ESG View - October 2022

Welcome to our October edition of ESG View. I hope you are all doing well in navigating these turbulent times. No doubt like me you have been watching the news closely as the new Government in the UK shifts again. With COP27 fast approaching, things are also heating up on the ESG front. We are seeing a flurry of activity from regulators, industry bodies and activists who are keen to use the momentum to push ahead with their ESG agendas. It comes as no surprise that the choice of host destination, Sharm El-Sheik has been met with some controversy. Rumours of climate and human right activist groups being barred from attending by the Egyptian Government have not gone unnoticed. Coupled with the global energy crisis, there are reports that enthusiasm to attend has waned. Whatever the outcome, we will be watching closely. Look out for a full COP27 download in our next ESG View.

As promised in our September ESG View, this month we will deep-dive into the fractured landscape of ESG in the US. We will also cover recent GTAG and FCA publications, some surprising EU developments and a round-up of news from Asia and the Middle East.

Sonali Siriwardena
Partner - Global Head of ESG
sonali.siriwardena@simmons-simmons.com

1. Update on US ESG landscape (cross-sector)

• State-level: riding the Anti-ESG wave

In the US, ESG has become the new battlefield on which the ‘culture wars’ are fought. Republican states have come out strongly against financial institutions using ESG to guide their investments portfolios, with 17 states introducing anti-ESG bills this year. The bills vary by state but generally target either investment exclusions for fossil fuels, firearms and/or ESG factors more broadly. Democrats have been vocal in responding, by publishing an open letter criticising Republicans for ‘short term’ and ‘ideological’ thinking, as well as by introducing pro-ESG legislation of their own across 14 states. For the time being it seems that investment managers are holding firm, whilst trying to stay out of the firing lines of bi-partisan debates.

• Federal-level: regulatory uncertainty

Given the fractured politics of ESG, many are eagerly awaiting the final mandatory climate-disclosure rules to be released by the SEC, in the hope they will bring regulatory clarity. However, it’s unclear whether the rules will be able to deliver and withstand the political climate. 24 Republican states attorney generals have already made clear that they will challenge the SEC for regulatory overreach, describing the proposal as “agency mission creep of the worst kind”. The conservative-majority bench of the US Supreme Court also creates uncertainty because it has been willing to accept challenges to federal agency authority. If the court’s decision in West Virginia v. EPA (2022) is anything to go by, it’s likely legal challenges to the SEC rules may find their way into the courts.

• Climate Week: is enthusiasm on climate action slowing?

New York Climate Week was an opportunity to cut through the political noise and build momentum in the lead up to COP27. However, it proved to be a mixed bag. The geopolitical landscape dampened the enthusiasm seen at COP26, as the global energy crisis, and the rise in right-wing politics raised fears of climate backsliding. The collaborative enthusiasm of the Glasgow Financial Alliance for Net Zero (GFANZ) also saw a marked shift to uncertainty and fracturing. Members contemplated the risks of remaining in the alliance following the introduction of more stringent climate standards by Race to Zero, the U.N. backed campaign that set the minimum criteria for the GFANZ commitments. On 27 October, GFANZ announced that the Race to Zero requirements are no longer mandatory but instead only ‘encouraged’. We expect this softening of commitments will likely dominate conversations on climate finance during COP27.

However, there were also positives to be drawn from Climate Week. For example, the growing competitiveness of renewable energy markets, alongside the promises of the US Inflation Reduction Act, show potential to revolutionise the global green energy market. There was also increased interest in nature-based solutions and the Taskforce on Nature-related Financial Disclosures (TNFD). This will likely continue to gain momentum with a new TNFD draft framework expected in November and the UN Biodiversity Conference (COP15) in December.

Keeping on top of the ESG Landscape with Simmons: Simmons & Simmons will be co-hosting a half day hybrid event on the 5th December with New York law firm Kramer Levin titled: Navigating the Rising Tide of ESG policy, regulation and litigation across the US, Europe and the UK. Register your interest here.

2. Hot off the press - FCA consults on sustainability disclosure and investment labelling (UK regulated entities)

• What: The wait is over. This week the FCA finally published CP22/20 Sustainability Disclosure Requirements and investment labels. The FCA is seeking feedback on a package of measures that includes the introduction of investment product sustainability labels, consumer disclosures and restrictions on how terms like ‘ESG’, ‘green’ or ‘sustainable’ can be used. The paper is of interest to all UK financial institutions, not least because the proposed ‘anti-greenwashing’ rule will apply to all regulated firms. This general rule will come into effect immediately on the publication of the final policy statement. However, the core elements of the regime – labelling and classification, disclosure and naming and marketing rules – which will apply to asset managers initially will not come into effect until at least 30 June 2024. The FCA is also seeking views on expanding the regime to asset owners in respect of their investment products and proposing targeted rules for the distributors of investment products to retail investors. Expect further consultations to come.

• Looking ahead: If you want to respond to the consultation paper you have until the 25 January 2023. The FCA has indicated that it intends to set out final rules by the end of the first half of 2023.

3. GTAG advice on the UK Taxonomy (cross-sector)

• What: On 7 October 2022, GTAG published a report, “GTAG: Advice on the development of a UK Green Taxonomy”. This first advisory report focuses on four key themes: how to approach onshoring the EU framework; optimising the Taxonomy's international interoperability; streamlining the provisions around “Do No Significant Harm” so they are usable and useful for reporting entities; and setting out a range of potential taxonomy use cases. For full details see our briefing note here.

• Looking ahead: The political upheaval within the UK Government is likely to delay progress on the Taxonomy. The Government had announced plans to finalise the first two Technical Screening Criteria (Climate Change Adaptation, Climate Change Mitigation) by the end of the year, however we anticipate the release of an amended timeline so keep watch for further updates.

4. What’s been happening in the EU

EU proposal to ban products tainted by forced labour (cross-sector)

• What: On 14 September, the European Commission shared a proposal to ban all products made with forced labour. The proposed ban would apply to all products imported and exported to and from the EU across the full length of the supply chain. The proposal outlines that when European authorities identify such products they must be removed or destroyed at the cost of the relevant businesses. Businesses which fail to comply will then face penalties under the relevant national law.

• Impact: The proposal will only come into force 24 months after it’s discussed and agreed upon by the European Parliament and the Council of the European Union. Although any ban is unlikely to apply for some years, it is likely to have a significant effect on businesses’ approach to supply chain management well before its full implementation. Given the significance of the EU market, the effect of this ban will be felt far beyond the borders of the EU. See our full article on the proposed ban and related reforms proposed in the EU, UK and US here.

Legal challenges to the EU Taxonomy (cross-sector)

• What: The Taxonomy's Complementary Delegated Act (CDA), adopted on 9 March 2022, gave specific nuclear and gas energy activities a "sustainable" label, sparking widespread objection. The European Commission is facing a number of legal challenges as a result, which are largely been brought by environmental groups. Greenpeace have sent a formal request to the Commission for an internal review of the CDA, arguing that the inclusion of gas and nuclear violates the Taxonomy Regulation, the European Climate Law and the EU’s obligations under the 2015 Paris Agreement. Austria has recently joined the fray, filing a lawsuit on 7 October which seeks to quash the classification under the Taxonomy and Luxembourg has confirmed it will also join the action, with other nations likely to follow.

• Next steps: The Commission has until February 2023 to review the submissions and reply. If it refuses to withdraw the CDA, the complainants will be able to ask the European Court of Justice to rule. The end result could be a judgment that forces the Commission to repeal the CDA. For further details, see our full article here.

European Commission publishes further Q&A’s on EU Taxonomy (cross-sector)

The European Commission has published a notice setting out its interpretation of certain aspects of the Delegated Regulation made under Article 8 of the Taxonomy Regulation. The Delegated Regulation gave more detail to the provisions under Article 8 to specify the content, methodology and presentation of the KPIs that non-financial undertakings and asset managers must disclose. Learn more through our Taxonomy FAQ client note, accessible here.

Sustainable securitisation – Article 46 report published (financial institutions)

The European Commission published its long-awaited (and long overdue) report on the functioning of the EU securitisation framework. From an ESG perspective, the report is significant in two respects. First, the Commission decided against developing a dedicated sustainable securitisation framework at this stage, instead indicating its support for changes that bring securitisation within the scope of the draft EU Green Bond Regulation. And second, the Commission decided against extending the scope of the existing sustainability disclosures rules (which are very light touch) to non-STS transactions and/or a broader range of asset classes. The Commission appear to be lending support to the development of standard disclosure templates for a wider range of transaction types. For further details, see our client briefing here.

Update on Central Bank of Ireland’s fast track filing process for level 2 SFDR compliance (CBI authorised fund managers)

As mentioned in our September ESG View, the CBI is operating a fast track process for CBI authorised funds needing to update and file documentation for SFDR Level 2 compliance. Updated prospectuses along with the pre-contractual disclosure annexes will need to be filed by with the CBI by 1 December. The CBI has since released further details on the filing process. See our briefing here for further details.

Can we help with your SFDR compliance? Get ready for 1 January 2023 with our new templates

Our RTS template guidance documents are available for both Article 8 and Article 9 products, containing guidance, interpretative views, framework language and template form disclosures. Contact Nick Colston or Lucian Firth for details.

5. Hong Kong Fund Manager Code of Conduct (asset managers)

• What: In August 2022, amendments to the Fund Manager Code of Conduct (FMCC) came into effect. Fund managers of collective investment schemes (CIS) are now required to consider climate-related risks in their governance, investment and risk management processes, and make appropriate disclosures. ‘Large Fund Managers’ must comply with certain baseline requirements from August 2022, and an additional set of enhanced standards from November 2022. Other fund managers must comply with baseline requirements from November 2022.

The Securities and Futures Commission (SFC), Hong Kong’s financial regulator, is one of the first in the region to adopt such mandatory approach for fund managers. These new regulatory requirements make reference to the widely-endorsed Task Force on Climate-Related Financial Disclosures recommendations, aligning Hong Kong with international standards and global regulatory trends.

• Our view: Whilst the SFC’s effort to promote ESG leadership in Hong Kong is welcomed by the industry, fund managers are generally concerned about the limited availability of data and lack of common standards to effectively meet disclosure obligations. As this first phase of the new regulatory requirements comes into effect, with quantitative disclosures for Large Fund Managers expected in mid-2023, we will be watching this space closely to see how the SFC’s compliance landscape and enforcement efforts will roll out.

6. Middle East ESG Round-up (cross-sector)

• UAE launches independent climate group: On 20 September 2022, the UAE announced the establishment of the region’s first Independent Climate Change Accelerators (UICCA) during New York Climate Week. Against the backdrop of the UAE’s commitment to being net zero by 2050, the UICCA will be an independent body which will provide recommendations to the public and private sectors on the transition to a green economy to strengthen the UAE’s vision of being a global sustainability hub. Described as a non-partisan, climate action entity, the UICCA will also focus on facilitating international business, innovation and technology partnerships. Some of the main sectors will cover electric mobility, sustainable fuels, energy efficient buildings and cities, as well as Climate Tech.

• ESG assessment tool for companies: The Dubai Sustainable Finance Working Group (DSFWG) and the Dubai Financial Market (DFM) has introduced a self-assessment tool for companies to measure their ESG policies and practices. Developed in line with the principles of the UN Sustainable Development Goals and the standards of the Global Reporting Initiative, the tool will allow companies to assess their progress against international best practice.