Governance

On 30 November 2022, the Council of the European Union (the “Council”) adopted its negotiating position on the European Commission’s proposal for a corporate sustainability and due diligence directive (the “Draft Directive”). As discussed in our previous blog posts (which you can read here and here), the proposed Draft Directive set out an EU standard for human rights and environmental due diligence (“HREDD”) and required EU member states to introduce legislation making in-scope companies responsible for violations of HREDD standards across their entire value chain. This meant that companies would have to conduct HREDD on their suppliers and clients, and could be held liable for how their products and services are used and disposed of. Although the fundamental principles of the proposed Directive remain intact, the Council’s suggested amendments to the Draft Directive do include some important changes.

Continue Reading Human Rights and the Environment – EU Council responds to the draft Corporate Sustainability Due Diligence Directive
EFRAG_NEW_LOGO2015SEPT

On 23 November 2022, the European Financial Reporting Advisory Group (“EFRAG“) submitted the first set of draft EU Sustainability Reporting Standards (“ESRS“) to the European Commission.

As discussed in our previous blog post (which you can read here), the draft ESRS – which in-scope entities will be required to report against under the Corporate Sustainability Reporting Directive (“CSRD“) – were released on 29 April 2022 and made available for public consultation until 8 August 2022. Following the end of the public consultation, EFRAG amended the ESRS and approved updated versions on 16 November 2022. EFRAG subsequently submitted the updated draft ESRS to the European Commission.

The CSRD was adopted by the Council of the European Union on 28 November 2022, meaning the requirement to report against the ESRS will apply in stages from 2024, with first submissions due in 2025 (for more information on the CSRD, read our legal update here).

Continue Reading The European Financial Reporting Advisory Group submits draft European Sustainability Reporting Standards to the European Commission
world-benchmarking-allicance-logo

On 21 November 2022, the World Benchmarking Alliance – a non-profit organisation that develops benchmarks to hold companies to account for their part in achieving the United Nations Sustainable Development Goals – published its 2022 Corporate Human Rights Benchmark Insights Report (the “2022 Report“).

Compared to previous iterations (which we have discussed in a previous blog post here), the 2022 Report devotes more attention to companies’ efforts to ensure that human rights are respected within their operations and supply chains, rather than simply focussing on the human rights-related commitments that companies have made. The 2022 Report also focusses on companies’ stakeholder engagement, their business models, strategies and risks, and whether they prohibit forms of forced labour.

In applying this revised methodology, the 2022 Report concludes that companies are better recognising their human rights-related responsibilities and have improved their human rights-related risk management strategies. However, the 2022 Report also highlights that the pace of this improvement has been very slow.

Continue Reading Business and Human Rights: Corporate Human Rights Benchmark 2022 shows that corporate respect for human rights has gained momentum
ESG or environmental social governance. The company development of a nature conservation strategy.
ESG or environmental social governance. The company development of a nature conservation strategy

On November 22, 2022, the U.S. Department of Labor (the “DOL”) published a regulation entitled “Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights” (the “Final Rule”). The Final Rule follows proposed rules regarding ESG investing and proxy voting by plan fiduciaries, issued on October 14, 2021 (the “Proposed Rule”) and amends prior regulations on the same topic issued by the DOL under President Trump in 2020 (the “2020 Rule”).

In the Final Rule, the DOL repeatedly emphasized that the regulation was primarily aimed at removing and remedying the chilling effect on ESG investing by plan fiduciaries created by the 2020 Rule. While the Final Rule takes a more permissive stance on the consideration of climate change and other ESG factors in investment decisions by plan fiduciaries than the 2020 Rule, the DOL cautioned that a plan fiduciary should not subordinate the interests of plan participants and beneficiaries to any collateral benefits (i.e., ESG objectives).

The Final Rule largely tracks the Proposed Rule, with a few notable exceptions summarized below.

Continue Reading DOL Finalizes Rule Regarding ESG Investing and Proxy Voting by Plan Fiduciaries
Governance

On November 15, 2022, the U.S. Securities and Exchange Commission (SEC) published a press release providing an overview of its 2022 enforcement activities. The SEC stated that it had filed 760 enforcement actions in fiscal year 2022, which was a 9% increase from last year. The civil penalties, disgorgement, and pre-judgment interest ordered in SEC actions were $6.44 billion, the most in the SEC’s history and almost double the amount from fiscal year 2021. Of the total money ordered, civil penalties, which totaled $4.194 billion, were the highest on record.

Continue Reading ESG continues to be a SEC enforcement focus
China - Hong Kong

The Hong Kong Monetary Authority (“HKMA”) released a research report last week showing evidence that about one-third of global corporate green bond issuers are reaping the benefits of issuing green bonds without cutting down their greenhouse gas (“GHG”) emissions. This type of ‘greenwashing’ behaviour impedes progress on combating climate change and could lead to financial instability if the market loses confidence in green bonds and other green asset classes.  Not all is grim, however, as the HKMA has identified positive trends and ways to mitigate the damage. The HKMA report also confirmed that corporate green bonds, if taken seriously by issuers, could help tackle climate change.

Not as eco-friendly as you think

The purpose of issuing a green bond is to generate proceeds that are committed to funding assets or projects that bring positive environmental benefits, one of which is reducing GHG emissions and fostering a low-carbon economy. 

Based on a set of sample data reviewed by the HKMA, around 40% of corporate issuers unfortunately showed a higher level of GHG emissions after they issued their initial green bond.  While the rest of the issuers did show a reduction in levels of GHG emissions, the magnitude of that decrease was relatively small.  This is strong evidence, in the HKMA’s view, that greenwashing is not uncommon amongst players in the green bond market.

The path to self-correction

Interestingly, the HKMA report explains that the market has its own way of penalising greenwashing behaviour.  Investors become less willing to invest in green bonds that are revealed as greenwashing, which in turn stifles demand and pushes up costs of issuance, dis-incentivising those greenwashing firms from issuing green bonds again.  Empirical evidence shows that greenwashing firms have a lower probability of repeated issuance of green bonds.

Mitigation through mandatory disclosure requirements and taxonomies

The HKMA report further observed that green bond taxonomies (i.e. identification of assets and projects needed to deliver a low-carbon economy which pass the GHG emissions screening criteria set by the COP21 Paris Agreement) and enhanced environmental disclosure requirements are effective in mitigating greenwashing risks.  The likelihood of greenwashing bonds being issued by firms with comprehensive disclosure requirements on environmental performance is about 21% lower than those without such requirements.

Data set

The HKMA’s conclusions are based on its analysis of data on 1,888 corporate green bonds with total issuance size of around US$591.14 billion issued by 643 listed companies between 2013 and 2021. Information on the data selection and methodology applied can be found in the HKMA’s report.

COP image

COP27 has now come to a close. Against the global backdrop of political and economic turbulence, many questions were asked as to what could realistically be expected as outcomes of COP27. We now have the answers to those questions.

Continue Reading COP27 Postscript – much ado about nothing?
Governance

On 10 November 2022, the EU Parliament adopted the Corporate Sustainability Reporting Directive (“CSRD“). The EU Council is expected to adopt the CSRD on 28 November 2022, after which it will be published in the Official Journal. The CSRD will then enter into force 20 days after publication and EU member states will have 18 months to integrate it into national law.

The CSRD will create new, detailed sustainability reporting requirements and will significantly expand the number of EU and non-EU companies subject to the EU sustainability reporting framework. The required disclosures will go beyond environmental and climate change reporting to include social and governance matters (for example, respect for employee and human rights, anti-corruption and bribery, corporate governance and diversity and inclusion). In addition, it will require disclosure regarding the due diligence processes implemented by a company in relation to sustainability matters and the actual and potential adverse sustainability impacts of an in-scope company’s operations and value chain.

The CSRD will begin to apply for many for financial years starting in 2024 (see “When does this apply?” below for further details). Companies should review the effect of the CSRD to understand how and when it may apply to them and what they should to do to prepare.

Continue reading at Mayerbrown.com.

Indonesia - Jakarta

At the G20 Summit being held in Bali this week, Indonesia President Joko Widodo and the leaders of the International Partners Group (IPG), co-led by the United States and Japan, announced the launch of the Just Energy Transition Partnership (JETP).  According to the joint statement released by IPG on 15 November 2022, the JETP aims to develop a comprehensive investment plan to achieve Indonesia’s decarbonisation goals.

Continue reading at Mayerbrown.com.

COP image

We are half way through COP27, so (disregarding the intersessionals that will take place during 2023), the negotiations will “soon” start to focus on Dubai, the venue for next year’s COP28 summit.  Who knows how much progress will be made before then.  One point to note is that COP27 is more of an “implementation” COP, rather than one with a more grandiose task, such as ramping up climate ambition.

Continue Reading Observations from the COP27 Halfway Point