Over the next 25 years, demand for critical minerals like lithium, cobalt, and rare earth minerals will increase sixfold if countries are to reach their emissions reduction targets. Critical minerals are essential to the production of low-carbon technologies, such as electric vehicles, photovoltaic cells and wind turbines. The UK’s Integrated Review Refresh, released yesterday, announced a suite of new initiatives for critical minerals. Meanwhile, the European Commission will publish cornerstone legislation in the form of the EU Critical Raw Materials Act (CRM) this week. Businesses and investors should engage with governments now to understand the trajectory of policy and regulation and the impact this might have on commercial considerations.
Geology Geopolitics
Europe and the UK do not have the domestic resources to meet producer demand for critical minerals. Securing supply from other geographies is now a key medium-to-long-term priority.
Beyond the very practical issues governments will need to resolve to secure supplies of critical minerals, geopolitics will continue to play a significant role in shaping the market.
China is overwhelmingly dominant in critical mineral supply chains, processing 90% of the EU’s rare earth metals and 60% of its lithium. But this reliance on a single market is risky – by way of example, in 2010 the Chinese Government imposed a 40% reduction in quotas for the export of rare earth metals, causing prices to rise outside of China until the resolution of the WTO dispute case in 2014.
Similarly, the EU relies on one EU-based company for the supply of all hafnium and strontium, which are used in aerospace engineering and nuclear reactors, and depends on single markets for other supplies (such as Turkey, which provides 98% of European Borates, and Kazakhstan, which supplies 71% of phosphorus).
These highly concentrated dependencies increase the risk of significant supply shocks.
Raw Materials Act Enter Stage Left
The disruption to energy and commodity markets following Russia’s invasion of Ukraine means that the security of energy supply is now top of mind for European Governments. The conflict has triggered a string of investment and regulatory interventions by the UK, EU, and US. The same mentality is now being applied to critical minerals.
The CRM is expected to set targets for domestic production, put limits on country import market shares, and increase recycling ambitions. The EU is also looking to label European-based mining operations as Projects of Common Interest (PCI), which would accelerate permitting procedures to speed up planning and unlock key funding.
The CRM follows the UK Critical Minerals Strategy, published July 2022 and ‘refreshed’ as part of the UK’s Integrated Review, released yesterday. It announced new funding, launched the UK-Canada supply chain dialogue and committed to new strategies on supply chains and semiconductors.
Both the UK and the EU will need to make swift progress to compete with the US, especially in the context of the $369bn Inflation Reduction Act (IRA), which set a strong precedent for state intervention to encourage investment in green technology.
While legislation and subsidies will be the foundation of government policy, policymakers are promoting groups such as the EU’s European Institute of Innovation and Technology Raw Materials, UK Task & Finish Group on Critical Minerals Resilience (announced this week) and UK’s Critical Minerals Intelligence Centre in the hope that they will help drive forward standards, confidence, and investment in this growing industry.
Additionally, to help combat unstable and concentrated critical minerals supply lines, the EU has finalised new trade arrangements with Chile, Mexico and New Zealand. It is also looking to agree on deals with other significant suppliers, including Australia, Kazakhstan, and India. The EU has also acted unilaterally to ease trade barriers for a range of critical materials, dropping import tariffs until December 2025.
Other developments such as UK-Canada Critical Minerals Supply Chain Dialogue, the American-led Minerals Security Partnership with Western allies and Japan, as well as the EU’s proposed ‘Critical Minerals Club’, will further strengthen efforts to develop stronger and more secure resource supply lines. Focus will centre on current EU-US critical mineral talks for a signal of American appetite for sharing the benefits of IRA subsidies with allies.
2023 will see further government intervention as policymakers attempt to boost domestic production and processing of critical minerals. This will include the anticipated EU Net-Zero Industry Act (to be released alongside the CRM), the potential establishment of the European Sovereignty Fund, and tweaking EU state aid rules to make it easier for governments to subsidise the green transition on a scale matching the US and China. In the UK we expect the Government to bring forward similar measures after the Spring Budget.
ESG
Resource-intensive future technologies will put pressure on governments and companies to ensure that appropriate environmental, social, and governance (ESG) metrics are in place for sourcing and processing materials.
Illegal mining, poor labour practices, and unclear guarantees of origin all risk undermining efforts for a clean energy future. Cobalt extraction in the DRC has already been in the spotlight due to concerns about safety and the use of child labour, and British and European ESG standards will invariably clash with third-country priorities to monetise resources.
The UK’s domestic Sustainability Disclosure Requirements (SDR) regime, announced in October 2021, introduced requirements for UK-based funds and assets to meet a strict set of criteria to identify as ‘sustainable’. Likewise, the EU’s Corporate Environmental Reporting Directive requires large and/or publicly listed companies to report impacts on the environment and people. The EU also has its Supply Chain Act, which makes companies liable if their supply chain includes a violation of human rights or environmental protections.
Dig for Victory
The increasing focus on critical minerals by governments in the UK and EU means that industry is at a crucial juncture. Pledges to decarbonise economies will need to be backed up with new critical mineral-rich low-carbon technology and infrastructure.
Although government action in this area is still in its early stages, the key pillars of enhancing domestic capabilities (production, recycling and refining); collaborating internationally with like-minded allies to source key materials on secure supply chains; and promoting transparent international markets have set out a roadmap for development.
With legislation coming thick and fast, governments need to get the strategy and incentives right across a whole range of policy areas, including skills, trade, R&D and national security. Business should engage with government sooner rather than later to encourage frameworks that allow the sector to grow.
Chris Hudson is a Manager based in London. He has a background in freight and commodities. Katie Whitting is a Director based in London. She advises clients on policy and political issues with a focus on national security, investment and geopolitics. Katie was a career diplomat with the Australian foreign service. To find out more about how Flint can help you navigate the risks and opportunities of these developments get in touch.
Overview
Following a year of crisis-fuelled focus on resilience, especially in the energy and water sectors, 2023 will raise an even more difficult question – how do you fund investment in long-term resilience during a period of economic uncertainty? Government budgets are under pressure, and the continuing cost-of-living crisis means there is limited scope to pay for investment by putting up consumer bills.
The post-privatisation regulatory settlement has meant it has largely been possible to have rising levels of investment without substantial increases in costs to consumers. However, with efficiency improvements increasingly difficult to come by and investor returns squeezed to their limit, particularly in network industries, there is a growing need for a fundamental change in approach. There are important questions about what a new funding settlement for infrastructure investment looks like when significantly increasing consumer bills is politically unacceptable.
In an era of tight monetary conditions, there is an even greater need for certainty and predictability to ensure the UK can attract the scale of investment needed to achieve ambitions such as net zero and energy resilience. The Government’s lack of political capital makes holistic reform difficult to deliver, but we expect some attempt to make progress on regulatory reform and revenue mechanisms during the year.
Rishi Sunak has brought stability to the Government, and while it will struggle to address large-scale challenges like infrastructure funding, progress is being made across the Government’s infrastructure priorities – particularly in areas like energy security following the recent departmental reshuffle. However, other sectors, such as transport, will continue to face difficulties due to political and budget pressures.
Any fundamental change to the funding settlement is likely to take several years, meaning Labour’s plans will become increasingly important ahead of the next election. Labour has put infrastructure investment at the heart of its growth strategy but beyond headline announcements on the creation of a National Wealth Fund and the ruling out nationalisation for most network utilities, it has shared few details. As we get closer to the election there will be pressure on Labour to explain how it will unlock the economic benefits of infrastructure investment.
As the Government seeks to deliver its infrastructure priorities over the next 18 months, it remains important for businesses and investors to engage on existing workstreams. Labour is thinking longer-term, especially on how infrastructure can revitalise the economy and is keen to hear from industry and investors as it starts to consider what will go in its manifesto.
Below we assess the regulatory and policy outlook for individual sectors, covering energy, telecoms, water, transport, and resources and waste.
Energy
The immediate concerns about energy supply during this winter have receded. Falling wholesale prices and healthy European gas stocks have given Government the space to consider its longer-term energy priorities. It will unveil these in a new ‘energy independence’ plan, slated for March. This should answer questions on the Government’s backing of specific technologies, including renewables, nuclear and new oil and gas projects. It should also help address the ongoing challenges to infrastructure deployment – notably securing grid connections and gaining planning approvals for new windfarms. The newly created Department for Energy Security and Net Zero should help accelerate progress. There will be more ministerial focus on the core energy brief, where this focus on energy security will be a clear priority.
The Spring Budget is another key milestone which should include clarification on the Government’s plans to extend carbon taxes to more sectors across the economy and confirm next steps on deploying CCS. We also expect Government to publish a ‘Net Zero Growth Plan’ later in March – a combination of the revised Net Zero Strategy and response to Chris Skidmore’s Net Zero Review. The recent easing of wholesale prices has taken pressure off Government to rush its Review of Electricity Market Arrangements (REMA) – but we can expect a response to last year’s consultation in February, before more detailed policy proposals in the summer.
Ofgem has an ambitious programme for 2023. It will progress the next phase of network price controls (RIIO-3), and develop regulation for heat networks, CCUS, the nuclear RAB, and hydrogen. The regulator is also preparing for the launch of the Future System Operator next year, which will play an important new role planning system requirements and future infrastructure needs. In the retail energy market, there will be a stronger focus on compliance and enforcement, as well as new regulation needed to enable flexible domestic energy use and the wider consumer market reforms being considered by BEIS this year.
Key moments: REMA consultation response (February); Energy Independence Plan publication (March); Spring Budget: update on carbon taxation, CCS funding clarification, progress on setting up Great British Nuclear (March); Net Zero Growth Plan (March); detailed REMA policy proposals (summer)
Telecoms
Broadband and mobile phone bills will remain the main political focal point this year. As there is no regulation of retail prices in the sector, the pressure will be on operators to show voluntary restraint. Ofcom has recently launched a review into whether mid-contract inflation-linked price rises give consumers sufficient clarity and certainty. Science, Innovation and Technology Secretary Michelle Donelan has urged telecoms companies to “think before” imposing inflation-busting bill increases of almost 15%.
At the same time, Ministers will have an eye on the extent to which the Conservative Party’s 2019 manifesto commitment of bringing gigabit-capable broadband across the UK by 2025 can be met ahead of the next General Election. Ofcom’s strategy for delivering this has been to generate a regulatory environment in which competitive full-fibre investment takes hold across (most of) the country. There is some nervousness in government and Ofcom about the impact the deteriorating macroeconomic context and rising interest rates have already had on the economics of large-scale full-fibre rollout by alternative networks.
BT Openreach has repeatedly been accused by its rivals of using its discount schemes to entrench an already very strong position in the market. This issue will be brought to a head in Ofcom’s upcoming decision on whether to approve the latest discount scheme, Equinox 2. Its preliminary view, published earlier this month, is that such discounting from Openreach is unlikely to be problematic as it would not prevent ISPs from switching to rival networks. Investors in alternative networks, who stand to lose from such an approval, will be watching the final decision closely as it has the potential to impact the investment thesis for the sector – will the UK see competing networks engaging in a race to build through the rest of the decade, or will the market rapidly consolidate around just a small number of players?
Key moments: Ofcom Equinox 2 decision (mid-March); Potential update on Project Gigabit progress and funding (March Budget); Voluntary commitments from the sector on moderating price increases (Q1)
Water
The water sector continues to face heightened political and regulatory scrutiny, particularly on the issue of sewage pollution. This – and the broader cost of living crisis – is the context that will inform the two most significant ongoing regulatory processes: the next price control run by Ofwat (PR24) and the Environment Agency’s Water Industry National Environment Programme (WINEP). These will determine company’s investment plans for 2025-30.
Ofwat, the Environment Agency and Defra are under significant pressure to improve the sector’s environmental performance to meet new environmental standards and rising customer expectations. At the same time, regulators and government (including HM Treasury) are all acutely aware of the pressure to keep bills stable, while unlocking the necessary environmental investment. This tension is causing a vacuum of clear guidance on how environmental improvements should be funded, creating significant uncertainty and the risk of knee-jerk policy pronouncements and poorly thought-through regulatory intervention. How it resolves will define regulatory settlements for 2025 and beyond and have a significant bearing on the attractiveness of the sector to investors.
Key moments: WINEP concludes (March); Levelling Up and Regeneration Bill (including nutrient neutrality obligations) becomes law (expected Spring); companies submit PR24 business plans to Ofwat (October); Ofwat/Environment Agency sewage treatment works investigation continues (next steps TBC).
Transport
The Government, and the Treasury in particular, will be seeking to minimise public subsidy for rail and bus operators, but some public funding need will remain as revenues have not yet recovered to pre-pandemic levels. This drive to reduce subsidy, alongside the need to tackle strike action, is likely to consume bandwidth to the detriment of proactive reform agendas and policy clarity.
The details of rail reform, in particular, remain uncertain. While the new Transport Secretary is supportive and a recommitment to reform has been made at this year’s George Bradshaw address, DfT will need to make outstanding decisions on the future policy framework and contracting arrangements to clarify the extent of private sector involvement and the commercial landscape.
A Transport Bill could offer some clarity and had previously been promised and drafted, but it will need advocacy to make it onto the legislative programme for the fourth session. Any Bill is likely to be constrained in scope, meaning representations will need to be made to push along outstanding regulatory issues, such as support for the rollout of more electric vehicle (EV) infrastructure and regulation of autonomous vehicles and e-scooters. Substantial delays to these risks holding up investment in the new mobility sector.
While the Government appears content with the rate of EV adoption, EV infrastructure and battery supply is widely considered to be lagging, worsened by the collapse of Britishvolt and dearth of other gigafactories. The Government will be seeking to address perceived weaknesses in supporting the automotive sector to decarbonise through a twin approach of offering clear incentives for private investment and setting stretching but realistic targets, including through the upcoming ZEV mandate. It will also need to be pressed to offer clearer direction on future subsidy regimes for decarbonisation technologies, including sustainable aviation fuels (SAF) and hydrogen.
The Heathrow H7 price control final decision is expected in March; Heathrow and airlines could then appeal the CAA’s decision to the CMA, which would take up much of 2023. There will be some read across between this decision and the CAA’s final proposals on the NATS NR23 price control, due in Q2 this year.
Key moments: Publication of proposed ZEV mandate (by Spring); setting of end date for the sale of new non-zero emission buses (H1); Heathrow H7 price control final decision (March).
Resources and waste
Having been somewhat ignored by previous Environment Secretaries, under Thérèse Coffey there are signs the resources and waste sector has a little more political impetus behind it. With the consultation response on the Deposit Return Scheme published in January, the next big milestone will be the Government’s update to Extended Producer Responsibility (EPR) in the form of the statutory instruments to implement the scheme. Eagerly awaited by firms working across the material production and disposal chain, EPR will be particularly important for the recycling sector. There are currently significant questions over whether the proposed framework will provide the right conditions and incentives to support new investment in recycling infrastructure. How Defra decides to structure and define the responsibilities of the Scheme Administrator will be key.
Clarification on the Government’s plans to include waste incineration in the UK’s ETS is likely to come in the March Budget, as well as confirmation of the funding envelope for Carbon Capture Utilisation and Storage (CCUS). Deployment of CCUS on energy from waste facilities is vital to achieving significant progress in decarbonising the sector. The next three months will set the tone for future investment prospects in the sector.
Key moments: Further information on carbon capture funding and extension of the ETS (March Budget); Defra EPR statutory instruments likely to be laid (Q2); Statutory instruments for new environmental targets to be laid (Q2).
Mark Caines leads our competition and regulatory team. An economist by background, he advises on complex regulatory and policy developments and supports clients on competition matters. Josh Buckland heads Flint’s energy and climate work, having previously worked as Energy Advisor to the Secretary of State for Business, Energy and Industrial Strategy. To find out more, get in touch.
The slightly dampened momentum we saw on green finance over the course of 2022 is unlikely to shift materially this year as governments continue to grapple with economic and inflationary pressures. The stronger focus on energy security opposed to climate action is leading to a gradual loosening of sustainability requirements. This is challenging for businesses trying to navigate the constantly changing policy and regulatory environment.
Divergence is now a growing risk, as the UK and EU still look to continue action in key areas like climate and sustainability disclosures, but international frameworks are also being progressed in parallel. Despite a lack of momentum, businesses will be expected to navigate an increasingly fragmented landscape, avoid accusations of greenwashing and make tangible progress on their corporate environmental plans over the course of 2023.
Context
2022 was a challenging year for policymakers and regulators looking to accelerate the green finance agenda. The inevitable focus on energy security and rising cost has left less space for decisive action, with some high-profile initiatives appearing to drift. The key short-term impact has largely been one of delay, with political and regulatory timetables for key changes being kicked to the right.
The long-term implications of the energy crisis are also now coming into view. We are starting to see a shift towards a bigger role for transition finance in both the UK and EU, with key reforms – such as taxonomy frameworks – being looked at again as a result. Mixed messages from policymakers have also meant that companies are becoming concerned about making long-term investment decisions that could fall foul of future changes.
State of play
UK
After months of political chaos, the Government is finally starting to dust off the green finance agenda that was driven forward by Rishi Sunak when he was Chancellor. More clarity on the overarching approach is expected in the revised Green Finance Strategy, due early this year. There is an expectation that the approach should become more business-friendly, with a less prescriptive Taxonomy framework and more time for companies to adopt new rules and regulations. Further detail to guide investment decisions should come through, including on the Technical Screening Criteria (TSC) for the Taxonomy which remains important for new and emerging green technologies.
There is also a pipeline of regulatory initiatives that are due to kick in during 2023. The FCA has now consulted on the Sustainability Disclosures Requirements regime (SDR) which will provide an integrated UK framework for disclosures on sustainability. The SDR will be launched in July, despite some continued confusion about how it will apply to corporates. The Government also remains supportive of plans to create a net zero transition framework for listed entities – with plans due to be finalised later this year. The Government will also consult on adding ESG ratings to the regulatory perimeter in Q1 to further its efforts to crack down on greenwashing.
EU
The EU has moved from the legislative to the implementation phase on green finance. The Corporate Sustainability Reporting Directive (CSRD) passed its last hurdle before full implementation and was approved by the plenary of the European Parliament in November. The CSRD introduces detailed, mandatory sustainability reporting for all large EU companies with more than 250 employees and will become applicable to large companies in scope as of 2024. Detailed standards are yet to be developed, with the Commission tasking the European Financial Reporting Advisory Group (EFRAG) to draft them.
Much-needed detail for financial market participants was provided on the Sustainability Financial Disclosure Regulation (SFDR), a regulation introduced in 2019 to improve transparency in the market for sustainable investment products – technical standards were published, laying out how financial market participants should comply with the SFDR. This led to a reclassification of investment products, due to fears about the stringency of new provisions. The EU is also planning to publish a regulation on ESG ratings in June 2023 aimed at tackling greenwashing across the EU. Finally, action will continue slowly on advancing the EU Taxonomy, with the remaining four environmental objectives of the EU Taxonomy due this year.
International
There remains momentum to establish a global baseline for corporate sustainability disclosures this year, with the International Sustainability Standards Board (ISSB) due to launch two reporting standards in June 2023. There is still no consensus on their international adoption, with the EU notably aiming to promote the uptake of their EFRAG standards. Activity is also ramping up on the biodiversity agenda following the conclusion of the UN Biodiversity COP15 last December – the Taskforce for Nature-related Financial Disclosures will publish the first risk management and disclosure framework on evolving nature-related risks in September.
But there are also challenges emerging at an international level. The Glasgow Financial Alliance for Net Zero (GFANZ) has run into serious problems, with members expressing concerns about requirements on financing coal. And in the US, while the Security and Exchange Commission (SEC) is expected to finalise rules requiring companies to disclose more information on climate risks, there is a growing backlash against sustainability disclosures given the potential cost to business.
Implications for business
We do not expect 2023 to be a year of radical change from 2022 on green finance. The economic and social challenges that many governments are dealing with will remain for some time. There is also a need for countries to prepare for what could be a harder winter next year, with implications for energy security and geopolitics. But we do expect to see some more evidence of delivery in 2023. The UK and EU will come forward with new and more detailed initiatives and efforts to tackle greenwashing will step up, alongside action to facilitate more transition finance.
Businesses need to be prepared, tracking the changing policy and regulatory environment to ensure they are ahead and can implement new regimes with less warning. It will also be key to managing the most significant and growing risk – one of international divergence. The new ISSB standards are unlikely to align with national frameworks – especially in the EU – meaning businesses need to actively engage with policymakers and regulators to minimise the risk of complex and costly green finance frameworks becoming the norm.
Josh Buckland heads Flint’s energy and climate work, having previously worked as Energy Advisor to the Secretary of State for Business, Energy and Industrial Strategy. Fiona Wright advises clients on EU political, policy, and regulatory issues, including financial services, ESG, and climate policy, and has two decades of experience in the financial services policy space. This blog post was written with input from Managers Zoe Alipranti, who advises corporates and investors on ESG and sustainability with a focus on the UK and international agendas and Lisa Keuper, who supports clients on EU political and policy developments in particular areas of financial services and fintech.
