Climate Change: The Legislative Amendment that Might help Companies Act Better

Climate Change: The Legislative Amendment that Might help Companies Act Better
2022-10-12

“The world will not be destroyed by those who do evil, but by those who watch them without doing anything."

– Albert Einstein

 

In this article I intend to share my perspective on aspects of UK company law and the climate emergency, with reference to important reforms that have been proposed to UK company law under the Better Business Act 2021 (“Better Business Act”).[1] 

For those of us concerned with climate law, policy and governance, the Better Business Act proposals contain a good deal to interest us.  Personally, I think the proposals are to be commended for pushing the debate on our response to climate change in directions that it needs to go.

The Better Business Act proposals endeavour to better ally company directors’ duties and shareholder interests with environmental protection and the interests of wider society.  Encouragingly, the proposals are being supported and driven by a broad coalition of companies.[2]

Why this Matters

Before pursuing that line further, let’s pause and reflect on why we should even care about any of this in the first place!  Let’s also take stock of where we are in terms of humanity’s response to the serious problem of anthropogenic climate change.

Anthropogenic climate change is one of the great dilemmas of our times.  At Edinburgh University, Elizabeth Cripps has recently set out the issue, and the compelling reasons for why we need to get to grips with the matter urgently, in her excellent new book What Climate Justice Means and Why we should Care.[3]  As American environmentalist Bill McKibben has put it, “We’ve been given a warning by science, and a wake-up call by nature; it is up to us now to heed them.”[4] 

The UK has pledged to reduce its greenhouse gas emissions to Net Zero by 2050 under the Climate Change Act, meaning that by 2050 it will need to take as much greenhouse gas out of the atmosphere as it puts into it.  UK Government has a target to reduce greenhouse gases by 78% from 1990 emissions levels by 2035.

But we have troubles.  If we look at heating, as reported by the BBC on the 11th of May of this year, we find that:

The government has committed to installing 600,000 heat pumps a year by 2028. These transfer heat from the ground, air or water around a property into its heating system, and start at £6,000.[5]

However, statistics show that:

[a]bout 35,000 were installed in the UK in 2019 - by comparison, about 1.7 million gas boilers are sold in the UK each year. There are 23.5 million gas boilers in the UK.[6]

This is not promising.  Let’s consider land transport:

By 2028, [the UK] wants 52% of car sales to be electric. In 2021, [only] 11.6% of car sales were electric.[7]

Again, not promising. How about aviation?  Here,the government is:

yet to publish its net zero aviation strategy. Currently the aviation industry sets its own goals for cutting emissions…  In the 2021 Budget, Chancellor Rishi Sunak halved the taxes on domestic flights, which is expected to lead to an extra 400,000 passenger journeys a year.[8]

On food, the Committee on Climate Change says emissions from agriculture need to be cut by 30% between 2019 and 2035, and this would mean, amongst other things, eating 20% less meat and dairy on average by 2030[9]; yet a recent in-depth study by the National Food Strategy shows it has taken a full decade for daily meat consumption in the UK to fall by just 17%.[10]

As to energy generation, in April of this year, “the government published a UK Energy Security Strategy aimed at moving away from ‘expensive fossil fuel prices set by global markets we cannot control’”; however, it “also includes a promise to issue new licences in the North Sea for oil and gas, despite the UN warning against new fossil fuel projects.”[11]

The picture that emerges from all of this is surely concerning in a period where the scientific community is telling us we need to decarbonise rapidly to deal with anthropogenic climate change. 

The expansion of North Sea oil and gas licencing seems particularly notable in this regard.  So let’s stay with energy matters a little and look at some more details -  details that we may not be aware of, and that tend to get overlooked. 

Energy Companies Windfall Tax

On Sunday 12 June, the Financial Times reported that the Chancellor:

confirmed that he… planned to target electricity generators when he announced a new 25 per cent windfall levy on oil and gas producers at the end of May to partly fund a £15bn package to help households with soaring energy bills.[12]

But this report could be read to interesting effect against important reporting on the subject of the Windfall Tax that appeared in The Independent the week prior to that, on the 7th of June.  Here, drawing on published analysis by the Labour Party and some other analytical outlets, the following was reported:

- A third or more of any revenue raised by the Chancellor’s new windfall tax on oil and gas profits could be handed back to the firms in tax breaks.

- The Chancellor recently did announce a temporary 25 per cent windfall tax on the profits of oil and gas companies to help support struggling households with the cost of living crisis gripping the UK, but;

- In order to ensure that companies are not deterred from investment by the new levy, energy firms will get a 91p tax saving for every £1 they invest in oil and gas extraction in the UK to the end of 2025 or until oil and gas prices return to historically more normal levels.[13]

The 91p tax saving on the £1 of investment discussed here amounts to a huge tax break for energy companies.  Note, too, that renewables do not benefit from the tax breaks in the announcement!

Let’s also recognise that while tax breaks are coming to energy companies that continue to make very substantial profits, other people are not doing so well.  On Monday 13th July, BBC News reported that:

households and businesses have been hit by rising prices, which are surging at their fastest rate for 40 years due to record-high fuel and energy costs.[14]

A few weeks prior to that, BBC News reported that:

Energy bills are one of the biggest contributors to inflation at present, as oil and gas prices remain at elevated levels in part due to the Ukraine war. After a rise in the UK's energy price cap in April [of this year], average gas and electricity prices jumped by 53.5% and 95.5% respectively compared with a year ago.[15]

Meanwhile, on 22nd May, Michael Lewis, Chief Executive of the energy company E.ON, announced that in his view, a staggering 40 per cent of households will be living in fuel poverty if the government sits on its hands while bills soar, where fuel poverty refers to households that have to spend more than 10 per cent of their disposable income on home energy.[16]  Mr Lewis suggested the annual energy price cap could reach as high as £3,000 in the autumn, compared with the £1,277 that families were paying before April.[17]

Clearly, there are a lot of problems here.  We have to get on top of them.

Strengthening and Deepening our Environmental Responsiveness

Legal analysis of the climate change challenge has highlighted that one way to improve our engagement with such matters is to fine-tune climate law so that we build in improved levels of strengthening and deepening. 

What does this mean? What are these so-called “strengthening and deepening opportunities and effects”?[18] 

Strengthening has been summarised as follows:

Strengthening should be taken to indicate most particularly the ramping up of target percentages and the tightening of other associated quantifiably measurable decarbonisation objectives generated by framework [climate legislation], particularly… carbon budget thresholds.[19]

Here, then, we are concerned with making measurable environmental indicators stronger.  This could include, for example: the percentage of renewables that we intend to integrate into our energy system by 2030; the number of houses that we aim to retrofit by a certain point in time; the quantity of greenhouse gases that we seek to sequester by the end of the decade; etc., etc.

Deepening is slightly different.  It has been summarised in the following terms:

Deepening indicate[s] a greater socio-economic depth of reach that could be accorded to [a climate law’s] processes…  In other words, pressure and innovation must be expanded much more broadly across all of the UK’s socio-economic sectors in as pervasive a fashion as possible.[20]

In other words, deepening references the need to push our responsiveness to climate (and indeed broader environmental) problems as deeply through our governance regime as possible.  For example, in the earlier stages of its response to the climate crisis, UK Government was reasonably swift in commencing the decarbonisation of electricity and heat, but it was much slower in “deepening” its response to begin to cover the transport sector in a significant way as well.  Even now, we are only really beginning to “deepen” our measures so that they cover the agricultural sector, a sector that has been even more neglected.

Amendment of the Companies Act 2006

This, it seems to me, is just the type of thing that the Better Business Act proposals strive to do.  Where the idea with strengthening and deepening is that pressure and innovation must be expanded much more broadly across all of the UK’s socio-economic sectors in as augmented (strong) and pervasive (deep) a fashion as possible, the Better Business Act momentum exhibits that trend in relation to important UK legislation – here, the Companies Act 2006 (“Companies Act”).[21] 

The amendments to the Companies Act proposed by the Better Business Act seek to intensify and enrich the extent to which climate and other environmental issues are addressed by company directors in the context of their duties, and including with broadened reference to communities.

The spirit of the proposed amendments is to widen s.172 of the Companies Act so that the duty of the director of a company is to promote the purpose of the company, and operate the company in a manner that benefits its members, the environment and wider society (see particularly the Better Business Act’s proposed s.171(2)(a)-(b) insertions to s.172 of the Companies Act[22]). 

The Better Business Act’s proposed addition at s.172(3)(1) extends these amendments to the whole of the UK.  It is also proposed that s.414CZA of the Companies Act is to be amended.[23]  This provision pertains to strategic reporting for the financial year, and the alterations would mean that a company’s reporting would be required to have regard to the broader environmental and community concerns amended into s.172, in addition to the existing matters that are already taken into account.

Section 172 of the Companies Act is presently titled (and would remain titled) “Duty to promote the success of the company”.  The textual construction of the provision itself here arguably underscores the overall profit-motive framing that has dominated in this area of law.  It is just the sort of provision we should consider stress-testing to ensure that a profit motive does not predominate in a potentially unconstrained or possibly reckless way that could neglect to take suitable account of people and planet.

Setting the proposed amendments against the backdrop of the climate change challenge, overall they seem to me to be positive and commendable.  This is due to their attempt to enrich the consideration of the environment and communities in the context of companies legislation generally, and directors’ duties in particular, thus deepening our response to climate change (and broader environmental concerns) a little more.

As such, personally I am very pleased to support the spirit of these amendments, and wish the Better Business Act campaign every success.

Image of a poster with a Planet Earth painting and the words 'One world' on a black background

 

 

 

 

 

 

 

 

 

 

 

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[1] This is an article based on my talk delivered at the event “The Climate Emergency and Company Law Reform: Would the Better Business Act Reforms make a Difference?”, 15 June 2022, 15:00-17:30, University of Edinburgh, Scotland.

[2] Further details can be found at the Better Business Act website:

https://betterbusinessact.org/

[3] Elizabeth Cripps, What Climate Justice Means and Why we should Care (Bloomsbury, 2022).

[4] Bill McKibben, commenting in relation to Hurricane Sandy in America: IRMA, Research Anthology on Environmental and Societal Impacts of Climate Change, (IGI Global: USA, 2022),p.199.

[5] BBC News “Climate change: Is the UK on track to meet its targets?” 11.05.22.

[6] BBC News, ibid., 11.05.22.

[7] BBC News, ibid., 11.05.22.

[8] BBC News, ibid., 11.05.22.

[9] Cumulatively, this would mean:

  • eating 20% less meat and dairy on average by 2030
  • land shifting from agricultural use to trees and restored peatland
  • less food waste.

[10] BBC News, ibid., 11.05.22.

[11] BBC News, ibid., 11.05.22.

[12] Financial Times, “Electricity generator SSE warns Sunak over windfall tax threat” 12.06.22.

[13] Independent, “Third of cash raised by Rishi Sunak’s windfall levy ‘could be handed back to oil and gas firms’ in tax breaks” 7.06.22.

[14] BBC News “Fears for UK economy grow as higher prices bite” 13.06.22.

[15] BBC News “What is the UK's inflation rate and why is the cost of living going up?” 23.05.22.

[16] The Independent, “Energy boss warns 4 in 10 households facing fuel poverty” 22.05.22.

[17] The Independent, ibid., 22.05.22.  See also BBC News, “E.On UK boss warns 40% of customers face fuel poverty” 22.05.22.

[18] Muinzer, Thomas L. (ed.) National Climate Change Acts: The Emergence, Form and Nature of National Framework Climate Legislation (Hart: UK, 2021), p.3.

[19] Muinzer, Thomas L. (ed.), ibid., p.70.

[20] Muinzer, Thomas L. (ed.), ibid., p.70-71.

[21] The Companies Act 2006 can be read here:

https://www.legislation.gov.uk/ukpga/2006/46/contents

[22] The proposed s.171(2)(a)-(b) insertions include as follows:

(2) The purpose of a company shall be to benefit its members as a whole, whilst operating in a manner that also—

(a)     benefits wider society and the environment in a manner commensurate with the size of the company and the nature of its operations; and

(b)     reduces harms the company creates or costs it imposes on wider society or the environment, with the goal of eliminating any such harm or costs.

(3) A company may specify in its Articles a purpose that is more beneficial to wider society and the environment than the purpose set out in subsection (2).

Subsection (3) here seems particularly helpful in that it establishes a floor or minimum standard, rather than a ceiling.

[23] The proposed amendment to s414CZA of the Companies Act is as follows:

414CZA Section 172(1) statement

(1) A strategic report for a financial year of a company must include a statement (a “section 172(1) statement”) which describes how the directors when performing their duty under section 172 —

(a) have advanced the purpose of the company, and

(b) have had regard to the matters set out in section 172(1)(a) to (f).

(2) Subsection (1) does not apply if the company qualifies as medium-sized in relation to that financial year (see sections 465 to 467).

Published by School of Law, University of Aberdeen

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