Written evidence submission from EY (COP0003)
EY UK & Ireland response to the UK House of Commons International Trade Committee inquiry on COP26 and International Trade
Q1: How can international trade and investment contribute to realising the goals of COP26?
- Trade policies are evolving to support wider environmental goals at both the international and national level. At the recent G7 summit, G7 leaders agreed (pdf),“on the need for the world’s leading democratic nations to unite behind a shared vision to ensure the multilateral trading system is reformed, […], to be free and fair for all, more sustainable, resilient and responsive to the needs of global citizens.”
- Trade and investment are levers which can be utilised in order for the UK to achieve its Net Zero ambitions. From the private sector, businesses are increasingly seeking to green their supply chains, reduce their carbon emissions, and track and account for their environmental impacts.
- One challenge facing all stakeholders is agreeing common terms and definitions. For the purpose of this response, we use the following:
- “Sustainable trade” is the exchange of goods and services structured so that the trade goes beyond the mere creation of economic value and so additionally generates social and environmental benefits. Sustainable trade also promotes the preservation and reuse of environmental resources or reduces poverty and inequality. Individual voluntary production standards are part of this movement, but, increasingly, public and private initiatives are looking at the full lifecycle of products and related services as they are traded internationally.
- “Sustainable finance” has a particular role to play but can mean different things in different contexts. EY defines sustainable finance as any form of financial service that incentivizes the integration of long-term environmental, social and governance (ESG) criteria into business decisions, with the goal of providing more equitable, sustainable and inclusive benefits to companies, communities and society. Embedding ESG concepts into investing is perhaps the highest-profile manifestation of sustainable finance, alongside the rising prominence of stakeholder or inclusive capitalism.
- The OECD has done a considerable amount of work looking at how environmental impacts can be incorporated throughout FTAs, including provisions relating to green subsidies, promoting sustainable investment chapters, and reducing or eliminating non-tariff barriers that might otherwise act as a brake on sustainable trade. Others, like IISD, have also contributed research on role of trade in scaling-up of renewable energy products as well as impact on developing countries.
Q2: Are international trade and investment likely to feature in the high-level negotiations at COP26?
Q3: What are the possible impacts of climate change on international trade and investment?
- Climate change already is having, and will continue to have, a significant impact on global supply chains and the flows of international trade and investment. This includes shifting weather patterns forcing change on where different products can be produced around the world, as well as the extreme weather events which disrupt manufacturing and transport infrastructure.
- As the COVID-19 pandemic has demonstrated, there is a significant need for companies engaging in international trade and investment to prepare for a future where greater resilience in their operations will be needed.
- Reporting on climate-related risk has become increasingly widespread through the emergence of voluntary reporting standards and the introduction of legal reporting requirements. International efforts on climate-related risk reporting has largely been led through the Taskforce on Climate-Related Financial Disclosures (TCFD), which is part of the G20’s Financial Stability Board. As more companies are required to map and report on climate-related risks will increasingly have an international dimension for UK businesses.
- The EY Global Climate Risk Disclosure Barometer (pdf) provides a global snapshot of the increasing corporate focus on climate risks and opportunities as pressure from stakeholders moves them up the boardroom and executive agenda. The research draws on public disclosures of companies on the uptake of the Task Force on Climate-related Financial Disclosures (TCFD) across highly impacted sectors. The disclosures of more than 1,100 companies across 42 countries were included in the assessment.
- The research found that companies have continued to make progress in addressing the quality and coverage of climate-related financial disclosures, driven by more regulators making TCFD reporting mandatory, pressure from investors, and the fact that the annual CDP response now incorporates TCFD recommendations.
- The research findings suggest many organizations are reporting on metrics that don’t correlate directly to risks. For example, disclosing Scope 1 and 2 emissions has no bearing on exposure to physical risks, such as a factory or data centre being at increased risk of fire or flood. A more rigorous level of assessment will likely be required to develop the climate-related financial disclosures that drive behavioural change. Equally, current climate risk assessments can often be limited to certain parts of the business and may only include qualitative analysis. Yet we know that the impact of physical and transition risks on products and services, supply chains and operations can materially affect operating costs and revenues across the enterprise.
- Information in order to provide such ESG reporting will be needed from across the value chain (e.g. on the issue of Scope 3 emissions), forcing more businesses to engage on the issue of sustainability and businesses to review their international supply chains and trade operations. The value for investors, consumers and other stakeholders of ESG reporting is that must be able to utilised, comparable, accessible and auditable.
- For UK service providers, this will likely include a shift towards lower levels of in-person business travel as service providers seek to minimise and offset their carbon intensiveness. As has been seen with the pandemic, this will continue to drive change in the way that services are provided, including through technological and virtual developments. This will necessitate an ongoing discussion between the private sector and the UK government about how changes in business models will impact on the UK’s international trading relationships.
Q4: To what extent does the Government’s trade policy align with the objectives of COP26? This includes, but is not limited to, its actions at the WTO, its G7 presidency, and its bilateral and plurilateral trade agenda.
- The UK government has taken some admiral steps to integrating its climate objectives into its trade policy. This includes eliminating tariffs on a number of environmentally-friendly products through the UK Global Tariff, through to joining as a member of the WTO plurilateral initiative on trade and environment and co-sponsoring a proposal to liberalise environmental services.
- Going forward, the UK government’s trade policy needs to support and encourage companies to make the transition to a low-carbon future. This can be done in a multitude of ways and should be thought about more broadly than just the sustainable development or investment chapters in Free Trade Agreements (FTAs).
- The UK government is already making efforts to align a number of its positive policy developments (including UK Trade Finance’s efforts to promote exports of environmental products and the FCDO’s ongoing efforts to green their Aid-for-Trade programmes and promote environmentally-friendly development outcomes) with development partners around the world. The forthcoming UK Export Strategy is another opportunity to further embed the promotion of climate technologies and environmentally-friendly products.
- However, our experience has shown that more could be done to integrate the UK’s climate objectives into developing a holistic climate-friendly/net zero trade policy which embeds sustainability through the UK’s trade strategy across all policy areas - including market access, regulatory dialogues, bilateral economic partnerships etc.
- G7: The UK government secured agreement at the G7 Environment Ministers of a commitment to end fossil fuel subsidies by 2025. The UK should prioritise turning this commitment into action through other fora and taking on the disciplines s currently being negotiated in as part of the Agreement on Climate Change, Trade and Sustainability (ACCTS). This would also support commitments that the UK has made as part of the Paris Agreement and the United Nations Sustainable Development Goals (SDG 12 target (c)). More detail on ACCTS is provided in our answer to Question 5 below.
- WTO: There are ongoing talks at the WTO on a new multilateral agreement designed for countries to eliminate harmful fisheries subsidies. The talks have not progressed smoothly, with long-running tensions around developing country status and obligations bubbling to the surface, but there is still a chance that they will be concluded in time for the 12th WTO Ministerial Conference. In addition to continuing to push for a multilateral outcome at the WTO this year, the UK could also seek to include enforceable commitments on harmful fishing subsidies in its bilateral FTAs.
- Multilateral Environmental Agreements: Multilateral Environmental Agreements (MEAs) are used to control trade in certain products and to commit parties to mutually taking action to prevent environmental degradation. The UK participates in MEAs covering a range of issues such as the Convention on International Trade in Endangered Species of Wild Fauna and Flora (CITES), the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and their Disposal, and the Stockholm Convention on Persistent Organic Pollutants.
- Free Trade Agreements typically include provisions affirming commitments to these MEAs, a trend the UK looks likely to continue, as seen in the UK-Australia FTA Agreement in Principle. Committing trading partners to joining MEAs that they have not yet ratified would be a positive for trade policy. However, this benefit is severely limited where partners are already bound by the same MEAs and hence do not take on additional commitments.
- As technologies and priorities evolve, so too must MEAs in order to effectively address emerging issues. A good example of this is the recent EU proposal to expand the universe of covered products relating to e-waste under the Basel Convention, subjecting more products to its rules. Such proposals will be of increasing significance as the global economy moves to a more circular model. Similarly, the UK should continue to promote the use of MEAs amongst trading partners including through FTAs, although there must also be a focus on updating MEAs where necessary and engage on emerging issues.
- Sustainability Impact Assessments: Specifically with regards to FTAs, the UK government should consider revising the use of Sustainability Impact Assessments. While the “Scoping Assessment” section of the UK-Australia and UK-New Zealand documents does provide for a short section dedicated to the potential impacts on the environment and labour standards, this falls short of the practice of many of the UK’s European trading partners whose impact assessments are now largely dedicated to assessing the economic, environmental and social impacts of trade agreements with much more equal weighting.
Q5: What discussions, if any, are planned to develop a multilateral approach to carbon pricing systems (including border adjustment mechanisms), green subsidies and investment funds, the curbing of fossil fuel subsidies, a circular economy and sustainable supply chains?
- The UK needs to decide whether to join the ACCTS negotiations. Six countries (New Zealand, Costa Rica, Fiji, Iceland, Switzerland and Norway) are reportedly close to concluding negotiations for a new trade agreement which would liberalise trade in environmental goods and services, eliminate fossil fuel subsidies and set guidelines for eco-labelling. ACCTS would be the first explicitly climate-focused plurilateral trade agreement, and if successful could potentially set the parameters for broader multilateral discussions. We would encourage the UK government to join these negotiations.
- The UK should also continue to participate in discussions at the OECD, UN and WTO on developing multilateral outcomes on the circular economy (that is, recycling of the components of complex products such as cars or computer) and sustainable supply chains.
- The UK may also choose to adopt some form of carbon border adjustment mechanism (CBAM), a concept which has come to prominence recently due to the EU’s proposed adoption of such a policy with the intention of achieving climate goals through international trade measures.
- CBAMs involve the introduction of a carbon price payable on certain goods imported, in this case into the EU. Its purpose is to prevent carbon leakage (i.e. the relocation of production from EU countries with tough climate policies to countries outside the EU that do not have such stringent measures).
- If designed effectively, affected importers should begin designing and implementing processes required for compliance with CBAM legislation, either by bringing manufacturing back to countries with tough climate policies, or by encouraging other governments to ‘clean up their act’. CBAMs could affect, either directly or indirectly, all sectors that depend on imports of the goods concerned into the EU. This may in turn have an impact on global trade flows and purchasing decisions.
- CBAMs are not without criticism, however. Some argue that they are simply disguised protectionist measures to protect domestic producers from competitive imports; others suggest that the carbon prices collected should by ring-fenced and spent on projects which allow developing countries to green their manufacturing processes sooner than would otherwise be the case.
Q6: What impact could an agreement on finance at COP26 have on trends in international investment?
Q7: What engagement has there been between the COP26 Unit and the Department for International Trade on the Government’s agenda for its Presidency?
- EY exists to build a better working world, helping to create long-term value for clients, people and society and build trust in the capital markets. Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate. Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.
 CDP is a voluntary reporting framework that some companies use to disclose environmental information to their stakeholders.