ESG View - December 2024

> Sign up to ESG View
> Read previous editions of ESG View

Welcome to the December edition of ESG View, this month we bring you a festive edition – comprising twelve updates mirroring the theme of the Twelve Days of Christmas. This includes round-ups from COP29 and global carbon market developments. You’ll also find key regulatory news from Europe and Asia, as well as a sprinkling of key global disputes.

This month, the wheels of the EU omnibus went round and round, with EU Commission President Ursula von der Leyen lighting a regulatory fuse by suggesting a single ‘omnibus’ package for three flagship sustainability regulations: the Corporate Sustainability Reporting Directive (CSRD), the Corporate Sustainability Due Diligence Directive (CSDDD), and the EU Taxonomy. Whilst there is universal support for tackling regulatory fatigue, the market is also bracing for impact given there is yet little clarity on how the omnibus proposal will leverage the time and resource already committed by business to comply with existing frameworks. It is expected to be discussed further in late February, with a legislative proposal expected to be tabled in the first quarter of 2025.

On the global stage, this month saw the third and final COP of the season, the 16^th Conference of Parties to Combat Desertification in Riyadh, Saudi Arabia (COP16). As drought and land loss create significant challenges across climate, biodiversity and livelihoods as well as the economy, COP16 warned that the global economy could lose $23 trillion by 2050 through degradation. Halting this trend now would cost around $4.6 trillion. COP16 saw some mobilisation of finance (e.g. Arab Coordination Group pledged US$10 billion by 2030 to the OPEC Fund for International Development) but the commitments were far below the levels needed. The next meeting of the Parties is set to take place in 2026 in Mongolia (COP17).

Meanwhile, as mentioned briefly on our previous ESG View, negotiations on the international plastic pollution treaty (INC-5) took place at the end of last month. While they were expected to be the final round of negotiations, consensus was not reached, with critical points of disagreement being around plastic production caps, mandatory restrictions on hazardous chemicals, funding mechanisms for developing nations and around transparency and accountability. Further negotiations are expected in 2025, although no dates have been confirmed.

In the spirit of a “new year, new me”, we are exploring an ESG View revamp in 2025, with the aim of making it more engaging, useful and accessible. We invite you to share your feedback in this quick survey so we can make sure we continue to be the ESG newsletter of choice for all our dear readers.

Have the most joyful holiday season!

Best wishes,

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

1. COP29: A climate conference round up (multi-sector)

What: Between 11-22 November, Azerbaijan hosted the 29th UN Climate Change Conference (COP29). The Baku COP presidency got off to an inauspicious start with the President Ilham Aliyev referring to fossil fuels as “a gift from God” in the opening ceremony of the World Leaders Climate Action Summit. However despite some significant procedural challenges around climate justice and the transition away from fossil fuels, there were some successes to note.

Key details:

• Progress on existing commitments: At last year’s COP28, following a global stocktake, countries had agreed to updated targets including; to cut emissions by 43% by 2030 relative to 2019 levels; to transition away from fossil fuels; phase-down unabated coal power; and triple renewable energy capacity by 2030. Unfortunately, the draft dialogue at COP29, aiming to reaffirm these goals was postponed for a decision at COP30 in 2025. Notably, 25 countries and the EU announced plans to include a pledge for 'no new unabated coal power' in their next climate plans (NDCs).

• Finance: COP29’s notable achievement was reaching agreement on a “new collective quantified goal on climate finance” (NCQG) whereby developed countries will “take the lead” in raising $300bn a year for developing countries by 2035. It also calls on “all actors” to scale up funds from “all public and private sources” to “at least $1.3tn” by 2035. The negotiation was marred with procedural challenges that highlighted the need for more streamlined and transparent discussions at future COP sessions.

• Carbon markets: Another major milestone was the agreement on the rules of carbon trading under Article 6 of the Paris Agreement, notably operationalising inter-state carbon trading under Article 6.2 (known as Internationally Transferred Mitigation Outcomes (ITMOs)) and a centralised international carbon market under Article 6.4 (the Paris Agreement Crediting Mechanism (PACM)). The Article 6.4 Supervisory Body has finalised standards for project methodologies and carbon removals. Methodologies for specific types of carbon-cutting activities need to be approved and projects need to begin being registered. The first methodologies are expected to be approved in the second half of 2025.

2. Momentum on global carbon markets (multi-sector)

What: In parallel to the momentum seen at COP29 (see above), there were several carbon-related developments of note globally.

Key details:

• The International Civil Aviation Organization (ICAO) has updated its list of Eligible Emissions Units (EEUs) for both the pilot phase (2021-2024) and first phase (2024-2026) of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). As of November 2024, the ICAO has approved six standards to issue EEUs: American Carbon Registry (ACR), Architecture for REDD+ Transactions (ART), Gold Standard, Verified Carbon Standard (Verra), Climate Action Reserve (CAR), and Global Carbon Council. Standards providers have begun publishing guidance to support project developers to produce credits under the scheme.

• On 15 November, the Integrity Council for the Voluntary Carbon Market announced that it has approved three methodologies for issuing high integrity carbon credits for reducing emissions from deforestation and forest degradation in developing countries (REDD+).

• On 11 December, Brazil passed a law establishing the Brazilian Emissions Trading Scheme (ETS) (Law 182/24), establishing a compliance carbon market not unlike the EU ETS.

• On 19 November, the European Council approved the first voluntary EU certification framework for permanent carbon removals, carbon farming, and carbon storage. It introduces four overarching criteria for certification, the activities must: be quantifiable, additional, ensure long-term carbon storage, do no significant harm to the environment, and provide co-benefits.

• On 15 November, the UK Government published Principles for voluntary carbon and nature market integrity (as briefly mentioned in our last ESG View). The UK principles are unique as they explicitly incorporate biodiversity protection and nature-based solutions, acknowledge misleading terminology (e.g., “carbon neutral” and “biodiversity positive”) and require the reporting of planned use of credits where financially material. As a reminder, there will be a consultation on the implementation of the principles in early 2025. In the meantime, there is a live UK Emissions Trading Scheme consultation, so see update twelve below for more details.

3. The International Platform on Sustainable Finance launches the Common Ground Taxonomy (multi-sector)

What: On 14 November, the International Platform on Sustainable Finance (IPSF), a partnership between the People’s Bank of China (PBOC), the European Union Directorate-General for Financial Stability, Financial Services and Capital Markets Union (FISMA), and the Monetary Authority of Singapore (MAS), presented the Multi-Jurisdiction Common Ground Taxonomy (M-CGT), a comparison of the sustainable finance taxonomies of China, the EU and Singapore. The purpose of the exercise is to facilitate interoperability between the jurisdictions and not to create a single standard.

Key details: The scope of M-CGT builds on the bilateral EU-China Common Ground Taxonomy (CGT), covering green activities across China, the EU and Singapore taxonomies and their corresponding criteria for the climate change mitigation objective. The M-CGT maps a total of 110 activities across eight focus sectors (expanding the EU-China CGT scope).

Once the mapping was complete, the scope and technical screening criteria for each activity was analysed. Where there were similarities, the level of stringency was compared and for distinct criteria (e.g., local certifications), common requirements were analysed. The findings showed some degree of comparability of green activities across the three jurisdictions, with around 60% of activities sharing clear, stringent criteria across regions (mainly across the manufacturing, transportation, water and waste sectors) and 5% have fully aligned criteria (e.g., electricity generation).

4. A flurry of FAQs from the EU (multi-sector)

What: This month has seen three key publications responding to frequently asked questions (FAQs) relating to the European ESG disclosure regime.

Key details:

• Implementation of the EU Taxonomy: On 29 November, the European Commission published a set of FAQs to support in-scope entities with the implementation of the EU taxonomy. Read full details of what is covered in our Insights article here.

• Disclosure against ESRS: On 6 December, the European Financial Reporting Advisory Group (EFRAG) announced the release of 64 new explanations added to its Compilation of Technical Explanations responding to stakeholders’ technical questions on the European Sustainability Reporting Standards (ESRS). This now includes a total of 157 explanations released between January and November 2024.

• Guidance on Funds’ names: On 13 December, the European Securities and Markets Authority (ESMA) published Q&As on aspects of the practical application of its Guidelines on funds' names using ESG or sustainability-related terms. Read full details of what is covered in our Insights article here.

5. EU Regulations on packaging waste and forced labour get close to the regulatory finish line and an update on the EU deforestation policy (multi-sector)

What: This month saw two key regulations get close to the finish line of the European lawmaking apparatus following European Council adoptions, as well as the EU reaching political agreement on the amendment of the EU Deforestation Regulation (EUDR).

Key details:

• Packaging Regulation: On 16 December, the European Council adopted a regulation on packaging and packaging waste. The regulation sets binding targets for re-useability of packaging, creates restrictions on certain types of single-use packaging and requires companies to minimise the packaging used and substances of concern (like packaging containing per- and polyfluorinated alkyl substances (PFAS)). The regulation will be published in the Official Journal and will enter into force twenty days thereafter. The regulation will be applied eighteen months after the date of entry into force.

• Forced Labour Regulation: On 19 November, the European Council adopted the regulation prohibiting products in the Union market that are made using forced labour. It does not create additional due diligence obligations for businesses besides those already provided by EU or national law. The ban will be enforced by risk-based investigations, which will assess likelihood of violations by looking at the scale and severity of the suspected forced labour, the quantity or volume of products placed or made available on the Union market, among other things. The regulation will be published in the EU Official Journal and will apply three years after coming into force, which will likely be at the end of 2027.

• EUDR: On 3 December, the European Council and Parliament reached a provisional agreement on a proposed targeted amendment of the EUDR, postponing its date of application by twelve months. Notably, the agreement does not mention any further amendments, including the "no risk" category (as mentioned in our November ESG View). This provisional agreement still needs to be confirmed by both institutions before going through the formal adoption procedure, so watch this space.

6. The UAE launch the GEEA, to double global energy efficiency (multi-sector)

What: On 15 November, the UAE Ministry of Energy and Infrastructure announced the launch of the Global Energy Efficiency Alliance (GEEA) at COP29. The GEEA aims to double annual global energy efficiency rates by 2030.

Key details: The GEEA’s key objectives include:

• Establishing a platform for sharing best practices and data;
• Providing training and resources for emerging economies;
• Facilitating collaborations between governments, private sectors, and financial institutions; and
• Harmonising global energy efficiency standards.

Looking ahead: The GEEA aims to establish a founding committee, create framework documents and engage stakeholders for initial partnerships and officially launch the GEEA in 2025, initiate flagship projects, and monitor energy efficiency progress. Keep an eye out for opportunities to get involved.

7. Hong Kong publishes a roadmap for mandatory sustainability disclosures (multi-sector)

What: On 10 December, Hong Kong’s government launched a roadmap on sustainability disclosure, which requires publicly accountable entities (PAEs) to adopt the International Financial Reporting Standards - Sustainability Disclosure Standards (ISSB Standards). PAEs are defined as entities:

(i) whose securities are traded in a public market or entities in the process of issuing securities for trading in a public market or hold assets in a fiduciary capacity for a broad group of outsiders as one of their primary businesses; and
(ii) have a significant weight in the jurisdiction, regardless of whether they are listed or non-listed.

The roadmap provides a well-defined pathway for large PAEs (i.e., listed companies which are Hang Seng Composite LargeCap Index constituents as well as large non-listed financial institutions carrying a significant weight in Hong Kong) to fully adopt the ISSB Standards no later than 2028.

Key details: Outlined in the roadmap:

• the Hong Kong Institute of Certified Public Accountants (HKICPA) has developed the Hong Kong Sustainability Disclosure Standards on a full alignment basis with the ISSB Standards, which were published on the 12 December, with an effective date of 1 August 2025;

• all Main Board issuers (companies listed on one of the Boards of the Stock Exchange of Hong Kong Limited) are required to disclose against the New Climate Requirements (based on IFRS S2) on a “comply or explain” basis starting from 1 January 2025 (further detail in the implementation guidance). Large Cap Issuers are required to disclose against the New Climate Requirements on a mandatory basis starting from 1 January 2026; and

• Hong Kong Exchanges and Clearing Limited (HKEX) will consult in 2027 on mandating the Hong Kong Standards for listed PAEs, with an expected effective date of 1 January 2028.

8. SFC guidance to asset managers regarding due diligence expectations for third-party ESG ratings and data products providers (asset management)

What: On 25 November, the Hong Kong Securities and Futures Commission (SFC) issued a circular to provide guidance to asset managers which engage ESG ratings and data products providers (ESG service providers) and use the products of these providers to facilitate their investment decision-making and risk management processes. Asset managers should conduct reasonable due diligence and ongoing assessments on third-party ESG service providers to ensure compliance with the Code of Conduct for Person Licensed by or Registered with the Securities and Futures Commission.

Key details:

• The due diligence and ongoing assessments should allow asset managers to reasonably understand the ESG products provided by the third-party ESG service providers. These include how such products are produced, limitations and the purposes for which the product is being used.

• To meet the above regulatory expectations, asset managers may take into account the principles and recommended actions of the Hong Kong Code of Conduct for ESG Ratings and Data Products Providers (VCoC). Where ESG service providers have signed up to the VCoC and completed the self-attestation document, asset managers can utilise the information contained in the document to facilitate their due diligence and ongoing assessments.

• Asset managers should adopt a proportionate approach to fulfil the regulatory expectations, i.e., the level of due diligence and ongoing assessments should be proportionate to the impact that the products ultimately have on their investment and risk management processes.

• Asset managers may leverage group resources and staff and adopt group policies and procedures to satisfy the above expectations, provided that they are subject to standards that are similar to or higher than the SFC’s expectations.

9. The UK NCP releases a final decision on a breach of guideline set down by the OECD (mining sector)

What: The UK National Contact Point (UK NCP) for the OECD Guidelines for Multinational Enterprises. received a complaint on 10 September 2020 alleging that Glencore UK failed to conduct appropriate environmental and human rights due diligence in relation to a wastewater spill and an alleged oil leak in 2018, and a further wastewater spill in 2020, at the Badila Oilfield in Chad. The complainants also alleged that Glencore UK has not meaningfully engaged with the local communities, has not contributed to the communities’ sustainable development, nor effectively disclosed information affecting the communities. On 21 November, the UK NCP issued its final decision, finding that Glencore UK had not complied with certain provisions in the OECD Guidelines and has recommended that Glencore UK refers to due diligence more prominently in its policies, making particular reference to due diligence in regard to its business relationships and environmental impact.

Our view: This case reflects a wider trend of regulators looking into due diligence requirements and holding companies accountable for failings in their due diligence policies, in particular where such failings cause environmental damage abroad. This trend is likely to continue as companies are required to conduct more detailed due diligence, in particular in Europe (e.g. as a result of CSDDD). It is notable that it took the UK NCP four years to reach a decision (result in part from having paused its investigation to encourage the parties to mediate) which shows how long these investigations can take.

10. Asset managers face ESG scrutiny in the courts and by regulators (asset management)

What: Several financial services firms have been the target of greenwashing-related regulatory / litigation activity this month, showing continued focus from regulators, courts and activist groups on the financial sector:

• Attorney General of Texas, Ken Paxton has led a lawsuit against large asset managers with the support of ten other States. The lawsuit has been brought against BlackRock, State Street Corporation, and Vanguard Group for conspiring to artificially constrict the market for coal through anticompetitive trade practices. It is alleged that they purchased shares in publicly held coal producers in the US, and then used their power as shareholders to pressure the coal companies to accommodate “green energy” goals. Attorney General Paxton has said that “Texas will not tolerate the illegal weaponisation of the financial industry in service of a destructive, politicised ‘environmental’ agenda”. BlackRock and State Street have reportedly described the suits as “baseless”. This case forms part of the wider ‘Anti-ESG’ movement in the US and is one of a few recent examples of States taking legal action to hold companies accountable for allegedly prioritising environmental issues over financial return.

• Luxembourg’s financial regulator, the Commission de Surveillance du Secteur Financier (CSSF) has fined Aviva Investors €56,500 for breaches of its internal governance frameworks in relation to five of its funds categorised as Article 8 under the EU’s Sustainable Finance Disclosure Regulation (SFDR). The CSSF identified a number of bonds held by the funds with an ESG score below the exclusion threshold disclosed in the funds’ prospectuses. This case demonstrates that regulators are increasingly focused on ensuring asset managers do not diverge from their advertised investment strategy and are willing to take enforcement action where necessary.

11. Best of the rest: A round-up of ESG regulatory, policy and disputes updates from around the globe (multi-sector)

• Global: UNEP FI has published a progress statement for signatories of the Principles for Responsible Banking (PRB), simplifying its reporting framework.
• Global: UNEP FI has published a nature-positive guide for insurance.
• EU: EU has published in the Official Journal the new Regulation on the transparency and integrity of Environmental, Social and Governance (ESG) rating activities.
• EU: Council and the European Parliament reached a provisional agreement on a proposal to streamline benchmark authorisation and registration requirements, and to alleviate the burden on EU companies. The Council and Parliament agreed that only those benchmarks defined as critical or significant, EU Paris-aligned benchmarks, EU Climate Transition benchmarks, and certain commodity benchmarks should remain under the scope of the regulation.
• UK: The UK Sustainability Disclosure Advisory Committee has confirmed it will issue recommendations for the UK’s Sustainability Reporting Standards (based on the ISSB standards) this month.
• UK: Greenpeace and Shell have settled SLAPP lawsuit outside of court.
• France: French NGO HOP, known as Stop Planned Obsolescence, has filed a complaint against HP, arguing its ink cartridges have programmed obsolescence in violation of the French Consumer Code.
• USA: The California Air Resources Board (CARB) has released an Enforcement Notice relating to the Climate Corporate Data Accountability Act, notably CARB will not take enforcement action in the first reporting cycle if entities make good faith efforts to comply.
• Türkiye: Türkiye has launched the Türkiye Industrial Decarbonisation Investment Platform.
• Australia: Australian Government released Australia’s first ever First Nations Clean Energy Strategy.
• Australia: Department of Climate Change, Energy, the Environment and Water published Australia’s Circular Economy Framework.

12. Shape the global sustainability agenda: A round-up of consultations in flight across the globe (multi-sector)

• Global: The Partnership for Carbon Accounting Financials (PCAF) is consulting on its newly developed methods for measuring and reporting the greenhouse gas (GHG) emissions associated with financial activities. One aspect of the consultation looks at “financed avoided emissions”, otherwise referred to as “scope 4” emissions. Consultation closes 28 February 2025.
• EU: ESMA has published a consultation paper seeking views on how the European Single Electronic Format (ESEF) can be applied to sustainability reporting. Consultation closes 31 March 2025.
• Switzerland: The Swiss Federal Council has opened a consultation on updating its sustainability-related disclosure rules for companies. Proposals including alignment with Switzerland’s net zero by 2050 target, and alignment with international disclosure standards. Consultation closes 21 March 2025.
• Germany: A voluntary sustainable fund label, the FNG Siegel has launched a consultation to introduce new categories of labels: FNG-Label Transition and FNG-Label Sustainable. Consultation closes 31 January 2025.
• UK: The Financial Conduct Authority (FCA) has proposed a selection of minor amendments to the Sustainable Disclosure Requirements (SDR), including proposal that firms will have 16 months (not 12 months) to produce the first report under SDR, giving an extra 4 months preparation time. Consultation closes 27 January 2025.
• UK: Launched a consultation on the implementation of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
• UK: There is a live consultation on expanding the scope of the UK Emissions Trading Scheme to include the maritime sector. Consultation closes 23 January 2025.
• Singapore: The Workplace Safety and Health Council is consulting on Guidelines on the Preparation of Workplaces for Adverse Weather Conditions supporting companies to prepare their worksites for adverse weather conditions such as strong winds and heavy rains. Consultation closes 10 January 2025.

HAVE YOUR SAY!

In the spirit of a “new year, new me”, we are exploring an ESG View revamp in 2025, in the hope of making it more engaging, useful and accessible. We invite you to share your feedback in this quick survey so we can make sure we’re producing the best publication for all our readers.