rating market as “suffer[ing] from deficiencies”, the European Commission is pushing for standardization and stricter compliance. As such, the new rules require greater levels of disclosure from businesses and aim to generate consistency in approach across agencies, all of which will be supervised by the European Securities Markets Authority (“ESMA”). Looking forward, this move should reduce costs for larger operating businesses, but could also undermine the EU’s ambition to support small and medium-sized businesses (“SMEs”) as the list of operating agencies is gradually streamlined. See here for an article on the topic.

ESG Counsel

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.