Research Trends and Conclusions: Environment 2010
Richard Noakes
Environmental law has never been so crucial. Increased awareness of climate change and recent environmental disasters in the Gulf of Mexico and north-eastern China are leading to new laws and regulations to protect the environment from potentially destructive human activity.
Barack Obama, in reaction to the Gulf oil spill, was quick to announce in June that “The tragedy unfolding on our coast is the most painful and powerful reminder yet that the time to embrace a clean energy future is now. Now is the moment for this generation to embark on a national mission to unleash America’s innovation and seize control of our own destiny.” Environmental law is increasingly tied to wider issues of climate change and the national security of countries reliant on foreign reserves of finite resources.
In such circumstances, environmental lawyers are now experiencing a “golden age” as they play a key role to guide clients through government-led programmes to make the transition to a clean economy. The focus on a low carbon environment and renewable energy is creating high levels of work across the transactional, litigation and regulatory fields.
Cautious Transactions
We reported in our last edition that the volume of environment-related transactions had significantly fallen. Fortunately, transactions have steadily picked up in 2010 and as Adeeb Fadil at Simpson Thacher & Bartlett in New York states “M&A has come alive again”.
This is largely due to the increasing interest in renewable energy as governments push for new wind farms and solar projects. There is also a growing interest in alternative sources of energy such as shale gas. In August 2010, the White House released a report stating that the $787 billion economic stimulus package will result in a doubling of the renewable energy capacity in the US by 2012, in comparison with 2008 levels. Wind power has become increasingly popular as a source of electricity generation. Information released by the American Wind Energy Association indicates that the total wind power capacity operating in the US is enough to power the equivalent of 9.7 million homes and avoid the production of an estimated 62 million tons of carbon dioxide annually. The European Union has also set out its ambition to reach a 20 per cent share of energy from renewable sources by 2020.
Clients are, however, having to look for new sources of finance as credit from banks remains difficult to obtain. As one source notes: “There has been more alternative finance work. Getting lenders together can be challenging because unlike banks, lenders have more control over clients.” Adeeb Fadil is quick to note that: “Deals are now more carefully engaged. Clients are more cautious due to an uncertainty that deals will go forward and are more careful when they engage us and how extensively they want to deploy us.” Lawyers now have to pay more attention to understanding and managing the anxieties of their clients in an uncertain global economy.
While transactions have picked up they are not back to pre-2008 levels. This has affected many environmental practices that have transactional work built into their business model. As a result, full-service law firms face an important challenge to replace revenue streams from their transactional environment work through activity in the regulatory compliance and litigation areas. According to Ed Keeble at Slaughter and May in London: “As the M&A boom tailed off, environmental lawyers have diversified into other areas such as climate change related work, to show that the environmental practice can still stand on its own two feet.”
The Recalibration of Risk and Increase in Compliance
The credit crisis and the Gulf of Mexico oil spill have led to the revision of the concept of environmental risk. Our research has found that particularly when speaking to directors about their duties, assessing the responses to risk is a highly important issue. Clients with offshore operations are re-examining their risk allocations, which will change the way lawyers draft and negotiate contracts. Governments around the world have made it clear that they will be less tolerant and there is widespread agreement among interviewees that environmental prosecutions by government agencies have become more aggressive.
The oil spill in the Gulf has had repercussions for other sectors. Kevin Gaynor at Vinson & Elkins in Washington, DC, says that “The spill is being used to clamp down on drilling wells for on-land shale gas production. The government will make it a lot harder for companies to engage in resource extraction.” Other interviewees have been asked to conduct environmental reviews for offshore wind farm projects.
The vast majority of our sources expect the volume of compliance work to significantly increase as clients become more concerned with risk and get to grips with the new regulations that will be introduced. Attitudes toward financial liability have shifted against oil companies as a result of the spill. However, Harry Reid, the US Senate majority leader, was unable to find sufficient support for his bill to remove liability ceilings in the oil industry. This continues to be a sticking point on Capitol Hill, which as yet has been unable to find consensus in relation to Obama’s energy programme. Earlier in the year Senate Democrats were unable to pass a global warming bill as support waned for the imposition of carbon caps and taxation on greenhouse gas emissions. Nevertheless, one source says, “The renewable energy and carbon markets will pick up considerably once Federal energy legislation is passed and policy issues are settled.” At the time of writing environmental lawyers in the US are still waiting for new legislation to come through. When it does, law firms with operations in the US seem likely to expand their environmental compliance capacities.
In the UK, lawyers have also seen an up-tick in compliance work. In April 2010 the CRC Energy Efficiency Scheme came into effect. As part of the UK government’s ambition to reduce greenhouse gases by 80 per cent from 1990 levels by 2050, the scheme is a regulatory incentive to improve energy efficiency in large public and private sector organisations. Organisations that use over a certain level of energy have to monitor their emissions and purchase allowances initially sold by the government for each ton of CO2 that they emit. As Claire Sheppard at Addleshaw Goddard in London explains: “The philosophy behind CRC is to get carbon on the boardroom agenda and change mindsets at a managerial level. It is not a tax but it is designed to change behaviour.” There has been a lot of compliance work related to advising clients on registration with the scheme. A number of lawyers particularly highlighted the complexities they encountered in advising clients such as franchises and private funds that have highly technical corporate structures.
The CRC provides a recent case study of how a major legislative change is picked up by environmental practices. Ed Keeble of Slaughter and May says that “A lot of work has been put into getting to grips with CRC, lecturing, publishing and presenting, but the hard question is how much of that can be recovered through billings. What clients really want is high-quality guidance that they can then take away and use in their own internal compliance activity. Increasingly, they are asking for that advice as part of their wider relationship with a law firm.” He adds that “the fact of the matter is that CRC is ferociously complex and so advising on it is resource intensive. Clients will understand that it is essential for them to be in compliance and so the detailed work has to be done and it has to be done right. But at the same time clients will want to balance legal spending with their likely CRC costs – which may not be that high.” While CRC has generated a high volume of activity, this does not mean that environmental practices in all cases have made significant returns from advising on it. As a result, revenue will also have to come from the fullest range of practice areas such as regulatory compliance, carbon-related advice, corporate social responsibility and old staples including contaminated land and litigation.
Litigation
The Gulf of Mexico oil spill has had tremendous implications for the region’s litigators. Michael Gerrard at Arnold & Porter and Columbia Law School says that “The spill has created a cottage industry of its own.” Over 70 lawsuits had been filed just two weeks after the accident and over 250 class actions have now been filed. Consequently, the Judicial Panel on Multidistrict Litigation decided to consolidate these class actions in federal court in Louisiana. Given the number of cases filed and that BP has created a $20 billion fund to pay for the claims made against it, this new sub-industry is likely to be a source of work for several years to come.
Litigation levels have been bolstered by more aggressive enforcement. In June 2010 alone the US Environmental Protection Agency made eight new rulings. As Vinson & Elkins’ Kevin Gaynor explains: “The US government is extraordinarily active on the regulatory front as there has been one initiative after another. I have never seen the environment practice as active as it is now especially as the stakes have gone up in disputes.” As a result, corporate clients increasingly require well informed counsel to be guided through potentially damaging risks that they face.
A Low-Carbon Economy and a Brighter Future
As environmental law is now dominated by a shift towards low carbon emissions and an emphasis on renewable energy, climate change has become an increasing source of activity for a number of firms. Wide-ranging schemes such as the CRC are likely to be replicated elsewhere and clients in both the private and public sector will seek counsel on the implications and risks involved. Lawyers have recognised the importance of climate change and are increasingly diversifying their practice into this area. One example of this is product liability work, which interviewees expect to be an active area in the coming months and years, particularly in the US.
Elsewhere, many lawyers noted other areas of potential activity. Robert Falk, chair of Morrison & Foerster LLP’s land use and environmental law practice, explains that “In addition to shifting our focus to a clean-green economy, our environmental practice is focusing on climate change and the increasing scarcity of adequate water resources as these will increasingly impact the legal services needs of our clients, both short and long term.”
Environmental lawyers are right to be optimistic about the future. Transactions have, somewhat cautiously, started up again. The oil spill in the Gulf of Mexico has put risk at the forefront of clients’ minds boosting the demand for compliance work and has spawned a litigation industry of its own that is expected to last for nearly a decade. Aggressive environmental agencies show no signs of reducing their emphasis on enforcement and further regulations are coming through to reduce carbon emissions. At the same time, the renewable energy sector is set to expand significantly. In such a context, clients are in need of counsel now more than ever.