What the Brexit agreement means for sustainable development in the UK

Though uncertainty has long been a factor in assessing the effects of Brexit on UK business and investment, the signing of the EU-UK Trade and Cooperation Agreement (TCA) in December 2020 provides a foundation to begin considering possible outcomes.

In these early stages, Rathbone Greenbank is working to assess the impact of the agreement on its core sustainable development themes.   

The TCA has established an ‘ambitious’ framework for cooperation on renewable energy provision and climate change where the UK and EU share broadly similar agendas. Additionally, both parties share common interests in developing the North Sea as a global centre for offshore wind energy. Such common sustainability aims may provide greater certainty for UK renewables companies and encourage investment in the market. Encouragingly, all energy agreements in the deal are incumbent on both parties remaining committed to the Paris Agreement.

The Department for Business, Energy & Industrial Strategy has also established the UK’s own emissions trading scheme (ETS). The cap-and-trade system is slightly more ambitious than the EU’s version with an annual emissions cap set 5% lower than the UK’s pre-Brexit share. Fines for emissions exceeding allowances will also be higher in the UK and the ETS is looking to incorporate emissions that are not currently covered in the future.

The impact of the TCA on employment policies

Regarding employment policies, both parties committed to a “level playing field”, ensuring the continuation of open and fair competition. One result is that high levels of employment protection in the UK cannot be lowered in a manner affecting UK-EU trade or investment. Both parties have also agreed to increase respective levels of labour and social protection. A ‘no-regression’ principle in the agreement ensures there can be no rollback on protections without consequences. It also makes it likely that the UK will align with EU directives to improve workers’ contractual rights and legislate for a variety of flexible working arrangements. 

These commitments also recognised how they must work within the context of sustainable development with both parties agreeing to adhere to internationally recognised standards such as the International Labour Organization Conventions and the longstanding European Social Charter.     

Exiting the single market nevertheless ends free movement of labour between the UK and EU. For the NHS, this has immediate consequences for the EU nationals it employs, who represent almost 6% of its 1.3 million staff. The King’s Fund estimates that to counter an increasing shortfall of nursing staff, the NHS must recruit 5,000 more overseas nurses each year to 2024.

The agreement therefore made provision to uphold the EU-wide Mutual Recognition of Professional Qualifications Directive for at least two years after the end of transition. It also established measures to encourage minimal regulatory divergence in the supply of medicines and medical equipment.

A post-Brexit shortfall in skilled workers is also likely to impact infrastructure development – around 37% of construction workers in London alone are EU nationals. Despite measures designed to ease restrictions on the flow of goods, issues such as additional customs checks, product restrictions and conformity assessments on material flows may delay construction projects and inflate associated costs. Infrastructure investment could also be impacted by the loss of European Investment Bank funding, which between 1973 and 2017 invested €165 billion in UK infrastructure projects. The emergence of this funding gap has led to calls for the establishment of an equivalent ‘British Investment Bank’. And while innovative UK start-ups and SMEs will lose out on funding from the European Innovation Council Fund’s accelerator programme, the agreement has secured UK access to the Horizon Europe research and innovation framework’s €95.5 billion budget.

The environment and climate change

The Department for Food, the Environment and Rural Affairs (Defra) was commended last year for establishing future legal targets for biodiversity, air and water quality, and waste management. However, delays to the UK Environment Bill have raised concerns that the government is mixing its messages ahead of November’s COP26 climate change conference. The bill’s supporters are also concerned that extended delays will affect the legislative aims of related environmental policies like the Agriculture Bill and the 25 Year Environment Plan launched in 2018. While appreciating the impacts of Covid-19, environmental groups are nevertheless urging Defra to use the additional time to strengthen legislation and make interim targets for environmental improvements binding.

Investment and reporting             

On the investment side, while the UK has pledged to join the International Platform on Sustainable Finance, co-led by the EU and China, it looks set to diverge in part from the EU’s taxonomy on sustainable finance. The Treasury shares the EU’s aim to promote consistent standards and prevent greenwashing but cites a lack of technical clarity as cause for the UK to reserve judgment. Whatever the outcome, a divergent regulatory framework raises the prospect of future challenges for cross-border asset managers. The government has nevertheless pledged to make UK corporate disclosure more robust, announcing its intention to make it mandatory for all reporting by public companies to be aligned with the Task Force for Climate-related Disclosures by 2025.