Much has been going on over a hot summer of ESG (incidentally, July is reported to have been the world’s hottest month ever recorded). In this Blog Post, we help make sense of the busy season and highlight important developments across Europe and Asia, including:

  • The EU’s “Fit for 55” Package and Taxonomy
  • Carbon Disclosures in the UK
  • The Launch of the TNFD
  • Increasing ESG Litigation
  • Climate-related Regulation in Asia

The EU is getting “Fit for 55”

Belying the witty title of the EU’s latest package is an enormous raft of policy documentation and legislative proposals which focus on the EU achieving its target to cut emissions to at least 55% below 1990 levels by 2030 and to be climate neutral by 2050.  A key element of the package is a revision and strengthening of the EU Emissions Trading Scheme (ETS), a separate ETS for buildings and road transport and expansion of the current ETS to include certain maritime emissions.  We have separately reported on the introduction of a Carbon Border Adjustment Mechanism (CBAM) here.  It remains to be seen whether the relative stringency of ESG requirements more generally becomes such an issue that a mechanism is required to regulate the import of goods from jurisdictions that impose lighter-touch ESG regulatory requirements.

What next for the EU’s Taxonomy?

As many of you will know, the EU has been busy defining what constitutes an “environmentally sustainable economic activity”.  Its detailed “technical screening criteria” for going about this has so far only been confirmed in respect of “climate mitigation” and “climate adaptation” objectives.  On 3 August 2021, a draft report on the criteria for the remaining four environmental objectives (water, circular economy, pollution prevention and control, and biodiversity & ecosystems) was published.  The report was published by the Platform on Sustainable Finance, and a final report is not expected to be delivered to the Commission until later this year. The Commission should adopt the formal delegated act in the first half of 2022.

The eventual outcome will be particularly important to those complying with the EU’s corporate reporting and investment firm disclosure regimes. Separately, the Commission is also consulting on a draft “Brown Taxonomy” and a “Social Taxonomy”.  Meanwhile, in the UK, the Treasury has announced details of the new Green Technical Advisory Group which will be considering how the UK Government should adapt the EU’s Taxonomy for UK purposes.

EU Green Bonds

The Taxonomy will also be important in respect of the EU’s plan to create its own EU green bond standard (the European Green Bond Standard, or “EGBS“).  Proceeds of issuance of EGBS bonds are required to be allocated in accordance with the EU’s Taxonomy.  The European Commission published its legislative proposal for a Regulation implementing the Standard in early July.

And what about EU green finance more generally?

Also in early July, the European Commission published its updated Strategy for Financing the Transition to a Sustainable Economy.  The original strategy (an “Action Plan” published in 2018, which trailed matters such as the creation of a Taxonomy (see above) and enhanced ESG reporting and disclosures) was getting a bit dated, though itself has not yet been fully implemented.  The updated strategy focuses on financing the transition to sustainability (climate and broader environment); inclusiveness (increased access to sustainable finance opportunities for individuals and small and medium-sized enterprises); financial sector resilience and contribution; and global ambition in respect of sustainable finance.  A broad range of initiatives are trailed, including promoting enhanced transparency on sustainability transition and decarbonisation plans, as well as the Commission preparing a report on approaches to measuring biodiversity risks and the development of standards for assessing natural capital and the development of biodiversity and natural capital accounting.

The UK’s plans for carbon disclosures

Whilst the EU has definitely stolen the regulatory agenda in respect of ESG for the time being, the UK has been ploughing ahead with its plans for enhanced carbon reporting.  In June, the UK’s Financial Conduct Authority published consultations on extending the requirement to make Task Force on Climate-related Financial Disclosures (TCFD) disclosures to issuers of standard listed equity shares, as well as asset managers, life insurers and FCA-regulated pension providers.  More broadly though, the UK has not yet published its own “net zero emissions strategy”.  A particular concern in the build-up to doing so seems to be how costs are fairly and reasonably spread across society.

Talking of taskforces…

Early June marked the launch of the Taskforce on Nature-related Financial Disclosures (TNFD).  The goal of the TNFD is to deliver a framework for organisations to report and act on evolving nature-related risks, in order to support a shift in global financial flows away from nature-negative outcomes and toward nature-positive outcomes. The TNFD intends for its outputs to be integrated into existing frameworks and standards in the space, such as those published by GRI, SASB, CDSB and the forthcoming IFRS Sustainability Standards Board.  The framework will be tested and refined in 2022 before its launch and dissemination in 2023.  As regards the IFRS Sustainability Standards Board, will the world slowly move towards a harmonised set of ESG reporting rules?  The IFRS continues to take steps towards creating a framework for sustainability-related reporting that is seeing wide-ranging support from corporates, investors and governments around the world.

Litigation risk?

Climate has continued throughout 2021 to capture the headlines on the ESG litigation front.  In May, the District Court in The Hague ordered Royal Dutch Shell to reduce its global carbon emissions by 45% by 2030 (compared with 2019 levels).  The case was brought by a coalition of NGOs and over 17,000 individual claimants.  Interestingly, the requirement covers not only Shell’s own emissions but also the emissions of its suppliers and its customers.  The fact that the emissions of companies like Shell were already regulated by matters such as the EU ETS was not a barrier to bringing a claim.  There is more to come here, as Shell will appeal the ruling.

Other interesting cases relating to climate matters came out of Australia. In one case, it was held that the government has a duty to protect children from the future impact of climate change (in this case in the context of the expansion of mine).  In another, an oil and gas company was sued over allegedly misleading and deceptive claims about its environmental performance, including its net zero commitment. Separately, an NGO and more than 200 claimants have filed a claim in Italy alleging that the Italian government, in failing to take actions necessary to meet Paris Agreement targets, is violating fundamental rights, including the right to a stable and safe climate.

Regulatory Focus on Climate Across Asia

Regulators across have Asia continued their focus on climate change this summer, particularly in China. In June, the China Securities Regulatory Commission published updated environmental disclosure requirements for companies listed in Mainland China, and encouraged issuers to voluntarily disclose their work to reduce carbon emissions in support of China’s “30/60 Goal” of reaching peak carbon emissions by 2030 and carbon neutrality by 2060.

July saw the launch of the world’s largest ETS in China and an announcement by a group of Hong Kong regulators on their near-term priorities to advance sustainable finance, including a focus on climate-related disclosures and carbon market opportunities. Shortly after that announcement, the Hong Kong Monetary Authority published a consultation on proposed climate risk management guidelines for banks incorporating international best practices from the TCFD and NGFS. The end of August saw Hong Kong’ Securities and Futures Commission publish final climate-related risk management requirements for fund managers.

In Southeast Asia, in May the Monetary Authority of Singapore published a guide to help banks, asset managers and insurers implement the climate-related disclosure requirements in its Environmental Risk Management Guidelines issued late last year. On the taxonomy front, in August, a joint committee of Malaysian regulators and industry participants announced the formation of an implementation group to support the adoption of Malaysia’s Climate Change and Principle-based Taxonomy, which was finalized in April. Going forward, it remains to be seen how Malaysia’s taxonomy will interact with other national frameworks in the region, including in Singapore, as well as the international ASEAN taxonomy announced earlier this year.