ESG Newsletter – December 2023
Welcome to the latest edition of the Linklaters global ESG Newsletter. This issue covers key developments from November 2023 - in the UK, EU, US, Asia and globally - on the full range of ESG topics.
Explore the key developments below
Climate Change & Energy
Global: What to look out for in COP28
Delegates from over 200 countries are preparing to descend in Dubai for COP28, the UN’s big global climate summit, which will start on 30 November and run until 12 December. The Linklaters team will be keeping a very close eye on development and letting clients know what the outcome means in practice. COP negotiations are never easy but this year is expected to be one of the most challenging. The physical impacts of climate change this year have been the worst so far and the geo-political and economic backdrop is also the most complex it’s been in a long time.
In the lead up to COP28, we held a webinar with the Right Honourable William Hague and other members of the Linklaters International Advisory Group to discuss what to expect from COP28. See here for a recording of that webinar.
Top of the COP agenda this year:
- Global Stocktake – COP28 is the first Global Stocktake of the Paris Agreement – where countries will be assessing progress towards meeting the goals of the Paris Agreement. We are literally at a halfway point - it has been 7 years since Paris and we have 7 years to go to 2030. However, the latest UN report says that current climate pledges put the world on track for a temperature rise of up to 2.9C above pre-industrial levels and that the chances of keeping within the 1.5C threshold in the Paris Agreement is around 14%. Which is leading many to question whether the goal of “keeping 1.5C alive” is still realistic.
- Phase out of unabated fossil fuels – Central to the discussions is whether agreement can be reached on the continued role of fossil fuels. This year’s COP hosts, the UAE, are pressing for increased focus on unabated fossil fuels and low-carbon technologies such as CCS.
- Renewable energy target –The COP28 hosts are calling for a tripling of renewable energy capacity and a doubling of energy efficiency by 2030.
- “Loss and damage” fund – Although a provisional agreement was reached in the lead up to COP28 on the basics of a new “loss and damage” fund to help countries most affected by climate change, important details (such as who pays into the fund and how much) still need to be ironed out at the summit.
- Clarity needed on carbon market – We are hoping for final agreement on the detailed rules under Article 6.4 of the Paris Agreement, the mechanism which allows governments to create tradeable carbon credits to help meet their national emissions reduction targets.
- And plenty more topics - including reducing methane emissions and the role of the World Bank and other MDBs in climate financing.
We will be following – and reporting – on this year’s summit via our COP28 page.
UK: Autumn Statement 2023: summary of energy-related announcements
The Chancellor of the Exchequer presented his Autumn Statement to Parliament on 22 November 2023. The building of “domestic and sustainable energy” was one of the UK government’s five areas of focus, in line with its broader aims to boost economic growth, reduce debt and lower inflation by half. Overall, the Autumn Statement confirms the government’s position that support for green industries will focus on facilitating growth in sectors where the UK can make the most headway (including CCUS, hydrogen, offshore wind, electricity networks and nuclear, as well as low-emissions vehicle manufacturing) rather than responding directly to the US Inflation Reduction Act or the EU Net Zero Industry Act. There was no announcement on a UK Carbon Border Adjustment Mechanism (CBAM) but a separate policy announcement on this is anticipated soon. For more information, see our blog post.
UK: Government publishes battery strategy
The UK government has recently committed to over £2 billion in new capital and R&D funding being made available for the automotive sector, supporting the manufacturing and development of zero emission vehicles, their batteries, and supply chain for five years to 2030. Shortly after this announcement, at the end of November, the government published the first UK Battery Strategy, setting out its vision for building up a globally competitive battery supply chain in the UK by 2030. The government is looking to capitalise on the UK’s strengths in research and advanced manufacturing to facilitate the huge opportunities for growth in the battery sector within the UK. The strategy adopts a Design-Build-Sustain approach through which government intends to:
- support innovation across the battery value chain, explore new financing mechanisms and maintain safety standards to build on the UK’s R&D expertise to enable the design and development of batteries that are lighter, smaller, and have greater capacity (Design);
- establish a resilient UK manufacturing supply chain by building international collaboration, speeding up grid connections, and reforming planning and permitting (Build); and
- develop a sustainable battery industry by ensuring availability of skills needed, reducing barriers to green trade, and setting out regulation to incentivise investment (Sustain).
The strategy sets out the government’s overarching ambition for the UK battery industry, a framework for its implementation, and various policy options to enable delivery of the strategy. The government is seeking ongoing engagement with business, in particular through the Battery Strategy Taskforce, in order to help deliver the strategy as well as to identify emerging opportunities and risks in the sector. The publication of the Battery Strategy is being seen by industry as a positive and significant step forward in the light of the global race to develop sustainable battery industries.
UK: ClientEarth fail to appeal ruling in Shell climate-related derivative action
The Court of Appeal has refused to allow ClientEarth to proceed with a proposed derivative action against the directors of Shell plc. The decision on 14 November 2023 confirms the earlier findings of the High Court and brings an extended period of attempted activism by the NGO to an end. In May this year, the High Court ruled that ClientEarth had failed to establish a prima facie case that Shell’s directors were not acting in the best interests of shareholders and were in breach of their statutory duties under the Companies Act to promote the long-term success of the company and to act with due skill, care and diligence. The Court of Appeal has confirmed the High Court’s judgment in robust terms. The Court of Appeal’s decision puts an end to what was the first climate-related derivative action against a board of directors under the UK’s Companies Act, and the first English case targeting corporate directors personally for a company’s energy transition strategy. The UK courts have made it abundantly clear that they are reluctant to interfere in directors’ management and commercial decision-making, that it is for the directors themselves to determine how best to promote the success of a company, and that companies’ AGMs might be a more appropriate forum for disagreements over a company’s climate strategy. The bar for using the derivative action process in the UK to challenge a company’s climate strategy has been set very high. For more information, see our blog post.
Global: ICMA updates to the Guidance Handbook
On 29 November 2023, the International Capital Market Association (ICMA) and the Executive Committee of the Principles published an updated edition of the Guidance Handbook. The Guidance Handbook, first published in 2019, complements the Green Bond Principles, the Social Bond Principles, the Sustainability Bond Guidelines and Sustainability-Linked Bond Principles (together, the Principles) providing additional information to market participants on how to interpret the Principles as well as giving more detail on practical application for transactions. The main updates relate to additional guidance on use of proceeds for green, social or sustainability bonds (GSS Bonds). The Guidance Handbook now includes additional Q&A for issuers intending to allocate proceeds of a GSS Bond towards investment in pure play companies (i.e. companies that are primarily involved in environmental and/or socially sustainable activities) or fund investment in pure play companies and/or eligible projects. For more information, see our blog post.
EU Taxonomy: Delegated Acts with TSC for remaining four environmental objectives and amending climate TSC published in Official Journal
The following Delegated Acts under the EU Taxonomy were published in the Official Journal of the EU on 21 November 2023:
- Delegated Act with the technical screening criteria (“TSC”) for the remaining four environmental objectives (circular economy, water and marine resources, pollution prevention and control, and biodiversity and ecosystems - also known as “Taxo4”) and which also makes the necessary amendments to the existing Taxonomy Disclosure Delegated Act; and
- Delegated Act which amends the existing Taxonomy Climate Delegated Act to include climate adaption and mitigation TSC for additional economic activities and some changes to existing climate TSC.
For details of what each Delegated Act does, see our previous blog post.
Disclosures in respect of the TSC in the new Delegated Acts will apply as follows:
- From 1 January 2024: all entities report on eligibility (for the previous calendar year);
- From 1 January 2025: non-financial entities report on alignment (for the previous calendar year);
- From 1 January 2026: financial entities report on alignment (for the previous calendar year).
EU: ECB threatens to fine banks that lag behind on managing climate change risks
The European Central Bank (ECB) will impose financial penalties on banks that take too long to address climate change risks in their business, according to Frank Elderson (Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB), in a keynote speech delivered on 14 November 2023. Mr Elderson explains that, in line with what has been communicated previously, the ECB has started to adopt enforcement measures and has “issued binding supervisory decisions, including the potential imposition of periodic penalty payments if banks fail on their requirements. In other words, we have told those banks to remedy the shortcoming by a certain date and, if they don’t comply, they will have to pay a penalty for every day the shortcoming remains unresolved.” No indication was given as to how much the penalties could be or when they would commence. For more information, see our blog post.
EU: Green Bonds Regulation published in the Official Journal
On 30 November 2023, the Regulation on European Green Bonds and optional disclosures for bonds marketed as environmentally sustainable and for sustainability-linked bonds (EU GBS) was published in the Official Journal of the European Union. The Regulation will enter into force on 20 December 2023 and will apply from 21 December 2024, meaning that it will likely be 2025 before we see the first issuers to use the label. The Regulation introduces: (i) a voluntary label for issuers of green use of proceeds bonds where proceeds are fully allocated to economic activities aligned with the EU Taxonomy Regulation (subject to some limited flexibility); and (ii) creates an optional disclosure regime for bonds marketed as environmentally sustainable and sustainability-linked bonds. There is still more detailed work to be done and further rules to follow by way of technical detail - in particular when it comes to the optional disclosure regime for bonds marketed as environmentally sustainable and sustainability-linked bonds and the regime applicable to external reviewers. The EU GBS - which comes with rigorous allocation and transparency requirements - will be the first standard of its kind globally. For more detail on the Regulation, see our previous blog post and our podcast series.
EU: AFME report on sustainable finance in the EU
The Association for Financial Markets in Europe (AFME) has published a new report 'Sustainable Finance in the EU: Priorities to unlock financing and investment', which outlines AFME members’ views and recommendations on the functioning of the current EU sustainable finance framework and the implementation challenges that banks face in applying it to financing companies. The paper highlights AFME’s recommendations for policymakers, including how policymakers and regulators can further enable financial institutions in providing financing in support of climate, environmental and social goals. The report sets out five priority recommendations to address identified challenges:
- maintain focus on establishing roadmaps, reducing regulatory barriers for the deployment of sustainable investment projects and providing incentives for the real economy transition;
- ensure that the regulatory framework is achieving its goals, is coherent and usable in practice to promote and support sustainable finance (including transition finance);
- provide a stable regulatory framework with time for implementation and review how it is working in practice, with targeted guidance/changes introduced where needed in consultation with market participants;
- ensure that regulation is promoting investment and does not adversely impact the competitiveness of financial institutions or companies operating in the EU and internationally; and
- enhance international coordination and improve international interoperability with other key jurisdictions.
Alongside recommendations on improving the functioning of the EU regulatory framework, the report also sets out AFME’s recommendations in three further important areas which we see as priorities for EU policymakers: facilitating transition finance; developing carbon markets; and scaling finance for nature.
ESMA provides guidance on Sustainable Finance Framework
On 22 November 2023, ESMA published three explanatory notes covering key aspects of the EU Sustainable Finance framework, namely the concepts of sustainable investments and environmentally sustainable activities, the “Do no significant harm” definitions and criteria and the concept of estimates. The notes aim to help stakeholders navigate the sustainable finance framework by explaining the concepts and by putting them in context with other publications and clarifications provided by e.g. the EU Commission and the ESAs. ESMA stresses that the notes are purely factual presentations of the legal provisions which merely have a descriptive character rather than laying down new requirements.
UK: FCA finds that AFMs still have further to go to fully embed ‘Guiding Principles’ for ESG and sustainable investment funds
A review by the Financial Conduct Authority (FCA) has found that, while most Authorised Fund Managers (AFMs) have made efforts to comply with the FCA’s expectations on the design, delivery, and disclosure of their ESG and sustainable funds, “further improvement is needed”. The latest review is a follow up to the FCA’s July 2021 Dear Chair Letter, in which the FCA provided a set of guiding principles and set out its expectations in this area. The review assesses how AFMs have implemented the Guiding Principles. It comes against the backdrop of the FCA’s Asset Management Portfolio letter of February 2023, which highlighted the increase in the prominence of products which have ESG and sustainable investment characteristics within asset managers’ business strategies (and the risks to consumer confidence and market integrity of misleading or inaccurate claims about ESG and sustainable investing). The review indicates a hard-line approach by the FCA – particularly given the FCA’s focus not just on disclosures and marketing materials, but also on fund portfolio holdings, and their correlation to the fund’s ESG or sustainability commitments. There is a clear focus on AFMs substantiating, or evidencing their claims. The FCA has chosen to publish this review and set out its expectations ahead of its final rules and guidance on Sustainability Disclosure Requirements (SDR) and investment labels regime, which it says it expects to publish “shortly”. For more information, see our blog post.
UK: FCA publishes SDR investment labels and anti-greenwashing policy statement
On 28 November 2023, the FCA published a Policy Statement with its final rules and guidance on its Sustainability Disclosure Requirements (SDR) and investment labels regime. The Policy Statement is also accompanied by a consultation on Anti-Greenwashing Guidelines that will accompany the new anti-greenwashing rule introduced by the FCA under the SDR (which, unlike the other SDR rules, will apply to all FCA regulated firms). The final rules are largely similar to the proposals the FCA had previously consulted on – and the FCA have made some helpful improvements based on industry feedback. In particular, a fourth label of “Sustainability Mixed Goals” has been introduced for multi-strategy products that did not fit neatly any of the other three labels, and the previously broad naming and marketing rule has been relaxed (so that retail funds which do not qualify for a label are still able to use ESG terms in their names or marketing documents if certain conditions are met – which are akin to EU SFDR pre-contractual and reporting requirements). The final rules do not apply to overseas funds or separate account managers as yet – both of which we expect will be brought into scope at a later date (in the case of overseas funds, we expect this will be done as part of the UK’s overseas funds regime (OFR)). However, firms offering overseas funds will be caught by the FCA’s anti-greenwashing rule and certain distributor related obligations. The anti-greenwashing rule and guidelines will become effective from 31 May 2024 (rather than as of 28 November as was initially expected). Meanwhile the implementation date for the SDR labelling and disclosure requirements will be staggered with in-scope firms able to use the labels from 31 July 2024. For more information on the FCA Policy Statement and Anti-Greenwashing Guidelines consultation, see our briefings here and here.
UK: IAIS second consultation on climate risk for the insurance sector
The International Association of Insurance Supervisors (IAIS) has launched the second in a series of three consultations on climate risk. The consultation focuses on proposed supporting material addressing issues relating to market conduct and scenario analysis, through the publication of the following two draft application papers:
- Draft Application Paper on climate risk market conduct issues in the insurance sector aims to support supervisors in their efforts to identify instances of potential unfair treatment of consumers that can emerge in relation to natural catastrophe protection products or sustainability-focused products (for example, through greenwashing or misleading information on the sustainability of an insurer’s operations).
- Draft Application Paper on climate risk scenario analysis in the insurance sector focuses on the use of climate-related scenario analysis as a tool used by both supervisors and insurers to understand the risks to which the insurance sector is exposed at a micro- and macro-prudential level. The paper considers why and how climate-related scenario analysis exercises should be used and the extent to which they can overcome some of the shortcomings of existing methods for assessing risks.
The consultation closes on 23 February 2024. The IAIS launched its first consultation in March 2023; responses received during the first consultation can be found here, together with an update on how the IAIS is considering these comments in its ongoing work.
EU Green Deal & "Fit for 55" Package
EU: Parliament and Council agree on Critical Raw Materials Act
On 13 November 2023, the European Parliament and Council reached a political agreement on a Proposal for a Critical Raw Materials Act (CRMA). Critical raw materials are essential for the EU's green transition. However, Europe relies on raw materials that are supplied by several third countries, raising concerns about the security and availability of these rare minerals and metals. The CRMA aims to tackle this problem by encouraging mining and recycling of these materials within the EU, as well as diversifying supply sources using economic incentives and fast-track permits. The CRMA, along with the Net Zero Industry Act and the reform of the electricity market design are all part of the Green Deal Industrial Plan. For more information on the CRMA, see our blog post.
EU: Parliament and Council reach deal to cut methane emissions in energy sector
On 15 November 2023, the European Parliament and Council reached a political agreement on a Regulation that establishes a new EU legal framework for the measurement, reporting, and verification of methane emissions in the energy sector. The Regulation also introduces mitigation measures to prevent such emissions, including detecting and repairing methane leaks and limiting venting and flaring. It also sets out global monitoring tools to ensure transparency on methane emissions from imports of oil, gas and coal into the EU. The agreement now needs to be formally adopted by both the Parliament and Council. It will then be published in the Official Journal of the EU and will enter into force 20 days later. For more information, see our blog post.
EU: Trilogue negotiations to start on right to repair proposal
The European Parliament and Council have each adopted their negotiating positions on the right to repair initiative. Both institutions call for changes to the Commission's proposal, but in different ways. The new rules will impose new obligations on companies involved in the production, sale or repair of goods. The Commission’s proposal for a Directive on common rules promoting the repair of goods is intended to boost the sustainable consumption of goods, thereby avoiding premature disposal and developing a circular economy to protect the environment. Among other things, the proposal amends the legal warranty rules laid down in the Sale of Goods Directive and introduces new rights and obligations for the time after the legal warranty period has elapsed. The trilogue negotiations are set to start on 7 December 2023, with a view to reaching a final agreement in early 2024. However, given the differences in their position, the negotiations promise to be difficult. In particular, from the point of view of in-scope companies, the institutions disagree completely with regard to the scope of amendments to the legal warranty under the Sale of Goods Directive. For more information, see our blog post.
EU: Parliament and Council reach political agreement on nature restoration law
On 9 November 2023, the European Parliament and Council reached a political agreement on a Regulation on Nature Restoration, commonly known as the “Nature Restoration Law”. The Regulation aims to improve the state of nature by setting binding targets and obligations for a wide variety of land and sea ecosystems. The new rules are intended to help restore degraded ecosystems across Member States’ land and sea habitats, support EU goals for climate mitigation and adaptation, and strengthen food security. The provisional agreement will now need to be formally adopted by the Parliament and Council before it can be published in the Official Journal of the EU and enter into force 20 days later. The Regulation is a key element of the EU Biodiversity Strategy for 2030 which is part of the European Green Deal. It is intended to help the EU meet its international commitments, in particular the UN Kunming-Montreal global biodiversity framework agreed at the 2022 UN biodiversity conference (COP15). For more information, see our blog post.
EU: Environmental Crime Directive: Parliament and Council agree to introduce an “offence comparable to ecocide”
On 16 November 2023, the European Parliament and Council reached a political agreement on the Commission’s proposal for a Directive on the protection of the environment through criminal law, replacing the existing Environmental Crime Directive 2008. The new Directive provides for new environmental crimes and introduces a “qualified offence” which is comparable to “ecocide” (for when a criminal offence provided for under EU law is committed intentionally and causes destruction, or irreversible or long-lasting, widespread and substantial damage to the environment), as well as increased imprisonment sentencing and fines. The formal adoption of the new Directive is expected in 2024. However, it will still need to be transposed into national law by Member States, likely by early 2026. For more information, see our blog post.
EU: Proposal for EU certification framework for carbon removals can now proceed to trilogues
On 21 November 2023, the European Parliament agreed its negotiating position on a Commission Proposal for a new EU certification framework for carbon removals. The Council agreed on its negotiating mandate on 17 November 2023, which means that trilogue negotiations between EU co-legislators can now commence. The proposal sets out a voluntary framework for certifying carbon removals created in Europe and establishes criteria for high-quality carbon removals. It also provided guidelines for monitoring, reporting, and verifying of the robustness of carbon removals. The certification and verification processes should help avoid greenwashing and attract private investment in carbon removal projects within the EU. This is intended to support the EU’s goal of climate neutrality by 2050 as it balances out greenhouse gas emissions which cannot be eliminated. However, the proposal does not address carbon capture for storage or utilisation (CCUS) or provide for any rules for trading the carbon removal certificates. For more information, see our blog post.
EU: Political agreement reached on amendments to Industrial Emissions Directive
On 29 November 2023, the European Parliament and Council reached a political agreement on amendments to the Industrial Emissions Directive (IED) and a Regulation on the establishment of an Industrial Emissions Portal. The IED is the primary EU instrument for regulating pollutant emissions from large-scale industrial installations in Europe, as well as livestock farms. (For background on the Commission’s proposal, see our previous blog posts here and here.) The revised text of the proposal is not yet available but according to the press releases from the Parliament and the Council, amendments to the Commission’s proposal include adjusting certain agricultural thresholds for animal rearing, excluding extensive farms and animal farming for domestic use from the Directive’s scope while expanding the scope to include mining activities and large installations manufacturing batteries. The co-legislators have also agreed to introduce the concept of “environmental performance limit values” (EPLVs) which will be stipulated in the permits for establishing and operating installations. These will be binding for all energy resources excluding water. Companies failing to comply may face penalties of at least 3% of an operator’s annual EU turnover for the most serious infringements. The co-legislators have included the flexibility for Member States to adapt provisions on penalties and compensation in health damages cases to their national legal systems. The agreed text now needs to be formally adopted by the Parliament and Council, after which it will be published in the Official Journal of the EU and will enter into force 20 days later. The new rules will be progressively applied, starting in 2030 with the largest farms.
Co-legislators have also agreed to transform the existing European Pollutant Release and Transfer Register into an EU Industrial Emissions Portal, where citizens can access data on all EU permits and local polluting activities. In addition, systems for e-permitting should be in place by 2035 at the latest.
EU: Parliament and Council agree on Directive on common rules for the internal markets in renewable and natural gases and in hydrogen
On 28 November 2023, the European Parliament and Council reached a political agreement on a Directive on common rules for the internal markets in renewable and natural gases and in hydrogen. The Directive lays down rules for the transportation, supply and storage of natural gas and hydrogen. Moreover, it outlines the transition of the natural gas system to a system based on renewable and low-carbon gases. The Directive sets out rules for the development of an EU-wide interconnected hydrogen system, which is integral to achieving the EU’s goal of climate neutrality by 2050. It is designed to enable market participants to consider the transitional role of fossil gas in planning their activities to avoid lock-in effects and ensure gradual and timely phasing-out of fossil gas, particularly in all relevant industrial sectors and for heating purposes. The Directive was proposed by the Commission on 15 December 2021 along with a Regulation, as part of a hydrogen and gas markets decarbonisation package that was part of the second suite of the “Fit for 55” package (see our previous blog post). According to the Council press release, the alterations made to the Commission’s initial proposal include the division between Transmission System Operators (TSOs) and Distribution System Operators (DSOs) for hydrogen, protective measures for vulnerable groups, and increased coordination between network development plans for hydrogen, electricity and natural gas. Network development plans will be based on sector integration, the “energy efficiency first” principle and will prioritise the use of hydrogen in sectors that are difficult to decarbonise. Before the Directive comes into effect, both co-legislators must formally adopt it. It will then be published in the Official Journal of the EU. The Council and the Parliament will agree on the Regulation at a later stage.
Disclosure & Reporting
EU: Latest developments from EFRAG on the CSRD
The European Financial Reporting Advisory Group (EFRAG), which helping the European Commission develop the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), has said it will publish, shortly, for public consultation several sets of implementation guidance on key topics, in particular: materiality assessment, value chain, and data points overview for gap analysis (see EFRAG press release).
EFRAG has also launched its ESRS Q&A Platform to collect technical implementation questions from preparers and the wider public on the ESRS. Stakeholders can complete the online form and ask their questions, with further information on the process here. In its role as technical advisor to the European Commission, EFRAG will provide non-authoritative responses to the questions asked through the Q&A Platform. Answers will be provided by EFRAG following its due process.
EFRAG has also published a draft framework for voluntary disclosures by non-listed small and medium-sized enterprises (SMEs) under the ESRS. These are voluntary ESRS disclosures for non-listed SMEs not required to disclose under the CSRD. The voluntary standards are intended to be simpler than those required of listed SMEs, and are designed to help them respond to requests for information from customers, banks, investors or other stakeholders. The structure replicates that of the mandatory ESRS for large companies.
EFRAG and CDP are collaborating to accelerate the market adoption of the ESRS approved by the European Commission in July this year (see EFRAG press release). Under the agreement, CDP will align its disclosure system with the ESRS using technical expertise and guidance provided by EFRAG. This partnership aims to promote environmental reporting by ensuring that businesses are prepared to comply with new mandatory sustainability reporting standards. CDP’s disclosure system already covers climate change, forests and water security, with its data being used by financial institutions and organisations worldwide to measure environmental progress. CDP, with EFRAG’s support, will offer webinars and technical guidance materials to help companies report ESRS data through CDP. CDP is currently used by more than 23,000 companies. CDP announced last year the integration of the ISSB’s IFRS S2 climate-related disclosures standard into its disclosure platform.
UK: TPT consults on sector-specific guidance on climate transition plan disclosures
The UK Transition Plan Taskforce (TPT) published its final recommendations on climate transition plan disclosures in October 2023. The TPT Disclosure Framework and accompanying implementation guidance, which are sector-neutral (i.e. not aimed at any particular sector), provide a set of good practice recommendations aimed at facilitating high-quality, consistent, and comparable transition plan disclosures. They provide a roadmap for organisations in the private sector to formulate and report credible and robust climate transition plans. The TPT has now published, for consultation, draft guidance for seven sectors: banks; asset owners; asset managers; electric utilities & power generators; food & beverage; metals & mining; and oil & gas. The sector-specific guidance gives advice to firms on what they "should consider” and "may consider" disclosing across the five disclosure elements in the TPT Disclosure Framework: foundations; implementation strategy; engagement strategy; governance; and metrics and targets. Firms have until 29 December 2023 to provide feedback on the draft guidance, with a view to the final guidance being published in February 2024. For more information, see our blog post.
UK: FRC Corporate Governance Reporting Review
The Financial Reporting Council (FRC) has published its Annual Review of Corporate Governance Reporting. This focusses on premium-listed companies which are required by the Listing Rules to report against the UK Corporate Governance Code. Many of its findings will also be relevant, though, to large companies wishing to follow best practice and the FRC urges all companies to pursue a goal of strong, clear and informative reporting. UK companies starting to prepare for next year’s annual reporting, should read this latest publication alongside the FRC’s Annual Review of Corporate Reporting which was published in October and set out expectations for the accounts and reports of all UK companies in the coming disclosure season. For the key ESG takeaways, see our blog post.
UK: FRC abandons some but not all changes to UK Corporate Governance Code
The Financial Reporting Council (FRC) has changed its approach to proposed changes to the UK Corporate Governance Code following concerns raised in feedback. It will push ahead with reforms on internal controls but these will be changed to reflect feedback and to ensure that UK listed companies do not end up with a “Sox lite” regime. For more information, see our briefing.
UK: Applying a materiality mindset: FRC suggestions for better, not more, reporting
The Financial Reporting Council (FRC) has published a report by the Financial Reporting Lab on how companies can apply a materiality mindset to improve their reporting. The report encourages companies to think holistically when preparing their annual reports about what information is material to stakeholders. It includes practical suggestions and examples for identifying material issues in the form of a three-part toolkit. For more information, see our briefing.
DEI and Employment
EU: Mind the (Gender Pay) Gap: EU Pay Transparency Directive and its Global Impact
The adoption of the EU Pay Transparency Directive in June 2023 represents a bold step forward in the pursuit of gender pay equality. The Directive introduces far-reaching obligations on employers of all sizes which are backed up by powerful enforcement mechanisms. As the countdown to implementation begins, employers caught by the Directive will need to start adapting their practices and tackling the compliance challenges early in order to manage the associated legal, financial and reputational risks. Visit our dedicated webpage to watch a recording of our recent webinar on the topic and listen to our new podcast series, where legal experts from across our global Employment & Incentives team take a deep dive into pay transparency and equal pay in key European jurisdictions and consider the impact of the Directive. As businesses begin to navigate the changes required, our experts provide their observations on how employers can start to prepare.
UK: New laws to tackle sexual harassment
Tougher laws on sexual harassment are set to come into force in around October 2024, after the Worker Protection (Amendment of Equality Act 2010) Act 2023 received Royal Assent on 26 October 2023. The Act introduces a new duty for employers to take “reasonable steps” to prevent staff from sexual harassment at work. For more information on the new duty, see our blog post.
UK: Supreme Court decision on employment status of Deliveroo riders
In Independent Workers Union of Great Britain v Central Arbitration Committee and another, the Supreme Court considered whether a group of Deliveroo riders in London were in an employment relationship for collective bargaining purposes. Finding that the riders were not in an employment or worker relationship with Deliveroo, the Supreme Court concluded that they were not able to rely on the protection afforded under Article 11 of the European Convention on Human Rights (Freedom of Assembly and Association) and therefore had no collective bargaining rights. For more information, see our briefing.
Consumers continue to file greenwashing suits against major corporations in the U.S. In November 2023, a proposed class action was filed in the U.S. District Court for the District of Maryland against a major U.S. airline claiming that it had defrauded consumers by making false and misleading representations and omissions about its environmental initiatives with the purpose of inducing plaintiffs to buy flights at a substantial price premium. The complaint alleges that the airline’s claim that it uses “sustainable aviation biofuel” is misleading because the biofuel makes up a minimal amount of the total aviation fuel used, and while biofuel may result in lower CO2 emissions than fossil fuels, its production and use still results in CO2 and non-CO2 emissions, which is not sustainable since their effects on climate change are cumulative.
Also in November 2023, a trash bag manufacturer reached a settlement agreement to dismiss all claims in a class action lawsuit alleging that it falsely advertised a line of trash bags as recyclable despite knowing that the products are made of a material that is not recyclable by most facilities in the country. You can find more information on the initial suit in the November edition of the ESG Disputes Bulletin.
For more information on other recent litigation in the US and elsewhere across the globe, sign up to the Linklaters quarterly ESG Dispute Bulletin here.
U.S. government agencies continue to take enforcement actions to crack down on environmental violations. On 20 November 2023, the U.S. Department of Justice (DOJ) announced a settlement with a Kansas-based refinery company for violations of the Clean Air Act (CAA) and several provisions of a 2012 consent decree. To resolve these violations, the company agreed to pay more than $13 million in penalties and spend at least $1 million on an environmentally-beneficial project to be approved by the State of Kansas. Additionally, the company must undertake various measures to facilitate future compliance with the CAA, reduce nitrogen oxide emissions from its refinery heaters, and build an approximately $9 million flare gas recovery system to reduce the refinery’s flaring.
Also in November 2023, the U.S. Environmental Protection Agency (EPA) reached a settlement with a Puerto Rican oil and chemicals company for alleged violations of the CAA at its facilities in Peñuelas, Puerto Rico. Under the settlement agreement, the company must pay $287,756 in penalties and monitor its gasoline storage tanks for potential emissions of hazardous air pollutants using an infrared camera over the next 12 months.
U.S. President announces funding for community change grants
On 21 November 2023, the Biden-Harris administration announced $2 billion in funding for environmental and climate justice community change grants to support deployment of clean energy projects, bolster climate resilience, and strengthen communities’ abilities to combat environmental and climate change challenges. According to the press release, the EPA’s “Community Change Grants are the single largest investment in environmental justice going directly to communities in history, and will advance collaborative efforts to achieve a healthier, safer, and more prosperous future for all.” The Community Change Grants Notice of Funding Opportunity is now open and the EPA is accepting applications until 21 November, 2024.
On 13 November 2023, the Commodity Futures Trading Commission (CFTC) Commissioner Kristin N. Johnson delivered a keynote address at the Federal Reserve Bank of Atlanta highlighting the need for the CFTC to “initiate effective enforcement, offer guidance, and refine existing regulation in carbon credit markets.” In her remarks, Commissioner Johnson also stated that the CFTC has engaged in three “significant steps to address climate related risks that may affect the functioning of markets essential for economic activity”: (1) recognizing the need to examine the scope and impact of climate-related risks on U.S. markets; (2) hosting convenings focused on the market for carbon offsets; and (3) soliciting comments from the public regarding how it can effectively respond to emerging concerns.
Also on 13 November, the U.S. Department of the Treasury (Treasury Department) published a summary analysis of how the Inflation Reduction Act of 2022 (IRA) serves as a key investment in reducing carbon pollution in the U.S., seeking to refute objections that pollution reductions would come at the expense of economic growth. The Treasury Department asserted that climate policies such as the IRA can promote growth by lessening greenhouse gas emissions, which result in: costly climate damages; adapting to the effects of climate change; reducing economic damages from local pollutants; supporting innovations that have productivity benefits beyond their direct climate effects; and lowering economic reliance on fossil fuels with volatile global market prices.
On 15 November, acting Comptroller of the Currency, Michael J. Hsu, testified before the U.S. House Committee on Financial Services to provide an update on the activities underway at the Office of the Comptroller of the Currency (OCC). He highlighted that it is critical that banks prepare for climate-related financial risks and indicated that the OCC plans “to monitor the development of large banks’ climate-related financial risk framework for safety and soundness and engage with bank management and other regulators to better understand the challenges banks face in this effort.”
On 17 November, the Internal Revenue Service (IRS) issued proposed regulations regarding investment tax credits (ITC) for renewable energy projects to account for changes made under the Inflation Reduction Act of 2022 (IRA). The proposed regulations principally focus on defining “energy property” for purposes of Section 48 the Code in light of the expansion of the types of property eligible to claim such ITCs under the IRA. While a substantial portion of the proposed regulations integrate already outstanding guidance from prior regulations, notices and revenue procedures, they also provide new and useful guidance on the scope of property eligible for ITCs, how an “energy project” is identified for purposes of the prevailing wage and apprenticeship requirements, domestic content adder and energy community adder, and hydrogen storage property. For more information on the proposed regulation, see our client alert.
Greening competition in APAC
With environmental and sustainability initiatives gaining prominence on boardroom agendas, collective action by businesses could be a shortcut to accelerating progress for ESG goals together. But when does legitimate cooperation cross the line into an antitrust risk area? Listen to our podcast which explores how environmental and sustainability initiatives intersect with competition law, and the approach taken by the competition authorities across the Asia Pacific region to handle competition issues potentially arising from ESG initiatives.
ASEAN capital market regulators endorse the ASEAN Transition Finance Guidance
At the 39th ACMF Chairs’ Meeting hosted by the Indonesian Financial Services Authority (OJK) in October 2023, the ASEAN Capital Markets Forum (ACMF) endorsed the ASEAN Transition Finance Guidance. The aim of the voluntary Guidance is to define principles by which stakeholders may assess their, or another company’s, transition credibility at an entity level to support access to financing from the capital markets. The Guidance complements the ASEAN Taxonomy for Sustainable Finance Version 2. The Guidance is intended to be viewed as a basis for issuing, developing or managing transition-labelled financing instruments and providing financing that supports the transition. It is also intended to accelerate the efforts of financial institutions to direct finance to transitioning companies as well as create incentives for real economy companies to create more ambitious and credible transition plans. A key point is that the Guidance is intended to be relevant for Asia recognising that different parts of the world will transition at different times. At the 39th ACMF Chairs’ Meeting, the ACMF also endorsed the Handbook for Cross-border Offerings of ASEAN Sustainable and Responsible Funds under the ASEAN CIS Framework and the revised ASEAN Corporate Governance Scorecard to align with the revised G20/OECD Principles of Corporate Governance.
Singapore’s Accounting and Corporate Regulatory Authority (ACRA) highlights climate change in financial reporting
On 6 November 2023, Singapore’s Accounting and Corporate Regulatory Authority (ACRA) released Financial Reporting Practice Guidance No. 1 of 2023, which highlights pertinent financial reporting areas that may require closer attention by directors in their review of the FY2023 financial statements. The Practice Guidance is intended to guide directors, especially those serving on audit committees (ACs), in reviewing financial statements and discharging their duties as directors. A key area highlighted by ACRA in the Practice Guidance is the need for directors to consider the impact that climate-related risks might have on a company's operations and, accordingly, its financial performance, position and cash flows. Some relevant accounting considerations include changes to credit risk, impairment (e.g. due to changes to revenues expected to be generated from assets), green financing and provisions. ACRA has also provided some practical tips for ACs, namely: (i) directors should understand how climate-related risks can impact the financial statements; (ii) ACs should remain vigilant for greenwashing, especially when commitments have been made towards ambitious goals such as carbon neutral or carbon zero emissions within a short period of time; and (iii) with increasing requirements for climate reporting, ACs should ensure consistency between financial and non-financial reporting on key climate-related assumptions, risks and opportunities. ACRA's guidance points to, and is consistent with, the increasing regulatory focus on ESG issues in Singapore, reinforcing the need for directors to adequately consider climate-related risks in discharging their duties owed to the company.
GRI and ISSB work towards a unified approach to ESG reporting in Asia
The Global Reporting Initiative (GRI) has partnered with the IFRS Foundation (of which the International Sustainability Standards Board (ISSB) is a part) to launch the Sustainability Innovation Lab (SIL) in November 2023 (see GRI’s press release). The SIL will be based in Singapore and will serve as a platform to bolster GRI and ISSB’s efforts in strengthening and advancing sustainability reporting in Asia as well as support companies in Asia meet the evolving sustainability disclosure requirements. According to the GRI, over 80% of listed companies in Asia Pacific currently report with GRI Standards, which enable companies to report on their impact on the economy, environment, and people. There is, concurrently, increasingly strong interest in the region in adopting the new ISSB standards, which are designed to ensure that companies provide sustainability-related information alongside financial statements in the same reporting package (see our previous blog post). The increase in competing metrics in ESG reporting has resulted in a lack of clarity that has made it difficult for stakeholders to hold all companies accountable to comparable standards. The SIL intends to support the interoperability of the two reporting standards by making it easier for companies using both the ISSB standards and the GRI standards. The SIL will initially be operated by the GRI ASEAN Network and managed by a steering committee that is led by senior representatives from GRI and the IFRS Foundation. Multi-stakeholder working groups are being set up to focus on four priority areas: (i) digital taxonomies, (ii) audit and assurance, (iii) smaller companies, and (iv) public sector reporting.
Hong Kong Stock Exchange postpones climate disclosure framework
On 3 November 2023, the Hong Kong Stock Exchange (HKEX) announced that the implementation of the Listing Rules amendments related to climate-related disclosures will be postponed to January 2025. Earlier in April, HKEX proposed in a consultation paper to enhance climate-related disclosures under its ESG framework, with an implementation date of 1 January 2024. If the consultation is adopted in its current form, all issuers would be mandated to make climate-related disclosures in their annual ESG reports, essentially upgrading the current “comply or explain” requirement to a mandatory climate-related disclosure requirement and lifting the bar to align with the International Sustainability Standards Board (ISSB) climate disclosure standards (see our previous blog post). The ISSB has indicated that an Adoption Guide will be released to support local regulators in their implementation considerations and to advise on scalability and phasing-in measures for consistency in approaches in the application of the ISSB standards across different jurisdictions. This Adoption Guide is expected to be released by the end of 2023. In this recent announcement, HKEX has stated that it will take into account the recommended approaches to be included in the Adoption Guide when finalising the Listing Rules amendments, indicating that the proposals will eventually be adopted (likely with modifications). The implementation date for the final Listing Rules amendments will be postponed to 1 January 2025 (a delay of one year). Wider industry preparations are taking place to prepare Hong Kong for the implementation of sustainability reporting based on the international standards, for example with the November launch of the SFC’s inaugural Forum on Sustainability Disclosures. The Forum was an opportunity for listed companies and financial firms to discuss the challenges, as well as the benefits of developing a regime aligned with global standards.
Hong Kong Stock Exchange and China Beijing Green Exchange sign MOU to promote green finance
On 28 November 2023, Hong Kong Exchanges and Clearing Limited (HKEX) announced that it has signed a Memorandum of Understanding (MOU) with the China Beijing Green Exchange (CBGEX). According to the press release, under the MOU, HKEX and CBGEX will work together to “explore cross-border sustainable development” in a number of areas, including building an ESG ecosystem, promoting green and sustainable finance and contributing to the green development of the Belt and Road Initiative (BRI). The aim is to address the demand generated from China’s increased focus on green infrastructure investments and its shift to a low-carbon economy. The two exchanges will also conduct research related to green and transition finance, collaborate on capabilities building for ESG standards and information disclosure, as well as explore opportunities in the carbon market.
China releases various CCER supporting rules
On 17 November 2023, the National Centre for Climate Change Strategy and International Cooperation released the “Registration Rules for Voluntary Greenhouse Gas Reduction (for Trial Implementation)” (the Registration Rules) and the “Guidelines for the Design and Implementation of Voluntary Greenhouse Gas Reduction Projects” (the Guidelines). Just one day before, the China Beijing Green Exchange also published the “Voluntary Greenhouse Gas Emission Reduction Trading and Settlement Rules (for Trial Implementation)” (the Trading and Settlement Rules).The above rules serve as supporting documents for the “Measures for the Administration of Greenhouse Gas Voluntary Emission Reduction Trading (for Trial Implementation)”, which have been effective from 19 October 2023 and further develop the framework of the China Certified Emission Reduction (CCER). Specifically, the Guidelines provide guidance for the selection and execution of CCER projects, while the Registration Rules and the Trading and Settlement Rules mainly regulate access to and transactions related to CCER projects. For more information relating to the CCER, see our previous blog post.
China releases pilot plan for carbon peak
On 6 November 2023, the National Development and Reform Committee (NDRC) released the “National Carbon Peak Pilot Construction Plan” to implement the “Action Plan for Carbon Peak before 2030” published by the State Council in 2021. The Pilot Plan sets out the first batch of 35 cities and/or industrial parks in 15 provinces for construction of carbon peak pilot projects, and envisages to ultimately extend to 100 cities and/or industrial parks. The Pilot Plan aims to provide practical, replicable, and promotable experience and practices with respect to carbon peak for cities and projects going forward. The construction scope under the Pilot Plan broadly covers determining pilot tasks, implementing key projects, strengthening scientific and technological innovation, improving policy mechanisms, and carrying out nationwide actions.
Southern China leads the way with GBA climate funding launch pad
Guangzhou is spearheading a climate financing push in the Greater Bay Area, becoming the first city to launch its pilot investment scheme. The platform, based in Nansha district, was launched on 17 November 2023 to channel debt and equity financing to companies involved in climate change-related projects. The state-owned Shanghai Securities Journal reported that 95 projects designed to combat climate change had submitted funding applications to the scheme for a total investment of 72.7 billion yuan (US$10 billion). Nansha is one of 23 centres across the country granted approval for the pilot schemes last year and is charged with developing a new model for cross-region cooperation within the Greater Bay Area on climate change financing. Nansha Development District of Guangzhou city has published a notice on the Measures to Promote Climate-Related Investment and Financing (the Measures) on 28 September 2023 and a public consultation draft on the implementation rules on 9 November 2023. The Measures aim to attract institutions involved in climate-related financing to set up offices, business centres and branches in the Nansha Development District and to promote the innovation of climate-related financing. The products covered by the Measures include climate-related loans, ESG bonds, climate-related funds and climate-related insurance.
Indonesia launches Comprehensive Investment and Policy Plan under the JETP
On 3 November 2023, the Indonesian government launched the “Just Energy Transition Partnership Indonesia - Comprehensive Investment and Policy Plan 2023”. The Comprehensive Investment and Policy Plan (the CIPP) is a roadmap for the Indonesian government and the IPG to achieve the objectives laid out in the JETP Joint Statement, announced at the G20 Leaders’ Summit last year in Bali. To recap - on 16 November 2022, the Indonesian government and the International Partners Group (IPG) launched the Just Energy Transition Partnership Indonesia (JETP). IPG comprises Japan, the US, Canada, Denmark, the EU, Germany, France, Norway, Italy and the UK. The initial commitment of US$20 billion was made up of US$10 billion in IPG funding which was pledged to catalyse US$10 billion of private financing from GFANZ. The CIPP maps out a technical pathway for Indonesia’s power sector, recommends policy changes needed to successfully transition the power sector, and outlines a just transition plan. The CIPP sets out five JETP investment focus areas (IFAs) which are targeted to be built up by 2030, which are: (i) transmission lines and grid deployment; (ii) early coal-fired power plant retirement and phase-out; (iii) dispatchable renewable energy acceleration; (iv) variable renewable energy acceleration; and (v) renewable energy supply chain enhancement.
CCS/CCUS regulatory developments in Indonesia
Indonesia has one of the world’s largest CO2 storage potentials. Making the country a regional CCS/CCUS hub is one of the most appealing future business opportunities in Indonesia. Listen to our podcast about the current policy and regulatory developments on CCS/CCUS and matters to take into account before engaging in this “soon to be major” business in the Indonesian energy sector.
In case you missed it
FCA Policy Statement on UK SDRs and its Anti-greenwashing rule – Access our recording
Human rights litigation - emerging trends and mitigation strategies in key jurisdictions – Access our recording
How will ESG considerations shape the next wave of construction & infrastructure disputes? – Access our podcast
EU CSDDD: lessons learnt from the French Duty of Vigilance law – Read our blog post
Asia Carbon Series – Access the recording
Meet our ESG team: Iyes Igiehon – Read our blog post