ESG View - November 2022

Welcome to our November ESG View. As this month draws to a close, the sandstorms of Sharm El Sheikh have settled on the outcomes of COP 27 but the path to reach net zero remains masked in a haze of confusion. Key commitments like the complete phase out of fossil fuels or a follow-through on the phase down of coal were absent from the final text dampening the ambition to agree bold steps to mitigate warming to 1.5 °C. With reports estimating a need for $4-6tn a year for a global transformation to a low-carbon economy, there will need to be far greater momentum on the mitigation agenda to mobilise private markets to meet this ambition.

However, COP 27 did deliver a significant win for climate justice by announcing the creation of a Loss and Damage Fund to raise money in support of developing countries that are most vulnerable to climate impacts. The details of the Fund are yet to be finalised with the funding mechanics to be agreed over 2023 in the lead up to COP 28 - it will be interesting to observe what sources of ‘innovative finance’ will be deployed to support the Fund and what impact it will have on the market.

Beyond the formal negotiations of COP 27, there was much dynamism on display with a flurry of announcements on global initiatives, some of which are highlighted below. We will be publishing a legal deep dive into the outcomes of COP 27 so do stay tuned for that update, which will come your way shortly: a pre-Christmas gift of sorts from us to you.

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

Some Key Global Developments announced at COP 27

1. International Sustainability Standards Board and CDP Climate Disclosure updates (multi-sector)

• What: In its October meeting the International Sustainability Standards Board (ISSB) prioritised conversations about facilitating interoperability of its climate disclosure standards (the Standards) across jurisdictions. This included confirming use of the Task Force on Climate-Related Financial Disclosures (TCFD) architecture as the basis for its Standards; confirming that the Standards will require company disclosures on Scope 1, 2 and 3 greenhouse gas emissions (with relief provisions to help companies apply the Scope 3 requirements) and modifying some disclosures and language in relation to transition plans to facilitate alignment. Within a supplementary November meeting, the ISSB also confirmed that companies will be required to use climate-related scenario analysis to report on climate resilience and to identify climate-related risks and opportunities to support their disclosures.

  COP 27 also saw the announcement that ISSB Climate-related Disclosure Standards would be incorporated into the CDP global environmental disclosure platform, signalling a movement towards the delivery of a comprehensive global baseline for climate-related disclosures.

2. Climate Data Steering Committee: White Paper on Net-Zero Public Data Utility (multi-sector)

• What: The Climate Data Steering Committee was created in June of this year with the mandate to enhance private sector transparency around climate commitments and action. During COP 27 the Committee released a whitepaper on the development of the Net-Zero Data Public Utility (NZDPU), an open-data source of aggregated private sector net-zero transition data. The aim of the NZDPU is to give financial institutions as well as civil society and regulators access to the information they need from companies to make progress on global net-zero goals.

  The whitepaper speaks to key data challenges that need to be overcome and shares that the first steps for NZDPU are to collect ‘foundational data’ for companies, including; Scopes 1, 2 and 3 data for current and historical GHG emissions, company climate targets, the use of carbon credits and climate disclosure methodologies.

• Looking Ahead: The Committee has made a Request for Proposals to build out a beta pilot of the NZDPU. Submissions are due 15 February 2023, with the goal of technical providers being selected by the end of Q1 2023.

3. UN High- Level Expert Group Report on Integrity of Net Zero Pledges (multi-sector)

• What: During COP 27 the UN High-Level Expert Group on the Net-Zero Emissions Commitments of Non-State Entities published the report Integrity Matters: Net Zero Commitments by Businesses, Financial Institutions, Cities and Regions.

  The report is explicit in requiring non-state entities to commit to ambitious and all-inclusive net zero pledges that cover absolute emissions (Scope 1, 2 and 3) across the entire entity: across regions, business activities and the entire value chain. These pledges must then be followed up with consistent and transparent transition plans that are reported on annually and updated every five years. The report recommends that entities report on specific policies and regulations that they need from governments to cut emissions in line with a 1.5°C scenario.

EU Developments

1. Corporate Sustainability Reporting Directive approved – Time to get moving (multi-sector)

• What: Just in time for this month’s publication, on the 28 November the Council of the EU gave its final approval to the Corporate Sustainability Reporting Directive (CSRD). CSRD extends and strengthens the rules introduced by the Non-Financial Reporting Directive and aims to ensure that companies report reliable and comparable sustainability information that investors and other stakeholders need.

• Impact: The new rules being introduced by CSRD will apply to:

  • large undertakings whether listed or not (being ones that exceed at least two out of: a balance sheet total of €20m; net turnover of €40m; average number of employees during the financial year of 250);
  • non-EU companies with substantial activity in the EU market (€150m in annual turnover in the EU) and which have at least one subsidiary or branch in the EU; and
  • SMEs with securities admitted to trading on an EU regulated market (other than micro undertakings).

• Timing: CSRD will be introduced in stages:

  • reporting in 2025 on the financial year 2024 for companies already subject to the NFRD;
  • reporting in 2026 on the financial year 2025 for large companies that are not currently subject to the NFRD;
  • reporting in 2027 on the financial year 2026 for listed SMEs except micro undertakings, small and non-complex credit institutions and captive insurance undertakings; and
  • reporting in 2029 on the financial year 2028 for third-country undertakings.

If not already done so, both EU companies and non-EU companies which operate in the EU should be carrying out scoping exercises and putting in place implementation plans if caught by the new requirements.

2. New Gender Balance Targets for 2026 (multi-sector).

• What: “A long-awaited moment, a moment to be celebrated as a breakthrough in gender equality” said EC President von der Leyden when announcing that the European Parliament has finally adopted the Women’s on Boards Directive. The European Commission first tabled this proposal on gender balance on company boards back in November 2021. Once published in the Official Journal, the Directive will enter into force 20 days after publication and Member States will have two years to transpose its provisions into national law. By July 2026, large publicly listed EU companies will need to have 40% of the under-represented sex among non-executive directors or 33% among all board directors. They will also need to ensure their recruitment processes and appointments to board positions are transparent and that candidates are assessed objectively based on their individual merits, irrespective of gender.

• Good news: The adoption of the Directive has been hailed a truly historic event and aims to shatter the glass ceiling that prevent women from accessing top positions. Today, women account for 30% of board members in the EU's largest listed companies, with vast variations across Member States. By the end of June 2026, that figure will no longer be acceptable and for those companies that do not meet the new objectives, they will be required to give detailed explanations on how they intend to achieve them. Member States will also be required to enforce sanctions on companies that fail to comply with open and transparent appointment procedures.

US Developments

1. US Department of Labor removes ESG investment barriers for workplace pensions (multi-sector).

• What: Last month we reported on the fractured landscape of ESG regulation in the US. This month, following another tense debate, the U.S. Department of Labor (DOL) announced a final rule that allows plan fiduciaries to consider climate change and other ESG factors when they select retirement investments and exercise shareholder rights, such as proxy voting.

• Impact: This decision reverses rules which were enacted under the Trump presidency that restricted ESG offerings and required workplace pensions to solely consider financial factors in investments. It is hoped that the final rule, which now explicitly allows for ESG investing, will be a further step forward to removing the barriers and market sensitivity to ESG investments in the US. The rule, which the DOL said covers plans that collectively invest $12tn, will take effect 60 days after it is formally published in the federal register with a longer transition for provisions for proxy voting.

• 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 here.

Asia Developments

1. New international carbon trading marketplace launched by Hong Kong Exchange (financial institutions)

• What: On 28 October, the Hong Kong Exchanges and Clearing Limited (HKEX) announced its launch of Core Climate, a new international carbon marketplace which seeks to connect capital with climate-related products and opportunities in Hong Kong, Mainland China and globally. Core Climate is designed to facilitate the trading of voluntary carbon credits and instruments, and participants will be able to source, hold, trade, settle and retire the carbon credits through the platform.

• Our view: Hong Kong’s ability to facilitate two-way capital flows between Mainland China and international markets adds value to global carbon markets and Core Climate is strategically placed to provide a one-stop solution supporting the global transition to achieve net zero. The launch of Core Climate follows HKEX’s formation of the Hong Kong International Carbon Market Council in July this year, which comprises a number of leading corporations and financial institutions focussed on the development of an international carbon marketplace. As different ESG initiatives roll out, we continue to observe a range of prominent efforts from regulators in support of Hong Kong’s growth as an ESG hub in Asia and globally.

2. Singapore Exchange: Identifying ESG fixed income securities (financial institutions)

• What: On 28 November the Singapore Exchange (SGX Group) launched a new initiative to identify green, social and sustainability fixed income securities that meet recognised standards. The SGX Sustainable Fixed Income initiative allows investors to more easily identify investments that meet certain criteria at issuance, and issuers of such securities may use an SGX Sustainable Fixed Income mark to identify the securities as having met such criteria.

3. ISDA publications (financial institutions Japan and Singapore)

• On 22 November, ISDA published a paper on the legal nature of Voluntary Carbon Credits (VCC) under, amongst others, Japanese and Singapore laws. This follows from ISDA’s initial paper (published on 1 December 2021) on the legal nature of VCCs under the laws of the United Kingdom, United States and Germany, where two possible approaches to the legal characterisation of a VCC were discussed: (1) VCCs as intangible property or (2) VCCs as a bundle of legal rights.

• On 14 November, ISDA published a paper on the Regulatory Framework for Sustainably-Linked Derivatives in Japan. The paper is the equivalent for Japan of ISDA’s December 2021 whitepaper on Regulatory Considerations for Sustainability-linked Derivatives (SLDs). It considers whether sustainably-linked derivatives in Japan would be classified as over-the-counter derivatives transactions or another type of regulated product and considers how they are regulated and what the compliance issues are for market participants when executing SLDs.

Litigation and enforcement

1. ESG and Competition Law (multi-sector)

What: Competition regulators across Europe have accelerated at pace in pushing climate change and sustainability issues to the top of their agenda. The European Commission, the UK Competition and Markets Authority (CMA) and other EU national competition authorities have issued consultations and guidance on sustainability agreements which aim to provide greater certainty to companies regarding the assessment of sustainability initiatives. Authorities are also showing increasing willingness to investigate and prosecute entities unable to substantiate green claims.

Greater clarity: The interaction between competition law and sustainability treads a fine balance. On the one hand, regulators are confirming that where agreements between competitors lead to price rises, affected consumers must be fully compensated by receiving a “fair share” of the resulting benefits. On the other hand, where those benefits are intangible and long-term, it can be difficult to demonstrate that harmed consumers are being sufficiently compensated. Competition authorities have also highlighted the need to ensure that sustainability agreements are not a front for illegal cartel activity. Accordingly, regulators have diverged in approach. The Dutch competition authority has adopted a more expansive view of what amounts to a “fair share” of the resulting benefits of such agreements and has encouraged collaboration in the name of sustainability (even where there is no immediate/direct benefit to consumers). Other regulators, such as the CMA, have focussed their efforts more closely on investigating malpractice in the ESG space, and in particular on misleading environmental claims.

Our view: Given the regulatory landscape is still developing without a clear consensus on when competition law principles may be suspended in favour of sustainable collaboration, businesses will remain cautious about the type of sustainability initiatives they embark on and must be able to substantiate any green claims they make. Businesses should also be concerned not only about action taken by enforcement authorities but also consumers: non-compliant companies may face direct customer claims for misleading actions, particularly given the rising availability of group consumer actions within the EU and UK.

ESG consultation round-up

Some 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.

1. UK Transition Plan Taskforce Consultation on Climate Plans (multi-sector)

• What: On 8 November, the UK Transition Plan Taskforce (TPT) published for consultation its proposed disclosure framework for private sector climate transition plans (TP). The TPT’s recommendations are intended to build on what was set out in Taskforce on Climate Related Financial Disclosures guidance and International Sustainability Standards Board exposure drafts.

  The accompanying draft implementation guidance recommends that entities publish standalone TPs at least every three years, and sooner if there are significant changes to the plan; that progress against the TP and material updates be reported annually in general financial reporting; and that if an entity produces a long-form TCFD or sustainability report, the TP be clearly separable.

• Timing: The consultation closes on 28 February 2023 and the TPT is expected to finalise the Disclosure Framework and Guidance shortly after.

2. Publication of TNFD third version of beta framework (multi-sector)

• What: As promised ahead of COP 27, the Taskforce on Nature Related Financial Disclosures (TNFD) released a third version (V0.3) of its framework, building on market feedback on V0.1 and V0.2. Together with the previously released draft disclosures on risks and opportunities, V0.3 of the TNFD framework, now provides a full view of recommended disclosures to support the reporting preferences and compliance requirements.

• Timing: Following a final consultation process after the V0.4 release in March 2023, the TNFD’s final recommendations will be published in September 2023. Companies should already be engaging and making plans to incorporate the framework and can pilot the current drafts and provide feedback on the beta version.

3. ESA call for evidence on better understanding greenwashing (financial institutions)

• What: On 15 November, the European Supervisory Authorities (ESAs) (the EBA, EIOPA and ESMA) published a call for evidence (CfE) seeking input on potential greenwashing practices in the EU financial sector. The CfE is requesting views, examples, evidence and data on potential greenwashing practises across the EU financial sector relevant to various segments of the sustainable investment value chain and of the product lifecycle. For full details see our briefing here.

• Timing: The deadline for responses is 10 January 2023, after which a progress report is expected by the end of May 2023 and a final report by end of May 2024.

Introducing our new ESG Asset Management tracker: In order to help market participants effectively navigate the local ESG regulation applicable to asset managers, we have developed - in collaboration with EFAMA - a brand new ESG Global Solutions module dedicated to Asset Management. For further details, please visit our website, or get in touch with a member of the team.

Exciting News: We’re delighted to have sponsored AIMA’s guide to the FCA’s new TCFD-aligned climate disclosure rules for asset managers. Our very own ESG expert team led by Nick Colston and Lucian Firth supported production of the guide, and co-hosted a launch webinar and panel event. AIMA members can access the guide and a recording of the webinar via the AIMA website.