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UK Environment Act heralds new legal landscape

With targets due to be set for air quality, biodiversity, water, waste reduction and resource efficiency, the legislation could impact portfolio companies in a range of sectors.

The UK Environment Act was passed into law in November 2021 after nearly five years of discussion, kicking off a swathe of new regulation and policymaking to address climate change and biodiversity issues, reports affiliate Private Equity International.

Designed to establish a post-Brexit set of statutory environmental principles that will affect most sectors of the economy, it establishes a new watchdog called the Office for Environmental Protection and includes new provisions on waste and sewerage, air quality, deforestation in supply chains and biodiversity.

Although a host of new rules will come into force immediately, a key function of the Act is to serve as enabling legislation.

It requires the government to set a series of new long-term targets for air quality, water, biodiversity, resource efficiency and waste reduction, for example, which need to be proposed by the end of 2022. It also introduces new powers that could be used to impose charges for single-use plastics or to implement an electronic waste tracking system.

Vanessa Jakovich, a partner specialising in environment and planning at law firm Freshfields Bruckhaus Deringer, says: “For private equity, where this is going to impact the most is at portfolio project level. That will be particularly evident in sectors such as water, where we are already seeing the impact of a proposal to impose specific requirements on sewage pollution. That was a particularly controversial aspect of the Bill, and resulted in new obligations on companies to reduce the impact of sewage overflows on the environment.”

The Act also brings in a mandatory forest commodities due diligence regime that seeks to prevent commodities that are the product of illegal deforestation from coming into the UK market, as well as pushing forward the law on air quality.

Impact on industry

Michael Coxall, an environmental lawyer at Clifford Chance, says: “The Act contains a requirement for long-term air quality targets for particulates that is likely to impact industrial sectors, in particular vehicle manufacture, and could also impact on real estate development in affected areas.

“Private equity investors will want to keep an eye on targets being proposed over time and their likely impact on particular industries and development locations.”

There will also be an extension of the responsibilities of producers for waste from the products they manufacture, with food waste one area in which action could be taken.

In general, the Act provides only the framework powers for the more detailed regimes that are still to come.

Coxall says PE firms “should monitor the detailed proposals and begin to assess how they might affect their existing portfolios and future investments”.

Jakovich adds: “The takeaway for investors doing M&A is that this will expand the scope and impact of environmental regulation on UK targets, and is yet another reason why meaningful analysis will increasingly replace simply having a checklist for your investor committee. You will need to be more dynamic because the law is going to change fairly rapidly over the next few years.

“This has also created a lot of scope for divergence from EU law, so when doing portfolio deals it will be important to seek advice across the geographical footprint of an asset in a way that wasn’t always required before for European targets.”