Both the financial sector and the real economy are faced with increased regulatory requirements and expectations of various stakeholders to meet ESG criteria, which are a benchmark for sustainability and sustainable investments. A high ESG rating not only promotes corporate policy, but also serves the profit interest of investors.

Currently, in the EU only capital market-oriented companies with an average of more than 500 employees and financial institutions/insurance companies are required to report. In the future, the limit is to be lowered to 250 employees and to non-capital-market-oriented medium-sized companies.

While historically the focus was more on the concept of sustainable finance, which assumes that an appropriate alignment of private financial flows is the most effective way to achieve politically set environmental and social goals, a further thinking can now be heard, especially in Germany:

Human capital management is not only becoming increasingly important for investors, but also influences the external image of the company. Promoting this is and will continue to be a central role of HR management.

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A recent attention-grabbing report by the Guardian, Die Zeit and SourceMaterial claimed that “more than 90% of rainforest carbon offsets by biggest certifier are worthless“. This prompted a swift detailed rebuttal by Verra – the world’s largest certifier of offsets and the organization subject to the criticism – who argued that the Guardian’s reporting contained “numerous falsehoods and distortions” and asserted that the studies cited in the related analysis were “not appropriate for avoided deforestation projects funded by carbon credits” and that the reporting had used “selective data and views to produce one-sided grandiose and sensational headlines“. Verra also offered a “fact-check” for the “most significant errors” in the Guardian’s reporting. In what may be a conciliatory move, the Guardian subsequently published a letter that offered a point and counterpoint discussion of avoided deforestation credits.

While this type of controversy is not unusual for avoided deforestation credits1 – which have long faced criticism for both the lack of additionality (namely, the determination of the baseline for the avoided deforestation and the demonstration of the ‘threat’ of actual deforestation to be avoided) and the difficulty of related measurement and verification of an activity not actually taken – this public attention is both timely and important, as various international standard setters are currently considering additional requirements and guidance to provide greater integrity to the voluntary credit market (“VCM“). he value of the VCM is reported to be around US$2 billion at year-end 20222, grew over 160% from the prior year and is projected to grow 10-fold by 2030.

In light of this anticipated expansion in the VCM, there have been, and will continue to be, several developments to the VCM governance frameworks. We set out some of the recent related developments below.

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On 25 January 2023, the new CEO of the UK Competition and Markets Authority (“CMA”), Sarah Cardell, set out one way in which the CMA will seek to ensure that the UK’s transition to a net zero economy will not be held up by competition law concerns. Significantly, Sarah Cardell again emphasised that environmental sustainability is a strategic priority for the CMA. This is an invitation for businesses to start pushing harder on the CMA’s open door, for which Mayer Brown’s ESG team is on hand to help.

Continue Reading Climate change: the CMA’s open door

On 26 January 2023, the UK’s Competition and Markets Authority (the “CMA“) announced that it intends to investigate the accuracy of environmental claims made by businesses in the fast-moving consumer goods (“FMCG”) sector. The CMA has stated that it will examine claims made both online and in-store about household products – such as food and drink, cleaning, homecare and self-care products – to determine whether they comply with UK consumer protection law.

The investigation of goods in the FMCG sector will expand the scope of the CMA’s ongoing anti-greenwashing work, which has the ultimate aim of ensuring products and services that claim to be ‘green’ or ‘eco-friendly’ are being marketed to consumers accurately.

Continue Reading Greenwashing: UK competition watchdog to investigate the FMCG sector

On 31 January 2023, the UK Government published its Environmental Improvement Plan 2023 (the “EIP”), detailing how it plans to restore nature and improve environmental quality in the UK. In particular, the EIP proposes new commitments to upgrade wastewater treatment works, restore wildlife and promote nature-friendly farming practices. These new commitments underpin the ambitious international targets agreed at the UN Biodiversity Conference COP15 in December 2022, which the UK Government helped deliver (for further information about COP15, read our earlier blog post here).

The UK Prime Minister, Rishi Sunak, has said that the EIP “provides the blueprint for how we deliver our commitment to leave our environment in a better state than we found it, making sure we drive forward progress with renewed ambition and achieve our target of not just halting, but reversing the decline of nature“.

Continue Reading UK Government publishes refreshed plans to improve environmental quality and reverse nature decline

On January 15, 2023, South Korea’s Financial Supervisory Service (“FSS”) issued new guidelines (the “Guidelines”) (Korean language only) to enhance transparency on the methods and procedures used by credit rating agencies to perform ESG bond certification evaluations. In announcing the Guidelines, the FSS noted that, prior to their introduction, there were no specific rules or regulations in South Korea covering the ESG certification process. The FSS also indicated that currently it is difficult to compare ESG ratings performed by different agencies due to the lack of consistent standards and that the Guidelines are intended to improve the comparability and utility of related evaluation reports.

We set out below some of the highlights of the Guidelines:

  • The Guidelines reflect the International Organization of Securities Commission’s recommendations for regulating ESG ratings and data product providers including those relating todocumenting the rating procedure and strengthening the independence of evaluators.
  • The FSS has also supplemented the Guidelines with local features including the disclosure of minimum investment ratios required for ESG bond recognition and the introduction of a validity period of the certification.
  • Credit rating agencies will be subject to certain requirements including verifying the use offunds when undertaking ESG bond certification evaluations. The FSS expects that this aspect of the Guidelines will help prevent greenwashing. 

The Guidelines will be implemented as Korea Financial Investment Association best practice and will become effective from February 1, 2023.

On 24 January 2023, each of the European Parliament’s trade committee and economic affairs committee reached agreed positions on the financial aspects of the draft Corporate Sustainability Due Diligence Directive (the “Draft Directive”). The agreed positions mark a departure from the European Commission’s and the Council of the European Union’s previous positions on the Draft Directive (which you can read about here and here), since the committees have agreed that:

  1. the scope of the Draft Directive should be widened to include the financial services sector and smaller companies; and
  2. the financial services sector should not be designated as “high risk”, meaning those within the sector would no longer be mandated to report on their sustainability engagement policies.

The European Parliament’s legal affairs committee will consider the trade committee’s and economic affairs committee’s agreed positions when reviewing the Draft Directive. Once the legal affairs committee has reviewed and opined on the Draft Directive, the EU Parliament will vote and determine its initial negotiation position on the Draft Directive (in accordance with usual EU legislative process).

FTSE Russell – a leading provider of benchmarks that are used extensively by investors across the globe – has removed 34 companies from the FTSE4 Good All-World benchmark (the “FTSE4Good Index”). The companies were removed for failing to meet climate performance standards imposed by the newly introduced ‘Climate Change Score’ system, which is based on parameters created by the Transition Pathway Initiative (“TPI”), an initiative backed by 132 investors with over US$50 trillion in assets under management.

Continue Reading Climate performance – FTSE4Good Index looks to hold companies to higher environmental standards

On January 17, 2023, the Board of Governors of the Federal Reserve System (“Federal Reserve”) launched its pilot climate scenario analysis exercise (“CSA”) by publishing instructions for the six US banking organizations that will participate.

As part of the CSA, participating organizations will submit data templates, supporting documentation, and responses to qualitative questions to the Federal Reserve by July 31, 2023. The Federal Reserve is continuing to collect information on climate risk management practices, and banks should consider reviewing the CSA instructions to better understand the Federal Reserve’s expectations.

In this Legal Update, we provide background on the Federal Reserve’s climate risk management initiative and highlight key items in the CSA instructions.

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By far the largest focus in recent years in terms of ‘responsible investment’ has been on the ‘Environment’ limb of ESG. The UN Principles of Responsible Investment (“PRI“) – an international organisation working to encourage the integration of ESG factors into investment decision making – is now seeking to change this with the launch of its ‘Advance‘ initiative, which is a “collaborative stewardship initiative where institutional investors work together to take action on human rights and social issues”. This forms part of a renewed effort to reinvigorate the ‘Social’ and ‘Governance’ limbs to ESG and bring social initiatives to the forefront of ‘responsible investing’.

Continue Reading Business and human rights: investors commit to action on human rights and social issues via the world’s largest human rights stewardship initiative