ESG View - January 2023

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Happy New Year! I hope you have all had a restful break and have returned recharged for what promises to be another rollercoaster year for ESG. We have certainly hit the ground running in 2023, with aspects of ESG such as investment in the global green economy and use of green technology being just a couple of key focal points at the Annual World Economic Forum meeting in Davos last week. We will bring you a snapshot of ESG-focused Davos developments in our February edition.

Meanwhile, to help ease you in and share a macro view for what awaits us over the next twelve months, check out our ESG predictions for 2023 in our The Year Ahead publication. Also stay tuned for our annual flagship Global Legal Business Outlook 2023 event taking place from 28 February to 2 March, which this year will focus solely on ESG. Did I just hear you whoop for joy? The registration link for the event will be going live later this week so do keep an eye out on our website.

This month held an important deadline for the UK FCA consultation on CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels, which closed earlier this week. Given the critical importance of SDR in shaping the UK’s ESG disclosure landscape, we decided to submit our own response to the consultation and address some key issues to ensure alignment and clarity. You can find our response here.

In this month's ESG View, some highlights include an update on the heightened global policy focus on biodiversity, the UK’s seminal net zero review and a significant tax-related change influencing the ESG agenda. We also cover some key developments in environmental litigation in Europe and ESG updates from the Middle East.

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

Global Developments

1. Everyone’s talking about biodiversity (multi-sector)

What: Whilst the focus on climate has dominated the discussions under the ‘E’ banner of ESG in recent years, biodiversity is slowly but surely beginning to receive its fair share of attention. The success of COP15 in Montreal last December propelled the topic further up the global policy agenda with the announcement of the Kunming-Montreal Global biodiversity framework commitments. The historic framework contains 4 goals and 23 action targets to halt and reverse the decline in biodiversity globally by 2030. This includes the headline target of “30×30” ambition to conserve 30% of the world’s land and 30% of the ocean by 2030. Currently, only around 17% of land and 10% of marine areas receive some form of protection.

Whilst not legally binding (unlike the Paris Agreement), the framework contains clear obligations including to ensure measures are implemented to require all large companies to monitor, assess and transparently disclose their risks, dependencies and impacts on biodiversity, along their operations, supply and value chains and portfolios. This was seen as a disappointing outcome for many stakeholders who were actively calling for mandatory reporting, which had seemed a possibility in the run up to COP15.

COP15 also saw the launch of the U.N.-supported Biodiversity Credit Alliance which intends to establish Global Biodiversity Credit Principles and the release of a consultation from the World Economic Forum (WEF) on fundamental considerations for the emerging biodiversity credit markets. In December 2022, the U.N. Development Programme and the WEF endorsed biodiversity credits as a critical tool for driving investment in nature, and we are likely to see an emerging market, similar to that of its carbon counterpart in the years to come.

Looking ahead: Unlike climate change, biodiversity has been hampered with a lack of consensus of how to measure and calculate biodiversity impact and loss. 2023 will hopefully provide a clearer picture with the final disclosure framework being developed by the Task Force on Nature-related Financial Disclosures (TNFD). The International Sustainability Standards Board has also announced it will be making incremental enhancements to its soon-to-be-released Climate-related Disclosure Standard, relating to the connection between climate, natural ecosystems and a just transition. A number of member bodies are also leading the way in setting data and impact standards such as the Science Based Targets Network and Accounting for Sustainability.

What should you be doing: Whilst not mandatory as yet, businesses should be looking at ways to reduce their negative and increase their positive impacts on biodiversity across their value chains. They should be looking to assess the business’ current links to nature, set targets, engage senior management and consider including nature capital disclosures in annual reports and accounts in line with the recommendations of the latest draft of the TNFD framework. The Global Reporting Initiative exposure draft revised biodiversity standard, which is open for comment until 28 February, is also a good opportunity to actively engage in this area. See below in our consultation round-up for more information.

2. First ‘Orange Bond’ (financial institutions)

What: December saw the launch of the Impact Investment Exchange’s (IIX) Women’s Livelihood Bond 5 (WLB5), the world’s first Orange Bond. The bond is named after the orange colourings of Sustainable Development Goal 5 for gender equality and is the world’s first asset class created by ‘both the Global South and Global North with a mission to build a gender-empowered financial system’. It adopts gender-lens investing that will fund small businesses that empower approximately 300,000 women and girls in emerging markets across Asia and Africa. This unique financial structure has demonstrated how innovative financial solutions can effectively balance risk, returns and impact. The WLB5 is intended to create a “gold standard” for the market and it complies with existing standards including the ICMA Sustainability Bond Guidelines and the ASEAN Social Bond Standards.

UK developments

1. Mission Zero: UK Net Zero Strategy Review (multi-sector)

What: MP Chris Skidmore’s mammoth Mission Zero report was published this month. The 340-page report is an outcome of more 1800 submissions making it one of the largest engagements on net zero in the UK. The report was commissioned by the UK Government last year to assess the UK’s net zero strategy with a focus on ensuring a pathway that aligns with economic growth and energy security. The report strongly backs the UK’s commitment to net zero by 2050 and finds that significant government action is needed to ensure it’s achieved in the best way possible for the economy and the public. The report is critical of the government’s current approach, with many respondents calling for greater ‘clarity, certainty, consistency, and continuity’.

The report frames net zero as ‘the growth opportunity of the 21st century’ and it offers up 129 policy recommendations for the government to consider to ‘turbocharge’ the path to net zero. To offer a snapshot, some of the themes covered are: greener and more energy efficient homes, stable environment for business to plan and invest, accelerating renewables, reforms relating to the circular economy, transport, hydrogen, nuclear, oil and gas and more.

Looking ahead: We will be keeping an eye out for the UK Government’s response to this report, which we anticipate will be embedded within the Government's revised net zero strategy expected for release before the end of March.

2. New UK antitrust sustainability guidelines coming soon (multi-sector)

What: The CEO of the Competition and Markets Authority (CMA) has confirmed that draft antitrust guidance on sustainability agreements will be published for consultation ‘in the coming weeks’. All the smoke signals are that the guidance will provide some helpful comfort for companies who wish to collaborate to achieve genuine green goals. Last year, the CMA told the government that there was ‘some flexibility under the current legal framework’ to create an exemption for climate-focused agreements between businesses.

Crucially, the guidance therefore seems likely to align sustainability goals with consumer benefit, including to the UK society as a whole. Under the new proposal, the CMA would consider climate change mitigation a benefit to society that would fit within the “fair share” exemption, and would not punish companies cooperating on policies that would have a substantial and demonstrable impact on climate change. This would be an important step and one which aligns with guidance of the Dutch Authority, but goes further than guidance issued by the European Commission.

Looking ahead: It will be fascinating to see how far the CMA is prepared to go in enabling the private sector to collaborate towards achieving the UK’s net zero ambitions – watch this space.

3. Ban on some single-use plastics in England (multi-sector)

What: Environment Secretary Thérèse Coffey announced this month that a range of single-use plastics will be banned in England from October 2023. The ban will target items such as: single-use plastic plates, trays, cutlery and certain types of polystyrene cups and food containers. The decision comes after a government consultation showed that over 95% of respondents were in favour of the bans and that the bans are likely to make a material impact in reducing plastic pollution. The EU introduced a similar ban back in 2019 through a Directive on single-use plastics and announced in November 2022 a proposal on Packaging and Packaging Waste, that includes further bans on single-use plastic, including for example single-use packaging for fruits and vegetables and miniature shampoo bottles and other miniature packaging in hotels.

Looking ahead: While the ban in England is limited in scope, it shows that the issue of single-use plastics is continuing to be a topic that regulators are willing to address. The UK government has expressed that it will be considering further measures around other plastic items, including wet wipes, tobacco filters and sachets, which could mean further bans or mandatory labelling requirements in the future.

4. Challenge to UK decision to invest in overseas fossil fuel project rejected (multi-sector)

What: Use of the English Courts, in particular the judicial review process, has long been a route by which environmental campaigners seek to hold the UK Government to account for its decisions. The Court of Appeal has recently dismissed a judicial review application by which Friends of the Earth sought to challenge a decision by UKEF (The Secretary of State for International Trade/UK Export Finance) to approve UKEF’s $1.15b investment in a liquified gas project in Mozambique (R (on the application of Friends of The Earth Ltd) v UKEF and others [2023] EWCA Civ 14).

The essence of Friends of the Earth’s challenge was that the UK Government had erred in law in concluding that their decision was aligned with the UK’s obligations under the Paris Agreement. The crux of the case rested on Article 2(1)(c) of the Agreement, which includes requirements that signatories aim to ‘strengthen the global response to the threat of climate change’ by ‘making financial flows consistent with a pathway towards low greenhouse gas emissions’. The court concluded that Article 2 of the Agreement should be treated as defining the purpose of the treaty, and that the specific obligations on the signatories could be found elsewhere (primarily in Articles 4, 7, 9, 10, 11 and 13).

To determine whether the UKEP made an ‘error in law’ by financing the project, the court asked whether it was tenable to decide that funding the project would be aligned with the UK’s obligations under the Paris Agreement. It came to the conclusion that it was tenable, finding that the Agreement (as an unincorporated treaty) was one of only a range of factors to be considered in reaching a decision on the project. The court also looked at UKEF’s Climate Change Report, which concluded (among other things) that the project was in overall alignment with Mozambique’s stated energy transition policies and that the project may reduce emissions (unquantified) to the extent that it displaced coal use in China, India and Indonesia.

The court did note that no attempt was made to argue that the decision was irrational on the basis that 6 months later it would have contravened the UK Government’s own policy; following a December 2020 announcement by the then Prime Minister, the UK Government issued its “Guidance: Aligning UK International Support for the clean energy sector”, stating that the UK would “no longer provide …support” for the overseas fossil fuel energy sector.

Looking ahead: Although Friends of the Earth were unsuccessful in this instance, we do not believe this will deter further similar claims against the Government in the future.

EU and Europe developments

1. Update on the EU carbon border adjustment mechanism (multi-sector)

What: From October 2023, the EU’s Carbon Border Adjustment Mechanism (“CBAM”) will come into effect. CBAM will apply to imports of certain products into the EU from non-EU countries. Importers will be required to purchase CBAM certificates at a price based on the difference between carbon pricing in the country of production (if any) and the price of carbon allowances under the EU Emissions Trading Scheme (ETS).

Timing: CBAM is arguably off to a slow start, being phased in from October 2023 when the reporting system will apply, but with no requirement to start paying a carbon adjustment until 2026. Even then, full implementation is dependent on the phasing out of allowances provided to EU businesses under the ETS, meaning it will be phased in gradually between 2026 and 2034. It will initially only apply to iron and steel (including some downstream products such as screws and bolts), cement, fertiliser, aluminium, electricity and hydrogen.

Next Steps: The Council and the European Parliament have reached political agreement on the implementation of CBAM but we now await the formal Regulation. When this is published there will be detailed compliance requirements to get to grips with including authorisation processes, the scope of CBAM, compliance deadlines, and the mechanism by which importers will have to report.

Our View: Given the urgent need to address climate change, it may seem that it is too little, too late. This is down to the multi-national and multi-disciplinary nature of the proposals, as well as the need to tie implementation to the phasing out of ETS allowances. However, the sense we get is that once the challenges of legislating and implementing a complex multilateral process have been overcome, there will be quick momentum. The legislation is being drafted deliberately to allow flexibility and future extensions.

What should you be doing: All businesses should watch this space. Typically, when the EU successfully implements a new initiative, others will follow. It would therefore not be at all surprising if many other countries look to implement similar rules over the next five years. The UK has already indicated that it will consult on the possible introduction of a UK CBAM during 2023 as one of a number of possible measures to address carbon leakage. For further information please see our briefings here and here.

2. Alleged breach of Due Vigilance in France (multi-sector)

What: French bottled water and dairy group Danone is facing legal action from three environmental groups (Surfrider, ClientEarth and Zero Waste France) for an alleged breach of the duty of vigilance for its plastic use established under the Corporate Duty of Vigilance Law (2017). The law requires large French companies to publish a vigilance plan and to guard against environmental and social violations in their value chains.

The environmental groups claim that the company’s current vigilance plan is silent on plastics and have called on the company to:

1. Map the impacts its use of plastics has on the environment, climate, health and human rights from production to end-of-life;

2. Provide a complete assessment of its plastic footprint, including plastics used in producing the products it sells, plastics used in logistics and promotions and plastic packaging; and

3. On the basis of this assessment, issue a new vigilance plan, including a credible ‘deplastification’ path for all their activities.

They have requested the Court order Danone to pay € 100,000 per day if they delay the issuance of a new plan beyond six months. Danone has denied the claim, stating that it has already implemented a decrease of 12% of its global plastic use between 2018 and 2021. The company states that its goal is for every piece of its packaging to be reusable, recyclable or compostable by 2025.

This claim follows a formal notice sent by the activists to nine food and retail companies (Auchan, Casino, Carrefour, Danone, Lactalis, McDonald’s France, Les Mousquetaires, Nestlé France and Picard Surgelés) in September 2022, in relation to their plastic use throughout their value chains. Four of the companies have not yet published a vigilance plan, and the rest, the activists allege, do not present a credible deplastification path for all their activities in their vigilance plan. The nine companies have three months from the notice to meet their obligations to respond and at the end of this period, the activists may launch legal proceedings.

Looking ahead: These proceedings, as well as the others brought under the French Duty of Vigilance law, shows the trend in France for NGOs to act against companies, requiring them to be transparent and to take into account their entire value chain. This claim is one of several recent legal claims filed against plastic pollution and reinforces the continuing trend of ESG litigation.

Middle East developments

1. Standardising ESG disclosures for listed companies across the GCC (multi-sector)

What: On 9 January 2023, the GCC Exchanges Committee, chaired by the Saudi Exchange, published a unified set of voluntary ESG disclosure metrics. These metrics align with the UN Sustainable Development Goals and include 29 standards which are aligned with the World Federation of Exchanges and Sustainable Stock Exchanges Initiative, across categories including energy and water usage, gender diversity, greenhouse gas emissions and data privacy. Whilst the metrics do not replace existing ESG disclosure guidelines for GCC stock exchanges, some view this development as an initial step by the GCC Exchanges Committee - comprising Bahrain Bourse, Boursa Kuwait, QSE, Muscat Stock Exchange, Saudi Exchange, Abu Dhabi Securities Exchange and Dubai Financial Market – towards obligatory standardised ESG disclosure metrics.

2. UAE Ministry of Human Resources and Emiratisation sets out guidelines on reporting workplace injuries and illnesses (multi-sector)

What: Ministerial Resolution No. 657 (Resolution) of 2022 issued by the Ministry of Human Resources and Emiratisation (MoHRE) outlines procedures for maintaining records and reporting workplace accidents and occupational diseases through MoHRE approved channels, adopting a system for monitoring work injuries and occupational diseases, and complying with the requirement to pay compensation. The intention of the Resolution is to make the identification of risks and other problems easier to distinguish hence strengthening the safety system in the private sector. The employer has a duty to record information about the injured employee, severity of the injury, circumstances of the accident and treatment procedures. In addition to keeping track of all work-related illnesses and injuries, the Resolution also requires companies to record any preventive measures and rehabilitation programmes implemented for employees involved in hazardous activities, as well as defining all activities that pose a threat to health and safety of workers.

3. Luxembourg Stock Exchange becomes the first European Exchange to sign Abu Dhabi Sustainable Finance Declaration

What: On 20 January 2023 in Abu Dhabi, the Luxembourg Stock Exchange (LuxSE) became the first European Exchange to sign the Abu Dhabi Sustainable Finance Declaration, which was launched in 2019 by the Abu Dhabi Global Market and is sponsored by the Ministry of Climate Change and Environment, the Central Bank and the Securities & Commodities Authority in Abu Dhabi. The LuxSE is joined as a signatory by 116 leading banks, asset managers, financial services providers and other institutions globally.

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. Global Reporting Initiative exposure draft of its revised Biodiversity Standard (multi-sector)

What: On 5 December 2022, the Global Reporting Initiative (GRI) published an exposure draft for its revised biodiversity standard 'GRI 304: Biodiversity'. The exposure draft proposes changes that:

• Reflect reporting throughout the supply chain, given many biodiversity impacts are found beyond the scope of a company’s own operations;
• Help organisations prioritise attention on their most significant impacts, recognising the challenge of scale in addressing biodiversity impacts;
• Add new disclosures to connect with the drivers of biodiversity loss, including climate change, pollution, and overexploitation of resources. Introduce requirements for biodiversity-related human rights impacts, such as those on indigenous peoples, local communities and workers; and
• Emphasise location-specific data, to ensure businesses are transparent about the sites where their biodiversity impacts take place.

Timing: The exposure draft is open for public comment until 28 February 2023.

2. US Federal Supplier Climate Risks and Resilience Proposed Rule (US federal suppliers)

What: On 10 November 2022, the Biden-Harris Administration proposed the Federal Supplier Climate Risks and Resilience Rule to protect the federal government's supply chains from significant climate-related financial risks. The proposed rule would require major Federal contractors to:

• Publicly disclose their greenhouse gas emissions and climate-related financial risks;
• Assess climate risks in alignment with the TCFD; and
• Set emissions reduction targets validated by the SBTi.

Timing: The 60-day public comment period for this proposed rule has been extended by 30 days to now close on 13 February 2023.

3. Australia’s Climate-related financial disclosure (multi-sector)

What: On 12 December 2022 the Australian Government published a consultation seeking views on key considerations for the design and implementation of the Government’s commitment to standardised, internationally aligned requirements for disclosure of climate related financial risks and opportunities in Australia. It also asks stakeholders to supply information on how they are currently managing climate risks including what transition plans they have in place, and whether particular disclosure requirements and/or assurance of those requirements commence in different phases.

Timing: The consultation closes 17 February 2023. Responses will be used to inform a specific design proposal for further consultation in 2023.