During last year’s COP26, the UK Government announced that it would mandate the disclosure of listed companies’ and financial institutions’ net zero transition plan, and that it would form a taskforce to assist private sector actors in doing so.

Coinciding with the start of COP27, the UK’s Transition Plan Taskforce (“TPT”) – a taskforce with a mandate from His Majesty’s Treasury to help enable private sector actors in the UK create robust climate transition plans to fulfil their net zero commitments – on 8 November 2022, published, for consultation, its new Disclosure Framework for companies to disclose their climate transition plans.

Importantly, the Disclosure Framework draws on existing and emerging disclosure regimes, such as the Taskforce on Climate-Related Financial Disclosure (“TCFD”) Recommendations and the International Sustainability Standards Board’s (“ISSB”) Sustainability Disclosure Standards (for more information on the TCFD and ISSB regimes, read our previous blog posts here, here, here and here).

The TPT’s publication of its Disclosure Framework recommendations is supplemented by the TPT’s Implementation Guidance. The Implementation Guidance sets out practical steps to help private sector actors develop climate transition plans, as well as information on when, where and how to disclose such plans.

Continue Reading Climate Disclosure: the UK’s Transition Plan Taskforce launches ‘gold standard’ for climate transition plans

The 27th Conference of the Parties of the United Nations Framework Convention on Climate Change (COP27) has opened in Sharm El-Sheikh, Egypt, against a global backdrop of massive hikes in energy prices, inflation, increases in interest rates and uncertainty about the robustness of the implementation of the ESG regulatory agenda (particularly in the US). In 2022, heat waves in Europe killed more than 15,000 people and nearly 1,700 died as a result of flooding in Pakistan. Hurricane Ian caused widespread devastation. A recent report by economist Nicholas Stern stated that $2 trillion (£1.75 trillion) per year will be needed by 2030 to help developing countries cut their greenhouse gas emissions and cope with the effects of climate breakdown —switching away from fossil fuels, investing in renewable energy and other low-carbon technology, and coping with the impacts of extreme weather.

With existing commitments to climate finance yet to be met and national policies not yet consistent with the objective of limiting global temperature increases to 1.5 degrees Celsius, this year’s COP has its work cut out. What can realistically be hoped for as outcomes of COP27?

Continue Reading COP27: From Grey Glasgow to Sunny Sharm

The UK’s financial regulator – the Financial Conduct Authority (“FCA“) – on 25 October 2022, published its “Sustainability Disclosure Requirements (“SDR“) and investments labels” Consultation Paper (CP 22/20) (the “Consultation Paper“).

This follows the FCA’s July 2021 “Dear AFM Chair” letter regarding improving the quality and clarity of authorised ESG and sustainable investment funds and November 2021 “SDR and investment labels” Discussion Paper (DP 21/4), both of which indicated that the FCA intended to toughen its stance towards greenwashing against the backdrop of increasing concerns over investment funds making ESG-related claims that are exaggerated, misleading or unsubstantiated.

Whilst noting that “tackling greenwashing is a core regulatory priority for the FCA“, the Consultation Paper proposes a set of new rules aimed at tackling greenwashing, including investment product sustainability labels and restrictions on how terms like “ESG”, “green” and “sustainable” can be used.

Continue reading at Mayerbrown.com.

On 3 October 2022, the European Commission (“Commission”) adopted a revised notice on informal guidance (“Revised Notice”) that provides an expanded mechanism for businesses to obtain enhanced comfort – through so-called “guidance letters” – on the application of the EU competition rules to novel or unresolved questions.

The Revised Notice permits businesses that have doubts about the legality of certain agreements/practices (including cooperation agreements) under competition law to approach the Commission and seek informal guidance. The procedure may lead, in practice, to informal clearance of agreements and unilateral conduct that meet specified criteria, thereby providing considerable comfort to companies engaged in innovative initiatives, for example in areas such as green energy.

Continue reading at Mayerbrown.com.

On October 31, 2022, the Bureau of Ocean Energy Management (BOEM) within the US Department of the Interior finalized two Wind Energy Areas in the Gulf of Mexico Outer Continental Shelf. This Legal Update provides further detail for companies interested in developing or financing offshore wind projects.

Continue reading at Mayerbrown.com.

On 28 October 2022, the Hong Kong Exchanges and Clearing Limited (“HKEx”) launched Core Climate, an international carbon marketplace designed to allow for the trading of voluntary carbon credits and instruments, which provides a best-in-class, trusted market infrastructure and helps connect capital with climate-related products and opportunities in Hong Kong, Mainland China and globally. Core Climate participants will be able to source, hold, trade, settle and retire voluntary carbon credits through the Core Climate platform.  

According to HKEx, the carbon credits on the platform will come from internationally-certified carbon projects from around the world, including carbon avoidance and reduction projects such as deforestation avoidance and removal projects such as reforestation. All carbon credits generated by projects listed on Core Climate will be issued under international standards, such as the Verified Carbon Standard by Verra.

The launch of Core Climate follows HKEx’s formation of Hong Kong International Carbon Market Council in July this year, which comprises leading corporates and financial institutions focused on supporting the development of an international carbon marketplace.

The initiative is also welcomed by the Green and Sustainable Finance Cross-Agency Steering Group co-chaired by the Hong Kong Monetary Authority and the Securities and Futures Commission, which published the Preliminary Feasibility Assessment of Carbon Market Opportunities for Hong Kong in March this year, and supports the development of a global, high quality voluntary carbon market and Hong Kong’s growth as a premier carbon hub in Asia.

Further details on Core Climate can be found in HKEx’s press release here.  

The requirement for companies to conduct human rights diligence (“HRDD“) is increasingly being implemented by legislators across the globe.  For example, the EU is expected to adopt its draft corporate sustainability and due diligence directive in 2023. Importantly, the Directive will apply to Japanese companies and their subsidiaries if they meet certain criteria (for further information on the applicability of the directive to Japanese companies, read our earlier blog post here). Japanese companies are, therefore, being required to strengthen their HRDD processes as a result of the legislation of foreign jurisdictions (including the EU).

On 13 September 2022, the Japanese Government published its Guidelines on Respecting Human Rights in Responsible Supply Chains (the “Guidelines“), which recommend that all enterprises engaging in business activities in Japan respect human rights in their supply chains and carry out HRDD.

Continue Reading Business and Human Rights: Japan publish Guidelines on Respect for Human Rights in Responsible Supply Chains

To help companies improve their reporting on net zero commitments, the FRC Lab have published its Net zero disclosures report (“the Report”), which provides companies with practical tips and questions to consider when preparing disclosures in their financial reports on net zero and other Greenhouse Gas (“GHG“) reduction commitments.

Continue Reading The UK’s Financial Reporting Council publishes guidance to assist companies reporting on their net zero commitments

Companies have long been awaiting some more clarity on their reporting obligations vis à vis the German Supply Chain Due Diligence Act (SCDDA). The BAFA has now shed some light on what is expected of the reporting entities by publishing 38 detailed questions (in addition to some general information on the reporting entity) covering the whole spectrum of due diligence obligations under the SCDDA. 

Continue Reading Business and Human Rights: Supply Chain Due Diligence – Questionnaire for reporting published by German authority

Interest in ESG investing continues to attract attention globally as policymakers and regulators around the world implement policies and regulations to direct or guide behavior and protect the interests of a wide range of stakeholders. Against this backdrop, we observe a rising challenge to so-called “woke capitalism”, particularly with the recent wave of anti-ESG sentiment building in the US.

In a previous blog post, we considered a new Texas statute (Tex. Gov’t Code sec. 809.051) prohibiting state investment in financial companies that “boycott” certain energy companies based on ESG metrics, as well as other potentially “anti-ESG” initiatives by lawmakers in other US states.

Recently, Florida announced proposed legislation that would prevent state fund managers from considering ESG factors when investing state money and prohibit discriminatory practices by financial institutions based on ESG social credit score metrics. Rather, institutions would only be allowed to invest with the goal of “maximizing financial return” (i.e., profit as the only measure). Florida joins a growing list of states – including (as noted in our previous blog post above) Texas, Oklahoma, Kentucky, Ohio, Arizona, Idaho and West Virginia – that have proposed or enacted what is being labelled “anti-ESG” legislation aimed at deterring or eliminating ESG considerations when investing state funds.

While the nature and scope of anti-ESG policy proposals may vary, they tend to fit into one, or both, of two broad categories – legislation that (1) targets financial institutions that “boycott” certain industries considered by the state in question to be important and (2) prohibits the use of state funds for the purpose of “social investment.”

Anti-ESG bills targeting financial institutions generally seek to prohibit state agencies from doing business with and/or investing state assets (commonly state pension plans) with financial institutions that are seen to discriminate by choosing not to invest in certain industries based on environmental or social concerns. These “Boycott Bills” most commonly relate to financial institutions with exclusionary investment policies targeting fossil-fuel producing energy companies, but also have been aimed at institutions seen to “boycott” state-relevant industries such as mining, firearms or production agriculture. These initiatives are often justified on the basis that they reduce support of financial institutions that indirectly harm the state’s citizens by refusing or limiting business with industries considered beneficial to the state economy.

In addition to the above, some Boycott Bills include provisions requiring entities that contract with the state to include specific representations or verifications in any contract (generally for a minimum contract value of $100,000) that the entity will not discriminate against any specific industry sought to be protected by applicable legislation.

The other category of potentially anti-ESG policies proposes banning the use of state funds for “social investment.” This approach often specifically bans the consideration of environmental or social factors in the investment of state funds, instead requiring the only purpose of investment be maximizing investment returns (i.e., profit and financial performance).

According to some ESG proponents, this anti-ESG legislation has the potential to cause widespread economic consequences. For example, in the context of oil and gas anti-ESG legislation, as one former US Treasury official noted, financial institutions banks may feel obligated to make potentially risky loans to energy companies for fear of the reprisal of state governments with strong anti-ESG legislation in place. As the former Treasury official noted, “[c]orners will be cut and, if examiners don’t notice, this can become a financial stability problem. It’s not just going to happen at one large bank; it could be the same dynamic with many of them.”

Recently, we have seen certain financial investors attack the “stakeholder capitalism” agenda often associated with the ESG movement with one outspoken entrepreneur and investor, urging certain public company CEOs to not make political statements on behalf of their respective companies, and to refrain from making hiring decisions based on race, sex, or political beliefs.  Navigating the tensions here can be tricky and we are seeing some prominent US-based asset managers with a focus on ESG facing criticism from both sides of the ESG “debate” particularly around the issue of climate change and investments in the “fossil-fuel” sector.

A Quick Comparison with the UK

The above is very much in contrast with the current position in the UK. It is well-established that trustees of defined benefit pension schemes can consider ESG factors when making an investment decision where they are financially material. Whereas, if ESG factors are non-financial factors, then they can be considered if they do not result in financial detriment (i.e., essentially used as a tie-breaker).

Over the last few years, there has even been some movement to permit non-financial factors to be considered in an investment decision even where there is some element of financial detriment. The English Law Commission said that trustees may take account of non-financial factors: (i) if they have good reason to think that scheme members share a particular view; and (ii) their decision does not risk significant financial detriment to the fund (which implies that some financial detriment is acceptable).

It should be noted that the UK Association of Pension Lawyers does not agree with the Law Commission’s view. However, with industry pressure groups, the UK government and certain pension scheme members keen for UK defined benefit pension schemes to be instrumental in driving ESG, it seems likely that there will be further developments in this area. This is amplified by the Financial Times recently reporting that pensions of UK-based staff at FTSE 100 companies were linked to an estimated 131mn tonnes of carbon emissions through the investments made by their pension schemes – this could bring the impact that UK pension schemes can make on climate-related ESG factors into greater focus.

And what about Asia?

While anti-ESG sentiment may be building in the US, policymakers and legislators in many key jurisdictions across Asia continue to support the development of ESG frameworks and regulations. However, ESG policy developments in Asia are evolving in a flexible manner to address the varying needs of the region’s wide ranging economies. The ASEAN Taxonomy Board has acknowledged the unique differences across its member states and recognized that its economic and environmental context is different from Europe and the US. These differences are reflected in, for example, the green taxonomies being developed by ASEAN and countries in the region. In a previous blog post, we discussed the first ESG disclosure guidance from China which adapts ESG standards to fit the Chinese business landscape and the requirements of domestic laws and regulations. From a social perspective, Asian nations currently appear to prioritize diversity and inclusion rather than developing new regulations and guidelines on other social factors, such as human rights. While there remains a range of views expressed by Asia-based asset managers, there also does not appear to be any significant rebellion or challenge to this approach to ESG frameworks and regulations from asset owners in the region.