The regulators’ growth duty: what does it mean for business from an environmental perspective?

read time: 5 mins

Legislation that expands the ‘growth duty’ on regulators to include the Office of Gas and Electricity Markets (Ofgem), the Water Services Regulation Authority (Ofwat) and Office of Communications (Ofcom), comes into force on 21 May 2024. Alongside the new legislation, the government has published draft revised statutory guidance on how the regulators are to comply with that duty, replacing guidance first issued in March 2017. 

This article introduces growth duty and advises the requirements for environment regulations as a result of this draft guidance.

What is growth duty?

Under section 108 of the Deregulation Act 2015, more than fifty specified regulators, including the environmental regulators, must have regard to ‘the desirability of promoting economic growth’, known as the ‘growth duty’. 

The draft guidance sets out how the regulators can better support sustainable economic growth through their decision-making and through the way they regulate. It also provides clarity for stakeholders as to what they should expect of regulators. The guidance does not apply to activities that are undertaken by small businesses.

The guidance goes on to state that the listed drivers are not exhaustive and other aspects of economic growth, or other objectives that relate to economic growth, such as the desirability to foster regional growth or support small and medium-sized enterprise (SME) development, could also be considered.

Efficiency and productivity

The guidance notes that, for business, a proportionate regulatory approach is fundamental to delivering economic growth through efficiency and productivity. It states “A proportionate regulatory approach is one which requires a regulated business to meet the minimum requirements necessary to deliver assurance to meet the regulator’s responsibilities for ensuring safety, environmental compliance, etc.”

The indicators that a regulator used to set regulatory policy which support efficiency and productivity include:

  • Faster decision making
  • Taking proportionate authorisations - ensuring that compliance costs for business in licensing and permitting are minimal, application and renewal processes are streamlined.
  • Compliance support through simple, clear and timely guidance and advice.
  • Minimising costs of intervention - the draft guidance expects the regulators to minimise the costs of compliance inspections for business and recognises the importance of taking into account a businesses own internal compliance systems.

Environmental sustainability

The UK Government has pledged to achieve net zero emissions by 2050 and environmental targets set out in the Climate Change Act 2008 and the Environment Act 2021. The draft guidance sets out some indicators that may frame a regulator’s policy to support economically and environmentally sustainable growth:

  • Assessing the impact of environmental policies
  • Setting sector-relevant incentives and advising on energy efficiency targets to reduce business costs.
  • Reporting on sustainability performance of industry
  • Enhancing capabilities and skills on sustainability
  • Adopting policies that prioritise long term sustainable economic growth over short term activity that causes unacceptable harm and may inhibit future economic growth.

What does the growth duty mean for environmental regulations?

The growth duty is one of many legal duties that the Environment Agency is required to ‘take account of’ or ‘have regard to’, when exercising its functions. 

For the regulator, it can be difficult to manage all of these various duties. For example, when a decision is made whether to grant an environmental permit, the agency must primarily ensure that the permit achieves certain emission limit values or other environmental outcomes, but must be taken to other applicable duties, including:

  • Contributing towards the objective of achieving sustainable development - section 4, Environment Act 1995.
  • Having regard to the Regulators Code - Legislative and Regulatory Reform Act 2006
  • Taking into account costs and benefits of decisions - section 39, Environment Act 1995
  • Human rights - Human Rights Act 1998
  • Securing the involvement of interested persons in the exercise of function by providing information, consulting or involving them in any other way - Local Democracy, Economic Development and Construction Act 2009.
  • Eliminate discrimination - section 149, Equality Act 2010

The growth duty and the supporting statutory guidance is likely to offer regulated businesses an enhanced tool to challenge regulatory action. Specifically, we anticipate that there may be grounds for challenge in how the regulators:

‘‘give appropriate consideration to the potential impact of their activities and their decisions on economic growth, for the wider UK economy, alongside or as part of their consideration of their other statutory duties.” 

This consideration is to be applied when enforcement action is being considered. The draft guidance states: 

‘‘Certain enforcement actions, and other activities of the regulator, can be particularly damaging to growth. These include, for example, enforcement actions that limit or prevent a business from operating; financial sanctions; and publicity, in relation to a compliance failure, that harms public confidence.’’

And before taking enforcement action, regulators are required to consider the: 

‘‘likely impact of the proposed intervention on the business, and the wider business community both in terms of remedying and deterring the noncompliance and in terms of economic costs and benefits to businesses.’’ 

Like any public body, regulators must provide adequate reasons for its decisions. The reasons do not need to be excessively detailed, but do need to be sufficient to include all the factors that were material to the decision being made. That would include how the growth duty has been complied with. To that end, I’d expect some movement in how the Environment Agency and other regulators explain how they have complied with the growth duty, including in relation to:

  1. Their enforcement and prosecution policy 
  2. Licensing or permitting decisions 
  3. Decisions whether or not to issue legal proceedings

Any failure to provide adequate reasons is likely to open the door to legal challenge. For further information, please contact the business risk and regulation team.

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