ESG View - August 2022

We received wonderful feedback on the first publication of our ESG View last month. We appreciate and welcome all your comments, so please keep them coming. For our August edition, as promised, we have expanded our global and sector coverage. This month we include updates from the UK (the crucial net zero strategy ruling against the Government, the plastic packaging tax, and the FCA’s latest warning shots on ESG), the pivotal US inflation and reduction act, and developments in Luxembourg, the Middle East and Asia. If you or your colleagues would like to be added to our distribution list, do please let us know here.

1. UK net zero strategy ruled ‘unlawful’ by high court (July 2022)

• What: In a judicial review challenge brought by campaign groups, the High Court has ruled that the UK Government’s plan to reduce greenhouse gas emissions to net zero by 2050 is too vague and therefore unlawful. As it happened, this judgment was handed down on the same day as temperatures in the UK reached record-setting highs. For a full analysis of the decision, see our briefing here or for a bite-sized discussion of its takeaway points, tune into our podcast here.

• Immediate action: the UK Government has been ordered to publish an updated climate report by the end of March 2023, setting out further detail on how its net zero goal will be achieved.

• What does this mean for corporates? Following decisions across Europe, the Court’s order demonstrates the increasing willingness of the judiciary to enforce climate legislation with teeth. Those measures include requiring governments to lower emissions, as well as imposing a duty on a company to do so. Pressure on corporates is also mounting in light of increasing activism by shareholders. Those investors will likely welcome the call for greater tangible governmental guidance on cutting emissions signalled by the Court’s decision.

2. FCA ESG priorities and expectations

If it was in any doubt that the FCA is continuing its interest in ESG, look no further than the two letters it issued this month.

• “Dear Remuneration Chair Letter” (proportionality level one banks, building societies, and PRA designated investment firms)

  • What: The FCA’s letter sets out its expectations for Remuneration Committee Chairs (SMF 12s). It covers culture and accountability, the Consumer Duty, the rising cost of living, operational resilience, ESG, D&I, and the remuneration approach for 2022/2023. For full details, see our August SMCR View here.
  • What should firms be doing? Relevant SMF 12’s should be made aware of this so they can take appropriate reasonable steps. Other firms may also wish to consider the letter as the broad and pervasive regulatory topics it covers may be read across.

• “Dear CEO Letter” (alternative asset managers)

  • What: The FCA’s letter outlines its priorities for alternatives firms. It covers putting customer needs first, conflicts of interest, market integrity and disruption, market abuse, culture, and ESG. See our full briefing here.
  • Helpful reminders: The FCA notes that firms that offer ESG products should expect to be subject to review to ensure marketing materials accurately describe their product. The FCA also reminds firms that in December 2021 they introduced rules requiring larger asset managers (including AIF managers) to make TCFD-aligned disclosures– but with a parting shot, they remind the sector that these rules will be imposed on smaller AIFMs from 2023. They expect such firms to consider now what steps they need to take to achieve disclosures at both entity and product level.
  • What should firms be doing? The letter states expressly that the CEO should discuss the letter with the Board/Executive Committee and consider which of the risks outlined are applicable, and whether there are appropriate strategies in place to address them.

3. Plastic Packaging Tax – what you need to know (cross-sector)

• What: The Plastic Packaging Tax is a new tax introduced on 1 April 2022 as part of the UK Government’s ESG agenda. It will apply to plastic packaging manufactured in, or imported into the UK, that does not contain at least 30% recycled plastic. The tax is designed to provide an economic incentive for businesses to use recycled plastic in the manufacture of plastic packaging. For a more detailed analysis, see our briefing note.

• Who is responsible for the tax? The primary liability is on the importer or the manufacturer of plastic packaging. However, determining who is the final manufacturer of the plastic packaging can be a complex question. According to the legislation, other parties in the supply chain can be either secondarily liable or joint and severally liable for the payment of the tax where they knew or ought to have known that the tax should have been paid.

• What should corporates be doing? If you have not already assessed whether your business is liable for the tax, then you should undertake this assessment as a matter of urgency. The relevant data is unlikely to be held by finance so the tax will likely require legal, tax, and operations to work in concert to assess the position.

4. CSSF-Authorised Funds to file SFDR updated documents funds by 31 October 2022

• What: The CSSF has issued a press release on SFDR Level 2. Long story short, financial market participants will need to file updated prospectus/issuing documents for Luxembourg Article 8 and 9 funds by 31 October 2022, to ensure approval before 1 January 2023.

• Surprising news: The CSSF notes it will give priority for visa stamping to those documents with updates that are limited to the sustainability related disclosure changes. Provided that submissions are complete, compliant and received by the CSSF by 31 October 2022, the CSSF will endeavour to release the visa stamp by 31 December 2022. This will have no doubt come as a shock for many firms that operate Luxembourg funds, who will need to prepare now to meet the October deadline.

5. U.S. Inflation Reduction Act 2022 (cross-sector)

• What: Turning our attention across the pond, this month saw President Biden signing into law the historic U.S. Inflation Reduction Act 2022. The Act itself is far-reaching, with goals to reduce the deficit, fight inflation and reduce U.S. greenhouse gas emissions by 40% by 2030.

• Scope: The Act boasts a large investment of $369 billion into Energy Security and Climate Change and is likely to reshape the U.S. as a global competitor in the green energy space. Investments will be felt by industries like solar, wind and biomass, hydrogen, and carbon capture and storage. While the Act has been hailed as a ‘Climate Act’, it is not overly detrimental to the oil and gas industry. Rather, it has marked a gradual transition away from oil and gas by creating a more dynamic energy market for the future.

• What will the likely impact be? Parallel to the ambition of its investment, the Act will raise $737 billion in revenue, the majority of which will fall on the largest corporations in the US irrespective of industry. This will be done mostly through an introduction of a 15% corporate minimum tax, a 1% Stock Buyback Fee and greater tax enforcement measures. It’s still unclear how these changes will be felt across different sectors as it remains to be seen how the provisions will be rolled out.

  More generally, in Q4 we hope to organise a webinar comparing the ESG rulebooks of the US and UK/EU – so watch this space!

6. APAC Region ESG Round-up (asset management, banking and investment firms)

China: In an effort to unify China’s fragmented green bond market and align it with international standards, the inter-ministerial and multistakeholder Green Bond Standards Committee has released the China Green Bond Principles. Under the principles, issuers must allocate 100% of proceeds to green projects and communicate their selection process to their investors. An independent third-party evaluation is also recommended.

Australia: Australian regulator APRA, has released the findings of its climate risk self-assessment survey conducted across the banking, insurance and superannuation industries. They measured compliance with a practice guide on climate change financial risks, known as CPG 229, released last November. APRA said that while there had been “reasonable alignment” to the guidance, and institutions had reported “robust” climate risk governance, “integrating climate risk into strategic planning has some way to go”.

Singapore: Last month, Singapore regulator MAS published its circular CFC 02/2022 Disclosure and Reporting Guidelines for Retail ESG Funds. The Circular, which will apply from 1 January 2023, sets out MAS’ expectations on how existing requirements under the Code on Collective Investment Schemes and the Securities and Futures (Offers of Investments) (Collective Investment Schemes) Regulations apply to retail ESG funds, and the disclosure and reporting guidelines applicable to these funds.

7. Latest ESG developments from the Middle East (cross-sector)

Middle Eastern interest in ESG investments has continued to increase over the past year. Saudi Arabia and the UAE lead the region in this respect, with both governments actively investing in hydrocarbon alternatives and increasing their respective shares in renewable energy resources.

Most recently, the Dubai Investment Fund (DIF) created a bespoke ESG Investment Department in recognition of the fact that “the term ESG…now represents one of the major trends in the financial and corporate world”. The department will monitor global and local ESG markets to locate investment opportunities, research sub-sections of ESG investing (such as ‘green’ and ‘ethical’ investment) and establish reliable methods for estimating ESG ratings.

Most importantly, the department will assist in the incorporation of ESG principles within the DIF’s long-term approach, with a view to making ESG a key component of the DIF’s due diligence when it considers new investment opportunities. This development is a clear indication that the DIF intends for ESG to become an institutional attitude rather than one of its many investment strategies.

8. Power to the People: ESG consultation round-up

Finally, here are a few notable ESG policy consultations in flight across the globe that are currently open for comment. Such engagement is a great opportunity to influence the direction of travel for ESG matters.

• Relevant to EU asset managers and financial advisors

  • The Platform on Sustainable Finance is seeking public feedback on its Draft Report on the minimum safeguards set out in Article 18 of the Taxonomy Regulation that require firms to implement procedures to comply with OECD Guidelines for multinational enterprises and the UN guiding principles on business and human rights. Comments are invited until 6 September 2022.

• Relevant to EU manufacturers and distributors

  • ESMA has out for comment its Consultation Paper on sustainability changes to its Guidelines on MiFID2 product governance requirements. Comments are invited until 7 October 2022. ESMA expects to publish its final guidance in early 2023.

• Relevant to domestic financial institutions and bond issuers in India

  • The Central Bank of India has open for comment its Draft Guidance on managing climate financial risks for domestic financial institutions which is largely in line with TCFD recommendations. The guidance is open for feedback until September 2022.
  • The Securities and Exchange Board of India has published a Consultation Paper on a proposed Green and Blue Bond Framework which is open for comment until 31 August 2022.