Net zero regulation – Meeting of minds is key, but the devil’s in the detail

PwC’s Christiane Conrads discussing the ESG in the Real Estate Industry guide at the German agency for political advice

PwC’s Christiane Conrads outlines how regulation will drive net zero agendas – and why it might become a legal battlefield. By Paul Strohm.

Expectations are high for this November’s COP26 conference in Glasgow. The pressure for the conference to produce results multiplied following the publication of an Intergovernmental Panel on Climate Change (IPCC) report, in August this year, its starkest warning yet that the rate of climate temperature increase is faster than previously thought and likely to be irreversible if not tackled immediately –
to paraphrase enormously.

There is a danger that events such as COP26 can be seen as an end in themselves. While bringing together the world’s heads of state and encouraging them to reach agreements on complex environmental issues is itself a Herculean and crucial challenge, the real work will begin afterwards.

While investors and real estate practitioners of all types, most of them already in the process of implementing ESG policies, may be hoping for some sort of practical guidance, a trickle-down process is inevitable and the translation of overarching goals into detailed guidelines will almost certainly be complex.

Global agreement

“If the conference is successful and a global agreement on effective climate change targets is reached and ratified among the countries that account for the majority of global GHG emissions, it is expected that numerous other ESG-related regulatory projects will be launched immediately around the world,” writes PwC’s Christiane Conrads in a forthcoming guide, ESG in the Real Estate Industry – Practical Guide for the Entire Real Estate and Investment Cycle, to be published in December.

The guide points out that due to different levels of economic and social development and regional specifics, local or case-by-case regulation will continue to be essential for a successful ESG transformation.

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“However, to avoid fragmentation in sub-markets and restrictions on competition, it is necessary to develop overarching international standards and to ensure the harmonisation of necessary, different standards,” Conrads writes. “Only in this way can the necessary global climate and environmental protection measures be taken and at the same time the already achieved advantages of globalisation – for example in the area of social justice – be maintained.”

Some may fear, with some justification, that the plethora of new rules and regulations becomes a legal battlefield.
To some extent, there are signs that this is already the case. The UN PRI Regulation Database recorded more than 650 regulations and guidelines worldwide as of January 2021 as well as 300 projects to develop existing instruments. “Global climate protection is increasingly occupying the courts worldwide,” Conrads writes, pointing out that a report of the UN Environment Programme published in January 2021 indicated that lawsuits relating to global warming increased from 884 in 2017 to 1,550 in 2020.

Changing attitudes

“When you look at the regulations, not only in the European Union but also in other countries, you see that there is an increasing number of ESG-related regulations and you also see that the attitudes of the courts have also changed to deal with ESG-related issues,” Conrads told Real Asset Impact. She said there is a clear trend toward stricter ESG regulations and also court rulings.

There is as yet no decision in the case of a Peruvian farmer who is pursuing German energy supplier RWE for part of the cost of protecting his village against the threat of meltwater because of the company’s contribution to the atmospheric CO2 that is causing glaciers to melt. However, judges at the higher regional court of Hamm, Germany, have indicated that a compensation claim is justified and that evidence should be gathered in Peru.

‘In the end the markets will decide and in the end the really sustainable products and services will be the only ones surviving this transition. But waiting for the market might be too late.’

Christiane Conrads, PwC

Undoubtedly, there is a need for the legislation: “In the end the markets will decide and in the end the really sustainable products and services will be the only ones surviving this transition. But waiting for the market might be too late.”

There is a need both for binding international law on climate change, Conrads says, but also international private law because there are increasing levels of risk for companies which, while they must themselves comply, may have responsibility for their entire value chain and securing the emissions of their contractual partners.

“Our current projects are mostly focused on risk management in relation to ESG,” Conrads says, explaining that this refers to physical risk but also to transitional risks, more regulation tomorrow even though the existing regulations have not yet been assimilated, of increasing litigation and unclear, unharmonised legal and market environments.

Education on regulations

“Basically the only thing you can do is to look at these regulations and educate yourself and implement adequate processes to ensure compliance,” Conrads says.

“But there is need for clarification, for standardisation and for international standards. Because what we see is happening at the moment is that the regulators, the legislators and the courts are putting more and more responsibility on investors and on companies. It is incredible what is happening right now. I expect this to become worse and there is really a need for rationalisation and a more pragmatic approach, maybe stricter, but it needs to be feasible for investors to obtain compliance.

“More clarity could provide for more standardisation and more clarity and could accelerate the transition, because right now we are risking that it is too late to act. The longer we wait, the riskier it gets,” Conrads says. “The world is looking to Glasgow to find a way out.”