modern-slavery

On 24 May 2023, Walk Free, an international human rights group focused on the eradication of modern slavery, published the fifth edition of its Global Slavery Index (the “Index”), which provides a national level analysis of modern slavery across 160 countries.

Modern slavery is a growing global problem against a backdrop of compounding risks.  According to the Index, some 50 million people around the world are living in modern slavery, with a reported 28 million in forced labour, 22 million in forced marriage and 12 million in child labour.  Moreover, the Index estimates that around US$ 468 billion of goods imported by the G20 are at risk of being tainted by modern slavery. This includes products related to: cattle, coal, cocoa, coffee, electronics, fish, garments, gold, palm oil, rice, solar panels, sugar cane, textiles and timber.

The Index includes a heatmap that illustrates where modern slavery risks are more acute.  In practice, this may prove to be a helpful tool for companies seeking to identify and assess human rights (and, in particular, modern slavery risks) in global supply chains in order to respond to: emerging mandatory human rights due diligence (“HRDD“) laws; obligations under established international norms (such as the UN Guiding Principles); and increasing stakeholder expectations.

Continue Reading Business and Human Rights – Global Slavery Index 2023 highlights global nature and scope of modern slavery risks in supply chains
Governance

The European Union has agreed on the final version of its Carbon Border Adjustment Mechanism (“CBAM”). The CBAM will apply to a limited set of products (cement, aluminium, fertilisers, electric energy production, hydrogen, iron and steel, as well as some “precursors” such as cathode active materials and a limited number of downstream products) which are vulnerable to carbon leakage. Initially, beginning in October 2023, a reporting obligation will apply, following which—in 2027—imports of covered products will be subject to the requirement to surrender of “CBAM certificates” (over calendar year 2026). For more details, see our Legal Update.

Energy innovation light bulb graphic interface.

The National Credit Union Administration (“NCUA”) has requested comment (the “RFI”) on how climate and natural disaster risks may affect federally insured credit unions, their members, and the National Credit Union Share Insurance Fund. The RFI indicates that the NCUA may use the results of the RFI to develop regulatory and reporting requirements and supervisory expectations for credit union management of climate-related financial risks. While it does not foreshadow the specific contours of these obligations, credit unions should look at the actions of the federal banking regulators, New York Department of Financial Services, and Task Force on Climate-related Financial Disclosures as examples of what the NCUA might impose.

The NCUA will accept responses to the RFI through June 26, 2023.

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On March 24, 2023, President Andrés Manuel López Obrador introduced a bill to reform and supplement various provisions in the Mining Law (Ley de Minería), National Waters Law (Ley de Aguas Nacionales), Ecological Balance and Environmental Protection Law (Ley General del Equilibrio Ecológico y la Protección al Ambiente), and the General Law for the Prevention and Integral Management of Waste (Ley General para la Prevención y Gestión Integral de los Residuos), specifically concerning mining and water concessions (the “Original Bill”). Following extensive discussions across various platforms, the House of Deputies (Cámara de Diputados) approved on April 20, 2023, an alternative text proposed by the MORENA deputies (the “New Bill”). The New Bill was then sent to the Senate (Senado de la República), where it was approved expeditiously on May 1, 2023. It is currently awaiting publication by the President in the Federal Official Gazette (Diario Oficial de la Federación).

Beyond the New Bill’s goals to shorten concession durations, restrict concessions to a single type of mineral, eliminate the mining industry’s preferential status and establish new grounds for concession revocation, it may also create several unintended consequences and challenges for the sector.

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Products

In recent years, we have seen an ever increasing number of lending transactions focused on promoting ESG in Latin America, such as green loans, social loans, sustainability loans and Sustainability-Linked Loans (“SSLs”). In this Legal Update, we focus on the role and impact of SLLs in Latin America.

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Indonesia - Jakarta

On March 27, 2023, the ASEAN Taxonomy Board released Version 2 of the ASEAN Taxonomy for Sustainable Finance (the “ASEAN Taxonomy“). As we reported here, Version 1 of the ASEAN Taxonomy was first published in November 2021 and it was designed to promote the transition towards sustainable finance by the ASEAN member states which, together, comprise the fifth largest economy in the world. 

Version 2 of the ASEAN Taxonomy took into account comments received from stakeholder consultations conducted in mid-2022 and expands on the conceptual thinking of the multi-tiered framework set out in Version 1. The ASEAN Taxonomy is meant to be interoperable with the EU Taxonomy and other national Taxonomies of ASEAN member states. In this Blog Post, we highlight the key aspects of the two assessment approaches as applied in Version 2 of the ASEAN Taxonomy, i.e. the ‘Foundation Framework’ and the ‘Plus Standard’.

Foundation Framework

As we previously reported, any economic activity seeking classification under the ASEAN Taxonomy must:

  • contribute to at least one of the four environmental objectives (“EO”), namely (1) climate change mitigation; (2) climate change adaptation; (3) protection of healthy ecosystems and biodiversity; and (4) promotion of resource resilience and transition to circular economy; and
  • fulfil the minimum requirements of the three essential criteria (“EC”): (1) not significantly harm any other EO; (2) measures taken to remediate or mitigate the activity’s potential adverse environmental impacts; and (3) an obligation to avoid causing social harm (which is newly incorporated in Version 2 to highlight the importance of social aspects in the ASEAN Taxonomy).

Under Version 2 of the ASEAN Taxonomy, users adopting the principles-based Foundation Framework are able to assess economic activities by using qualitative guiding questions, decision trees and use cases specifically designed for each EO and EC. Following the guiding questions, economic activities will be categorised as either “Green” which clearly contribute to or enable Climate Change Mitigation; “Amber” which contribute to decarbonisation where mitigation of other harm to environmental objectives is necessary; or “Red” which do not contribute to or enable Climate Change Mitigation and/or fail to meet other safeguards.

Plus Standard

Both the Foundation Framework and the more robust Plus Standard use “Green”, “Amber” or “Red” colour codes to classify the activity’s level of contribution to an EO.  The Plus Standard goes further by prescribing technical screening criteria (“TSC”) to categorise economic activities into Tiers 1, 2 or 3. Activities which meet Tier 1 TSC are considered “Green” under the Plus Standard. Activities which meet Tiers 2 or 3 are considered “Amber” under the Plus Standard.

Note, however, that the ASEAN Taxonomy does not provide TSC for all tiers of economic activities. Currently, TSC is available for “Tier 1 Green”, “Tier 2 Amber” or “Tier 3 Amber”. The latter two classifications which refer to activities transitioning to a more sustainable development will gradually “sunset” over time, and the goal is for all activities to transition into “Tier 1 Green”.  

Version 2 of the ASEAN Taxonomy provides the TSC tiers for the energy sector, i.e. the Electricity, Gas, Steam and Air Condition Supply sector, which is one of the six priority sectors identified in Version 1, and the Carbon Capture, Utilisation and Storage enabling sector, which is identified as one of the sectors that have a significant ability to enable other sectors to contribute to the EOs. Companies are required to provide evidence of fulfilment of the EO and the EC (if applicable) under the Plus Standard.

Next Steps

The ASEAN Taxonomy Board is aiming to finalise the TSC for the Energy sector in early 2024, with the TSC for all six priority sectors (as identified in Version 1) to be finalised in phrases by 2025. Also, it is expected that future versions of the ASEAN Taxonomy will establish an assessment mechanism for not only economic activities, but also entities and portfolios based on the aggregation of such activities.

Other Regional Developments

On February 15, 2023, the Green Finance Industry Taskforce (“GFIT”) in Singapore published its final consultation (“Final Consultation”) on the green and transition taxonomy designed for Singapore-based financial institutions (“Singapore Taxonomy”). The current phase of the Singapore Taxonomy is focused on climate change mitigation, and it seeks to align with international taxonomies including the EU Taxonomy and the ASEAN Taxonomy. In our previous blog posts, we discussed the first consultation (here) and second consultation (here) of the Singapore Taxonomy.

The Final Consultation proposes detailed technical criteria for the remaining five of the eight focus sectors identified by GFIT, namely (1) Industry, (2) Information and Communications Technology, (3) Waste & Water, (4) Agriculture & Forestry, and (5) Carbon Capture and Storage.

One key highlight of the Final Consultation is the proposed utilisation of the measures-based approach for the Industry sector in light of the challenges associated with decarbonisation and the lack of certainty of technologically and economically feasible low-carbon alternatives. Under the measures-based approach, an amber category is established for implementing technologies or measures that contribute to emissions reduction, instead of specific economic activities.

Further, GFIT has released a separate public consultation on the “Do No Significant Harm (DNSH)” criteria, which ensure that activities contributing to climate change mitigation do not significantly harm any other environmental objectives of the Singapore Taxonomy.

Following the conclusion of the Final Consultation, GFIT is anticipated to consider feedback received from all three rounds of public consultations and publish the final version of the Singapore Taxonomy by the first half of 2023.

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On April 19, 2023, the influential CDP (formerly known as the Carbon Disclosure Project) announced that nearly 7,000 organizations worldwide can disclose their plastic-related impacts for the first time, as CDP’s global environmental disclosure platform opens for 2023 reporting. CDP is adding plastic-related reporting to its online platform in response to a request from more than 740 investors with US$136 trillion in assets.

Last October, CDP reported that a record of around 20,000 organizations (over 18,700 companies representing over half of global market capitalization and around 1,100 companies and governments) reported on CDP’s platform in 2022 and that this was a 38% increase over the prior year.

Through the platform, organizations will disclose information on the production and use of the most problematic plastics, i.e., plastic polymers, durable plastics, and plastic packaging. This data will be made publicly available in September 2023.

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EDITORIAL USE ONLY US Federal Reserve Getty 941523462

On April 7, 2023, the Federal Reserve Bank of New York released two staff reports on climate-related risks for financial institutions. While the staff reports do not suggest or impose legal requirements, they provide financial institutions with insights on banking regulators’ positions on climate-related risk management requirements and current industry practices. In this Legal Update, we summarize the key points of the reports and consider how regulators might use them as they develop climate-risk management expectations for financial institutions.

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On 25 April 2023, the European Parliament’s Legal Affairs Committee voted in favour of a revised version of the EU draft Corporate Sustainability Due Diligence Directive (“the Draft Directive”).

The revised version differs from the versions that we have previously commented on here, here and here in the following key respects:

  • Inclusion of financial services: asset managers and institutional investors will now be subject to mandatory due diligence obligations, but pension funds, alternative investment funds, market operators and credit rating agencies will not.
  • Thresholds for inclusion of companies: the due diligence requirements will apply to: (i) EU-based companies with over 250 employees and a global turnover of over €40 million; (ii) parent companies with over 500 employees and a global turnover of over €150 million; and (iii) non-EU companies with a global turnover of over €150 million if at least €40 million of this was generated in the EU.
  • Exclusion of small and medium sized companies (“SMEs”): the Draft Directive will not apply to SMEs.
  • Climate transition plans: directors of companies with more than 1,000 employees will be responsible for ensuring that the company implements a transition plan that is compatible with the goals of the Paris Agreement.

It is expected that there will be a plenary vote on the revised version of the Draft Directive by the European Parliament on 1 June 2023. Following the plenary vote, negotiations with the Council on the final text of the Directive will begin. However, given that business associations have been critical of the current language in the Draft Directive, the text may well change again prior to the plenary vote.

China - Hong Kong

The Stock Exchange of Hong Kong Limited (HKEX) recently published a consultation paper proposing to mandate all listed companies in Hong Kong to provide climate-related disclosure in their Environmental, Social and Governance (ESG) reports. The proposal is formulated with reference to the Climate Standard exposure draft published by the International Sustainability Standards Board and will be introduced as a new Part D of Appendix 27 to the Hong Kong Listing Rules.

The mandatory disclosure rules, if adopted, will come into effect and apply to ESG reports in respect of financial years commencing on or after 1 January 2024. A transition period of two years is proposed for certain (but not all) disclosures where interim provisions are in place. In other words, the first ESG report in full compliance with all the new climate-related disclosures will be produced in 2027 for financial years commencing on or after 1 January 2026.  

Continue reading at Mayerbrown.com.