The U.K.'s decision to leave the European Union is unlikely to lead to a change in policy direction regarding environmental, social and governance-related legislation, but enforcement of certain environment regulations and government investment in ESG-related programs and technologies might suffer in the long term, warned ESG research firm Sustainalytics.
The firm's assessment of the ESG implications of the so-called Brexit showed that, while reports both for and against the case to leave might have exaggerated the impact of the vote on U.K. companies, “this is not to say that the ESG pathway ahead for Britain will be altogether smooth.”
The firm analyzed the impact of Brexit on nine ESG-related regulations, finding that the chance of seven of them being changed as a result of the vote was moderate or low. However, “if the U.K. experiences financial difficulties, as well as further populist upheavals, both enforcement of regulations, particularly environmental ones, and government investment in ESG-related programs and technologies may suffer in the longer term,” said the analysis.
On the issues of recycling and air pollution, the U.K.'s decision to withdraw from the EU “could lead to a weakening of domestic standards, which could blunt U.K. firms' incentives to develop programs in these areas,” the report said. Sustainalytics added that, while the U.K. has a tradition of strong corporate governance, the government's resistance to the EU ESG Disclosure Directive “could be a concern for investors as the U.K. negotiates its withdrawal from the EU.”
Regarding recycling, Sustainalytics said U.K. officials have expressed concern about the EU's direction of policy in this area, “and there are indications that the Brexit could lead to a downgrade in U.K. recycling policy, targets and/or enforcement.”
“The main takeaway was … we don't think … there will likely be a shift in policy direction in the U.K. in a post-Brexit environment,” said Doug Morrow, associate director, thematic research at Sustainalytics in a telephone interview. “The main reason I think is because a lot of the relevant EU directives — not just from Brussels but best-company practice — has been embedded in U.K.” companies.
But regarding the two areas of ESG that are likely to see changes, Mr. Morrow said: “There could be a relaxation of standards that could have a negative knock-on effect to U.K. companies.”
He added: “I would highlight that the analysis is preliminary, and acknowledge the degree of uncertainty, but based on what we look at our assessment of policy direction, our base scenario is we won't see significant divergence on U.K. policy on seven of those issues.”