7 September - A Deeper Dive into Carbon Trading in Asia

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Global: IFRS Foundation identifies areas the ISSB standards go beyond TCFD

The IFRS Foundation (which was responsible for setting up the ISSB) has published a comparison of the requirements in the IFRS S2 Climate-related Disclosures and the TCFD recommendations. The requirements in the ISSB climate standard IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD. According to the IFRS Foundation, companies that apply the ISSB Standards will meet the TCFD recommendations and so do not need to apply the TCFD recommendations in addition to the ISSB standards. However, there are additional requirements in IFRS S2. These include the requirements for companies to disclose industry-based metrics, to disclose information about their planned use of carbon credits to achieve their net emissions targets, and to disclose additional information about their financed emissions. As the TCFD recommendations have now been incorporated into the ISSB Standards, the Financial Stability Board (which was responsible for setting up the TCFD) has asked the IFRS Foundation to take over the monitoring of progress on companies’ climate-related disclosures from the TCFD. Companies can continue to use the TCFD recommendations should they choose to do so, and some companies may still be required to use the TCFD recommendations (for example in the UK). For more information, see IFRS press release and our previous blog post.

Global: IASSB consultation on sustainability assurance standard

The International Auditing and Assurance Standards Board (IASSB) has published for consultation an exposure draft of an International Standard on Sustainability Assurance Engagements. The consultation closes on 1 December 2023. This is intended to be applied by third parties who are appointed by companies to undertake an assurance engagement on their sustainability reports. However, it is up to individual jurisdictions to decide whether assurance of sustainability information is required and whether they must comply with the proposed standard. For more information, see our client briefing.

EU: Commission adopts first set of ESRS under CSRD

On 31 July 2023, the Commission adopted the final versions of the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD).  All disclosure requirements, with the exception of the General Disclosures in ESRS 2, shall be subject to a materiality assessment. However, the Commission now requires any reporting entity which determines that climate change is not material to provide “a detailed explanation” of the conclusions of their materiality assessment, including forward-looking analysis of conditions that could change the conclusion in future. The Delegated Act containing the ESRS is now being scrutinised by the European Parliament and Council. This is a two-month scrutiny period (which can be extended by a further two months). Neither the Parliament nor the Council can amend the Delegated Act – they only have the power to veto it. Unless objected on, the Delegated Act will be published in the Official Journal of the EU and will apply from 1 January 2024 (for FY beginning on or after 1 January 2024). For more information, see our blog post.

EU: EFRAG working on draft implementation guidance under CSRD

The European Financial Reporting Advisory Group (EFRAG) is in the process of developing implementation guidance under the CSRD: 

• Draft implementation guidance for the value chain: This will cover the whole value chain of the undertaking affected by the CSRD, but not its operations. It aims to provide support on the implementation activities of preparers and others using or analysing ESRS reports, on the value chain information per the requirements of Articles 19a or 29a of the CSRD and will include a number of FAQs on the topic;
• Draft implementation guidance for materiality assessments: This will include tools and mechanisms for undertakings to apply the materiality assessment requirements and disclosures set out in ESRS 1 and ESRS 2 and will include a number of FAQs on the topic.

Initial drafts of the guidance were discussed by the EFRAG Sustainability Reporting Board (SRB) at a meeting on 23 August and further changes will now need to be made to the draft guidance. Once the draft guidance has been approved by the SRB (the next meeting is on 4 September), there will likely be a 4-week public consultation. However, we do not expect the consultation to start until early/mid-September at the earliest.

EU: EFRAG assessment of interoperability between CSRD ESRS and ISSB

The EFRAG Sustainability Reporting Board (SRB) has published an assessment of the level of interoperability between the ESRS and the ISSB's IFRS S1 and S2, as well as a mapping table of climate change disclosures under both sets of standards. The SRB approved these documents at its meeting on the 23 August. The SRB emphasised that they wish to avoid undertakings being forced to prepare multiple sustainability reports, and they also want to encourage other jurisdictions to mandate sustainability reporting. Therefore, the assessment and mapping table demonstrate the high degree of interoperability between the ESRS and the ISSB standards. The SRB noted that ISSB and ESRS were misaligned with regard to financed emissions, since ISSB explicitly requires reporting of financed emissions, unlike the ESRS. However, the SRB noted that financed emissions are clearly material for credit institutions and therefore credit institutions should report on them. This will be clarified in the CSRD sector-specific standards. However, in the meantime, the SRB will consider publishing clarifications before the sector-specific standards are published in order to ensure that this is clear. The SRB has indicated that reporting under the ESRS would mean that the undertaking would also be reporting under ISSB (other than two points of misalignment, regarding financed emissions and carbon credits). However, reporting under ISSB would not necessarily mean that an undertaking is reporting in compliance with the ESRS.

EU: ESMA Statement on expected sustainability disclosures in prospectuses

On 11 July 2023, the European Securities and Markets Authority (ESMA) published a Public Statement on the level of sustainable disclosure expected to be included in prospectuses drawn up in compliance with the EU Prospectus Regulation (EU PR). The Statement is in part a recognition that legislative proposals for specific ESG disclosure in prospectuses, such as those included in the proposed EU Listing Act, will take time to come into effect. In the meantime, this Statement has been published to promote coordinated action by EU national competent authorities (NCAs) – as well as to ensure issuers and advisers understand expectations – in relation to sustainability-related disclosures which should be included in prospectuses under the existing EU PR. For more information, see our blog post.

UK: Implementation of ISSB standards and next steps on UK SDS

On 19 July 2023, the Financial Reporting Council (FRC) published a call for evidence to inform the proposed endorsement of the IFRS Sustainability Disclosure Standards in the UK. The call for evidence seeks views on whether application of the ISSB sustainability standards in the UK will result in disclosures that are understandable, relevant, reliable and comparable for investors – as well as whether the disclosures are technically feasible to prepare, whether they can be prepared in a timely basis and at the same time as financial reports, and whether they are expected to generate benefits that are proportionate to the costs. The call for evidence closes on 11 October 2023. The responses to this call for evidence will inform the UK Sustainability Disclosure Technical Advisory Committee’s (TAC) recommendations to the government on the suitability of the ISSB standards for the UK and considerations of whether any amendments are needed to the ISSB standards to ensure effective application in a UK context. The TAC is one of two committees advising the UK government on implementation of the ISSB standards. The final decision on implementation will be made by the Department for Business and Trade. For more information, see our blog post.

On 2 August 2023, the UK government published initial guidance on the government's framework to create the UK Sustainability Disclosure Standards (SDS). The UK SDS will set out corporate disclosures on the sustainability-related risks and opportunities that companies face, including those arising from climate change. The standards will form the basis of any future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability matters. The UK SDS will be based on the ISSB standards and will only divert from the ISSB’s global standards “if absolutely necessary for UK specific matters”. The government intends to create the UK SDS by July 2024. For more information, see our blog post. 

On 10 August 2023, in its Primary Market Bulletin 45, the Financial Conduct Authority (FCA) confirmed that the forthcoming UK Sustainability Disclosure Standards (UK SDS) will be based on the ISSB's standards and will only depart from those global standards “if absolutely necessary for UK specific matters”. The FCA plans to consult in the first half of 2024 on proposals for listed companies in the UK to report in line with ISSB standards. It is aiming is to finalise its policy position by the end of 2024, with a view to bring new requirements into force for accounting periods beginning on or after 1 January 2025 so that the first reporting would begin from 2026. The FCA expects to move from the current ‘comply or explain’ climate disclosure requirements to mandatory disclosures for listed issuers. The Department for Business and Trade will consult separately on reporting in line with the ISSB standards for UK registered companies and LLPs. For more information, see our blog post. 

UK: Next steps on climate transition plans 

The government had indicated in March 2023 in its Green Finance Strategy that it will consult in Q4 on the introduction of requirements for the UK’s largest companies (so this will include private companies, not just listed companies) to disclose a transition plan, if they have one. The consultation will take place in autumn/winter once the UK Transition Plan Taskforce (TPT) has published the final version of its guidance on transition plans. The TPT is expected to publish the final version of its sector-agnostic transition plan guidance in October and the sector-specific guidance consultation will start in November, with final sector-specific guidance expected in early 2024. The TPT published a summary of the main responses received to its consultation on its draft recommendations (see p.16 and onwards). Key takeaways from the TPT update:

• Final recommendations, which are sector-agnostic, will be published in October.
• Sector-specific guidance consultation will start in November, with final sector-specific guidance expected in early 2024.
• The Department for Business and Trade is expected to consult on transition plans for the largest companies (including private companies) towards the end of the year. The FCA will consult in the first half of 2024 for listed companies, alongside its consultation on implementation of the ISSB standards in the UK (see previous item in this newsletter).
• The TPT has confirmed that it intends to publish guidance for the financial sector – for asset managers, asset owners and banking. 
• The TPT will also publish other sector guidance - including for food & agriculture, metals & mining, oil & gas, and electric utilities & power generators. 
• The TPT has said it will adjust some of the recommendations under some of the sub-elements to address implementation concerns raised by respondents but that it was too early to say which sub-elements would be affected. 

For more information on the TPT’s draft recommendations, see our previous blog post.

UK: FRC thematic review of companies’ climate disclosures

In July, the UK Financial Reporting Council (FRC) published a thematic review, in which it assessed the climate-related metrics and targets disclosures of 20 premium and standard listed companies in their 2022 annual reports. The Listing Rules require both premium and standard listed companies to report against the TCFD recommendations in their annual reports. The companies operated in four sectors: materials and buildings, energy, banks, and asset managers. This thematic review follows the FCA’s reviews last year which identified climate metrics and targets disclosures as needing improvement. This year’s findings highlight better reporting practice and include sector-specific as well as cross-sector findings. It will be of interest not just to premium and standard listed companies but also to large UK-listed and unlisted companies and LLPs who will be required to include TCFD-aligned climate-related disclosures in a non-financial and sustainability information statement in their strategic reports for financial years commencing on or after 6 April 2022. For more information, see our client briefing.

UK: New reporting rules for large UK companies aim to improve corporate governance

The government has published draft Regulations (the Draft Companies (Strategic Report and Directors' Report) (Amendment) Regulations 2023) which will require the largest UK companies – public or private – to include new statements in their strategic and directors' reports. The new requirements cover four areas: risk and resilience; dividends; the company’s audit and assurance policy; and material fraud. The Regulations must be approved by both Houses of Parliament before coming into effect, but this is normally a formality. In-scope companies which are listed on a regulated market will need to comply with the new reporting requirements for financial years commencing on or after 1 January 2025 (so the first such reports will be published in 2026). Unlisted companies (including AIM companies and non-traded public limited companies) within scope will need to report for financial years commencing on or after 1 January 2026 (with the first reports published in 2027). The long lead time is intended to give companies time to update their systems and processes to be in position to make the necessary disclosures, particularly on risk. The government has asked the FRC to develop non-statutory guidance on good practice in complying with the new reporting requirements. The FRC is expected to publish draft guidance for consultation in late 2023 or early 2024. The new reporting requirements apply to companies incorporated under the Companies Act 2006 with: 750 or more global employees; and £750 million or more annual turnover. These companies are defined in the regulations as “companies with a high level of employees and turnover". In-scope companies will be required to include a resilience statement in their strategic reports setting out their strategic approach to managing risk and building resilience over the short, medium and long term. The statement should include (among other things): 

• details on how principal risks and resilience are considered within the company's business planning and investment cycle, and within its internal governance processes; and
• a description of the principal risks that could threaten the company's business model, operations, performance, solvency or liquidity over the short to medium term with an explanation of how such risks are being managed. The Regulations set out a list of principal risks to be covered including (among other things) impact of climate and sustainability-related risks - to the extent the directors consider such risks to be material.

Companies that report on their principal risks in line with the resilience statement will not need to report separately on their principal risks and uncertainties elsewhere in the strategic report. In-scope companies must include an audit and assurance policy statement in the directors' report every three financial years, with an annual update in the intervening years. The statement is intended to give information on company plans for assuring the reliability of non-financial reporting. For more information, see our client briefing.

EU: Commission adopts technical screening criteria for Taxo4

The Commission formally adopted the two Delegated Acts with the technical screening criteria for the remaining four environmental objectives under the Taxonomy Regulation (also known as “Taxo4”) on 27 June 2023, so the formal scrutiny period by the European Parliament and Council is currently underway. The Commission also made changes to the existing climate technical screening criteria as part of that package. The scrutiny period lasts four months (which can be extended by an additional two months). The European Parliament and Council do not have the power to amend the Delegated Acts – the most they can do is veto them. Provided neither the European Parliament nor the Council object to the Delegated Acts, these would then be published on the Official Journal of the EU before the end of this year and would apply from 1 January 2024. For more information, see our blog post.

EU: EBA consults on draft templates for collecting data for one-off climate risk scenario analysis

The European Banking Authority (EBA) has launched for consultation draft templates for collecting climate related data from EU banks as part of the one-off Fit-for-55 climate risk scenarios analysis. The draft templates are accompanied by a template guidance, which includes definitions and rules for populating the templates. This one-off scenario analysis exercise was announced by the European Commission in March 2023 as part of the Commission's 2021 'Strategy for Financing the Transition to a Sustainable Economy'. Its aim is to assess the resilience of the financial sector in line with the Fit-for-55 package and provide insights into the capacity of the financial system to support the transition to a lower carbon economy under conditions of stress. As a first step, the exercise requires each European Supervisory Authority to produce sector-specific results, based on three ad-hoc climate scenarios (i.e. one baseline and two adverse scenarios) implemented by the European Systemic Risk Board (ESRB)). The analysis will allow the EBA to examine for instance, how asset price corrections triggered by a sudden reassessment of transition or physical risks, propagate through the financial system, and how financial institutions' reactions might amplify stress in the system. The draft templates are designed to collect climate-related and financial information on credit risk, market risk and real estate risk. Banks are asked to report aggregated and counterparty level data as of 31 December 2022. The EBA will launch a data collection at the end of November 2023. 70 banks will take part in this exercise (the same banks as those included in the 2023 EU-wide stress test) although competent authorities might request other banks in their respective jurisdictions to participate. The one-off Fit-for-55 climate risk scenario analysis is expected to start by the end of 2023, with publication of results envisaged by Q1 2025. The consultation closes on 11 October 2023. A public hearing in the form of a workshop will be held on 28 September 2023. For more information, see the EBA press release.

UK: FCA outlines concerns about sustainability-linked loans market

On 29 June 2023, the FCA published a letter sent to the Heads of ESG and sustainable finance at firms in the sustainability-linked loans (SLLs) market. The FCA engaged with stakeholders earlier this year to better understand the market's functioning and to determine what measures might improve the integrity of the SLL product. The letter summarises the FCA's findings, which include:

• While a number of banks are keen to promote SLLs, the market is currently not achieving its potential. Increased trust and transparency could deliver wider uptake.

• Borrowers are concerned about unwelcome scrutiny if they miss performance targets. They may also consider the time and costs of doing an SLL against a more conventional loan.
• Market participants the FCA spoke to believe that a more prescriptive framework would improve market integrity and reduce the threat of greenwashing accusations. This could include more meaningful, science-based targets.
• There is the potential for conflicts of interest if banks accept weak targets and count the loan as part of their sustainable finance quota.
• Several banks are advocating for uniform disclosure and independent monitoring and verification of targets. This could include well-disclosed targets aligned to borrowers’ published transition plans.

The letter notes that some of these issues have been addressed by the revision of the Loan Market Association's Sustainability-Linked Loan Principles. The FCA believes a broader adoption of the existing SLLPs would drive further growth.  The FCA does not directly regulate the SLL market and currently has no plans to introduce regulatory standards or a code of conduct for the SLL market. For more information, see FCA press release.

UK: FCA launches consultation on Code of Conduct for ESG Ratings and Data Product Providers

The FCA’s ESG Data and Ratings Code of Conduct Working Group (DRWG), supported by the International Regulatory Strategy Group (IRSG) and the International Capital Market Association (ICMA), is seeking feedback on a draft voluntary Code of Conduct for ESG data and ratings providers. The consultation, which was launched on 5 July 2023, is open for comments until 5 October 2023. The final Code is expected to be published at the end of 2023. The Code aims to enhance consistency, transparency, and accountability in the financial services industry, by introducing clear standards for ESG ratings and data product providers and clarifying how such providers can interact with wider market participants. The Code is in close alignment with the International Organisation of Securities Commission’s (IOSCO) recommendations published in November 2021, and has taken into account the developments by the regulators in the EU, India, Singapore and Japan, who have recently published ESG ratings and voluntary guidelines for their markets. The Code is a voluntary standard that seeks to set a voluntary standard of best practice within the ESG data and ratings market – separately from the UK and EU proposals to regulate firms providing ESG ratings. For more information, see our blog post.

UK courts rule that derivative actions against Shell and USS in relation to their management of climate risk cannot proceed

Two separate UK court judgments in July 2023 have rejected claims that directors had failed in their duties because of their handling of climate risks. The first action was commenced in 2021 by two beneficiaries of the Universities Superannuation Scheme (USS) pension fund against the trustee directors of the pension fund company. The second case, against the directors of Shell plc, was brought by ClientEarth, an environmental NGO. Both actions were attempted “derivative” claims. In both cases, the UK courts held that the derivative actions cannot proceed. However, ClientEarth have indicated that they intend to appeal the High Court’s decision in the Shell derivative action so the final outcome of that case is not yet known. It is worth noting that even where unsuccessful, such claims often result in publicity and public scrutiny of the company involved and its climate strategy, which can consume significant management time and attention. Having said that, the emphasis by the courts on the significant amount of evidence and detail required at the initial stage to meet the relevant thresholds in derivative actions may ultimately prove cumbersome and off-putting to potential claimants. For more information on both cases, see our blog posts here (in respect of Shell) and here (in respect of USS).

To stay on top of ESG litigation across the globe, sign up for the Linklaters ESG Disputes Bulletin. 

Global: What to expect at COP28

Global heads of state will meet in Dubai on 30 November-12 December 2023 at COP28, the United Nations climate summit, to discuss global action on tackling climate change. This year’s COP is also the first Global Stocktake of the Paris Agreement – where countries will be able to assess progress towards meeting the goals of the Paris Agreement. As the official COP28 website states: “We are at a halfway point. It has been 7 years since Paris, with 7 years to go to 2030. We must respond to the facts. We need to reduce emissions by 43% by 2030 and course correct on adaptation, finance and loss and damage.” To find out what to expect at COP28, see our blog post. 

Global: Improved flexibility in the energy transition export credit market

In July 2023, following an EU-led initiative, the OECD’s Arrangement on Officially Supported Export Credits (commonly known as the OECD “Consensus” or “Arrangement”) was significantly updated and modernised, ultimately enabling export credit agencies (ECAs) to better support the financing of energy transition projects. The update to the Consensus is intended to allow ECAs to offer greater support for green projects in an increasingly competitive landscape, while avoiding market distortions. Of particular interest to energy transition developers and financiers are the updates to the terms the Consensus allows ECAs to offer on climate-friendly projects. Special rules applicable to project financing transactions have been removed, such that shorter repayment terms and lengthy eligibility criteria by virtue of the limited-recourse nature of a financing, no longer apply. This shift means that ECA-backed project financings for energy transition projects will be looking to the expanded terms of the specific Climate Change Sector Understanding which now covers a broader scope of green or climate-friendly projects eligible for the more flexible financing terms. Although there has been some disappointment that the Consensus reforms did not include an express requirement for ECAs to limit or reduce their support for fossil fuel projects, the focus on flexibility for climate-friendly projects is expected to enable, as intended, more green projects to benefit from ECA finance. The changes could have a substantial, positive impact on the debt service profile climate-friendly projects will have to cover, allowing them greater flexibility to cover early capital expenditure and ultimately increase debt sizing. ECAs have also welcomed the long-awaited overhaul of the Consensus provisions, citing the additional transparency and scope to be more reactive to climate-friendly projects as positive for the export finance market.

EU: CBAM reporting rules during initial stage

On 17 August 2023, the European Commission adopted an Implementing Regulation on the reporting obligations during the initial, transitional period of the Carbon Border Adjustment Mechanism (CBAM).  The CBAM is a system of carbon certificates to cover the embedded carbon emissions in products being imported into the EU. EU importers of the goods covered by the CBAM Regulation will be required to buy carbon certificates corresponding to the carbon price that would have been paid had the goods been produced in the EU, to reduce the risk of carbon leakage. It applies to cement, fertilizers, iron and steel, aluminium, electricity and hydrogen imported into the EU. It will be phased in from 2026 until 2034, at the same speed as the EU Emissions Trading System free allowances are being phased out. The Implementing Regulation describes the transitional reporting obligations for EU importers of CBAM goods, as well as the transitional methodology for calculating embedded emissions released during the production process of CBAM goods. Importers will be asked to collect fourth quarter data from 1 October 2023. Their first report will have to be submitted by 31 January 2024. In the CBAM's transitional phase, traders will only have to report on the emissions embedded in their imports without paying any financial adjustment. The Implementing Regulation will now be published in the Official Journal of the EU (OJ) and will enter into force on the day following that of its publication in the OJ and apply directly in all member states. Although the Commission will now send the Implementing Regulation to the Council and European Parliament for scrutiny, they cannot veto it.  The Commission published guidance for EU importers and non-EU installations on the practical implementation of the reporting rules and will be doing series of webinars in September covering general features of the CBAM as well as the specifics of each sector (iron & steel, aluminium, cement, fertilisers, electricity and hydrogen). For more information, see EU press release and our client briefing.

EU: Sustainable Batteries Regulation

The Sustainable Batteries Regulation was published in the Official Journal of the EU on 28 July 2023. It shall generally apply from 18 February 2024, save for certain requirements for which gradual implementation is provided. It applies to all categories of batteries, including portable batteries, starting, lighting and ignition (SLI) batteries, light means of transport (LMT) batteries, electric vehicle (EV) batteries and industrial batteries that are placed on the EU market. It covers the entire battery life cycle, from design and production to reuse and recycling. The Regulation:

• introduces labelling and information requirements, among other things on the battery's components and recycled content and an electronic “battery passport” and a QR code;
• requires a carbon footprint declaration for certain types of batteries;
• provides that by 2027 portable batteries incorporated into appliances should be removable and replaceable by the end-user at any time during the lifetime of the product subject to certain exemptions;
• sets due diligence rules for operators (except for those having a net annual turnover of less than EUR 40 million) who must verify the source of raw materials used for batteries placed on the EU market - non-compliance may lead to restrictions or prohibitions for placing the batteries on the market and, if the non-compliance is serious, withdrawal from the market or recalling;
• sets targets for producers to collect waste portable batteries;
• introduces a dedicated collection objective for LMT waste batteries;
• sets a target for lithium recovery from waste batteries;
• provides for mandatory minimum levels of recycled content for certain batteries; and
• sets the recycling efficiency target for nickel-cadmium batteries.

For more information, see our blog post.

EU: Revision of the Industrial Emissions Directive

The European Parliament and the Council have adopted their respective positions on the European Commission’s Proposal for a Directive amending Directive 2010/75/EU on industrial emissions (the IED) and Directive 1999/31/EC on the landfill of waste and trilogue negotiations can now start. The Proposal was published by the Commission in April 2022. Although the EU institutions have divergent positions on crucial elements of the Proposal, we expect negotiations to wrap up with a political agreement by the end of 2023. Key takeaways:

• The scope of the IED will be extended to certain extractive activities, but it is still unclear how it will apply to livestock farms.
• The IED will include incidents or accidents that significantly affect human health (in addition to the environment) and in-scope operators would have to put in place an environmental management system.
• There is an increased focus on private and public enforcement.
• The Parliament and the Council did not support the Commission’s proposal to reverse the burden of proof in favour of the victims of breaches of IED permits.
• The Parliament supported the Commission’s proposal to impose significant penalties for non-compliance calculated based on the operators’ annual turnover in the relevant Member State or in the EU.

For more information, see our blog post.

UK: Hydrogen transport and storage business model

On 2 August 2023, the UK government published its response to and minded-to positions on its August 2022 consultation on business model design, regulation, strategic planning and the role of blending in hydrogen transport and storage infrastructure. It also published an update to the market on its hydrogen strategy confirming a second hydrogen allocation round to be launched later in 2023, followed by a full draft Low Carbon Hydrogen Agreement on 9 August 2023 which forms the contractual basis for providing support under the hydrogen production business model. In these recent publications, the government highlights certain barriers to the growth of UK hydrogen infrastructure and indicates that it plans to take a holistic and transparent approach to developing the hydrogen network, with the aim to establish a successful hydrogen market economy in the UK. For more information, see our blog post.

UK: Biomass strategy

On 10 August 2023, the Department for Energy Security and Net Zero published its Biomass Strategy 2023 which describes the role of sustainable biomass in achieving net zero. The Strategy expands on the 2021 Biomass policy statement and Powering up Britain Strategy and focusses on the following:

• proposals to strengthen biomass sustainability criteria, including the implementation of a cross-sectoral common sustainability framework (to be consulted on in 2024);
• the impacts of biomass use on air quality;
• the regulatory framework for biomass;
• availability of sustainable biomass and opportunities for scaling up biomass supply in the UK;
• priority uses of biomass in the short, medium and long term, along with policy plans and actions for biomass uses across various sectors of the economy; and
• a review of bioenergy with carbon capture and storage (BECCS) and its role in achieving net zero.

Biomass production and use spans many sectors of the economy and so it features in various other government strategies including the Hydrogen Strategy (for more on which see here), the Jet Zero Strategy (which sets out plans to achieve net zero in aviation by 2050) and the upcoming Low Carbon Fuels Strategy (expected later in 2023).

UK: Update on government policy for CfD AR6

In August 2023, the government published responses to its December 2022 consultation on policy considerations for future rounds of the Contracts for Difference (CfD) including the sixth allocation round (AR6) which it intends to launch in March 2024. For a summary of the key outcomes, see our blog post.

UK: New guidance for investment managers on filing shareholder resolutions

In June 2023, the Investment Association published an overview for institutional investors on the key steps required to effectively requisition a shareholder resolution at a UK-incorporated company. This should only be done where shareholders believe that such an escalation is appropriate because other engagement has failed. The creation of this guidance indicates that larger and institutional investors may be prepared to contemplate taking actions which would previously have been the sole territory of NGOs and activist groups. At present, the requisitioning of such resolutions at UK listed company AGMs remains relatively unusual and amounts to no more than a handful every year. Nevertheless, the existence of this new guidance emphasises the importance of engaging with investors on a regular basis and on issues of concern, in particular where these are complex and evolving, such as in relation to climate risks and opportunities. For more information, see our client briefing. 

OECD announces updates to Guidelines for Multinational Enterprises on Responsible Business Conduct

On 8 June 2023, the OECD launched a revised version of its Guidelines for Multinational Enterprises on Responsible Business Conduct, 12 years after they were last updated. The OECD Guidelines, which cover all key areas of business responsibility, including human and labour rights, the environment, bribery, corporate disclosure, competition and taxation, have been revised to include new or updated recommendations relating to: (i) climate change (including adopting decarbonisation targets and prioritising emissions reductions over offsetting); (ii) biodiversity; (iii) supply chain due diligence; and (iv) the Just Transition (amongst other topics). For a detailed analysis of the key changed and what this means in practice for global businesses, see our blog post. 

EU: Trilogues start on Proposal for a Platform Work Directive

The first trilogue on the European Commission’s Proposal for a Platform Work Directive, which seeks to introduce a legal presumption of employment for platform workers and rules on algorithmic management, took place on 11 July 2023. Negotiations between the European Parliament and Council will continue after the summer break. However, reaching a final agreement may be challenging. Spain, which currently holds the Council's Presidency, supports a broad employee classification in line with the European Parliament, and enacted a similar national law in 2021. Meanwhile, other Member States' positions align more closely with platform companies, potentially complicating the Spanish Presidency's role as a neutral broker in the negotiations. For more information on the Commission’s proposal, see our previous blog post. 

UK: Government response to ethnicity pay gap reporting consultation

In July 2023, the UK government published its response to the ethnicity pay gap reporting consultation launched in 2018. Although over 90% of employers that responded were supportive of ethnicity pay reporting, the government concluded that it would not be legislating to make it mandatory. Instead, the government has released guidance to assist organisations that report voluntarily. For more information, see our blog post. 

UK: Employment Relations (Flexible Working) Act 2023 receives Royal Assent

On 20 July 2023, the Employment Relations (Flexible Working) Act 2023 received Royal Assent. The Act will amend the existing flexible working regime in a number of ways from next year, including allowing employees to make two flexible working requests a year instead of one and reducing the time limit for employers to respond from three months to two. There will be a new requirement for employers to consult with the employee before rejecting a flexible working request. Guidance on this will be set out in an updated Code of Practice. Acas has published a draft updated Code and has launched a consultation on it which runs until 6 September 2023. Whilst not included in the Act, the government intends to introduce secondary legislation to make the right to request flexible working a day one right, removing the need for employees to have 26 weeks’ continuous service. For more information, see our blog post.

U.S. affirmative action litigation and the potential effects on corporate DEI efforts

On 29 June 2023, the U.S. Supreme Court held that the race-conscious admissions process at Harvard College (Harvard) and the University of North Carolina (UNC) violate the U.S. Constitution’s equal protection clause. The landmark decision effectively, although not explicitly, ends the use of affirmative action in college and university admissions - a sharp departure from decades of prior precedent that upheld the permissibility of the consideration of race in college and university admissions. Writing for the majority, Chief Justice Roberts contended that the race-conscious admissions programs at UNC and Harvard used race as a “negative” and reduced people to racial stereotypes. While the opinion noted that colleges and universities may still consider an applicant’s “discussion of how race affected his or her life, be it through discrimination, inspiration, or otherwise”, the decision essentially erected a near-impossible barrier for colleges and universities to consider race in college and university admissions.

The ruling may soon impact diversity efforts in other contexts such as employment and corporate leadership. Shortly after the Supreme Court’s decision, the legal activist behind the lawsuits against Harvard and UNC filed suit against two national law firms in the Northern District of Texas and the Southern District of Florida, arguing that the firms’ diversity fellowships exclude certain applicants based on race in violation of Civil Rights Act of 1866. Also, a group of Republican state attorneys general recently issued a letter to several major corporations “to remind [them] of [their] obligations as an employer under federal and state law to refrain from discriminating on the basis of race, whether under the label of ‘diversity, equity, and inclusion’ or otherwise,” warning that companies found in violation will face “serious legal consequences.”

Climate change litigation 

In August 2023, a Montana state judge issued a landmark decision in the first ever constitutional climate case in U.S. history to go to trial. The court ruled in favor of the sixteen youth plaintiffs, who successfully argued that that the state’s aggressive pursuit of fossil fuel developments without consideration of the long-term climate impacts violated their right to a “clean and healthful environment” as guaranteed by the state Constitution. Similar youth-led constitutional climate lawsuits are pending in Virginia, Utah, and Hawaii. The Hawaii case is set for trial in September. See the May 2023 edition of the Linklaters ESG newsletter for more information.

Also in August, a county in Hawaii filed suit against one of the state’s largest electric utility companies, alleging that its powerlines caused the recent fatal wildfires on the island of Maui. A shareholder also filed a separate securities suit against the same Hawaii electric company alleging that the company made materially false and misleading statements regarding the company’s “business, operations, and prospects,” specifically with respect to the company’s wildfire prevention and safety protocols.

US greenwashing litigation 

Greenwashing litigation continues to gain momentum in the U.S. In August 2023, a major U.S. airline sought to dismiss a greenwashing lawsuit alleging that it misled customers by claiming it was the world’s first carbon-neutral airline despite having a large overall carbon impact. The complaint alleges that the airline’s claim of carbon neutrality is misleading because it is premised on the purchase of carbon offsets, rather than the use of sustainable fuels and carbon removals. In its motion to dismiss, the airline argued that the allegations in the complaint are preempted by the federal Airline Deregulation Act and otherwise fail to state a claim. 

Also in August 2023, California filed a lawsuit against an energy company based on its marketing claims suggesting that natural gas is “renewable.” Shortly after the lawsuit was filed, the parties reached a settlement agreement under which the energy company agreed to issue a corrective statement and pay $175,000 to the California Environmental Protection Agency’s Environmental Justice Small Grants Program to fund a project focused on environmental justice.

Proposed NEPA Regulation Changes 

The Council on Environmental Quality (CEQ) has proposed additional amendments to its National Environmental Policy Act (NEPA) implementing regulations as part of its phased rulemaking, which was initiated in 2021. The proposed Bipartisan Permitting Reform Implementation Rule was published in the 31 July 2023 Federal Register and is the second phase of CEQ’s rulemaking effort.  Phase one of CEQ’s NEPA rulemaking effort was finalised on 20 April 2022, and reversed controversial changes made to the NEPA regulations by the Trump Administration. Phase two of CEQ’s NEPA rulemaking, which is the current proposed rule, is proposing changes to push forward Biden administration priorities. This includes, among other things, implementing the bipartisan permitting reforms in the Fiscal Responsibility Act and codifying climate change and environmental justice principles. The proposed revisions are substantial. CEQ is accepting comments through 29 September 2023.

Japan Offshore Wind (5th edition): Recalibration

In 2022, Japan faced energy security issues. To address this, the Japanese government has reaffirmed its commitment to implementing annual offshore wind auctions, incentivised earlier commercial operation of projects, and focused on creating resilient supply chains. Future policy discussions may include creating an auction process for offshore wind projects in the Exclusive Economic Zone (EEZ) which are likely to shape the offshore wind sector in the next coming decades. Explore our 5th edition of our Japan Offshore Wind Report – Recalibration to gain a deeper understanding of the offshore wind sector and its future prospects. This report summarises the recent changes made to the auction guidelines and some regulatory developments. It also provides a summary of the EEZ report published under the inter-ministerial initiative in January 2023.

Singapore consults on adopting mandatory climate-related corporate disclosure requirements in line with the ISSB standards

The Sustainability Reporting Advisory Committee (SRAC) published a public consultation paper seeking market feedback on proposals to make climate-related disclosures mandatory for listed and certain non-listed companies in Singapore. The consultation paper was published on 6 July 2023 and closes on 30 September 2023. The consultation proposes to mandate listed issuers to report climate-related disclosures in line with the requirements of the International Sustainability Standards Board (ISSB) climate disclosure standards starting from financial year 2025 (FY2025). Large non-listed companies with annual revenue of at least S$1 billion will follow suit in FY2027. This development is in line with the general regulatory trend seen in other markets towards increased transparency and making the disclosure of climate, and other sustainability issues, mandatory. For more information, see our blog post.

Singapore competition regulator issues guidance on environmental sustainability collaborations

On 20 July 2023, the Competition and Consumer Commission of Singapore (CCCS) published a proposed guidance note on environmental sustainability collaborations and has invited market participants and stakeholders to provide feedback by 4 September 2023. The guidance note aims to assist companies in achieving their environmental sustainability objectives in a competition law compliant manner. While the proposed guidance recognises that certain types of collaborations between competitors are unlikely or less likely to raise competition concerns, it also sets out examples of collaborations which are cartel-like and are likely to be prohibited by the Competition Act. The CCCS’ guidance, once finalised, will be the second of its kind in Asia, following the Japan Fair Trade Commission’s green guidelines issued in March 2023. We anticipate seeing other competition authorities in the region following suit as the intersection between ESG collaboration and antitrust is increasingly in the limelight.  

Cross-Agency Steering Group announces priorities to further strengthen Hong Kong’s sustainable finance ecosystem

In August 2023, the Green and Sustainable Finance Cross-Agency Steering Group (made up of Hong Kong’s financial regulators and the Financial Services and the Treasury Bureau) announced three key priorities for Hong Kong’s development as a sustainable finance hub. The three areas of focus will look at: (1) aligning local regulation with global standards; (2) introducing measures to support capacity building, data enhancement and technology innovation of the finance ecosystem to support net-zero transition across the economy; and (3) increasing the range of markets and products to raise and deploy capital in support of the net-zero transition. In July 2023, the Securities & Futures Commission of Hong Kong (SFC) welcomed IOSCO’s endorsement of the IFRS Sustainability Disclosure Standards published by the ISSB (ISSB standards) and said it will work with various bodies in Hong Kong (including the Stock Exchange of Hong Kong) to develop a comprehensive roadmap for adoption of the ISSB standards in Hong Kong. For more information see our previous blog post.

Hong Kong Monetary Authority launches training framework for sustainable finance

The Hong Kong Monetary Authority (HKMA) and the Hong Kong Institute of Bankers launched the first phase of the “Enhanced Competency Framework (ECF) on Green and Sustainable Finance”, which establishes a set of common and transparent competency standards required of green and sustainable finance-related roles in the banking sector. The ECF has multiple modules covering different professional workstreams, and while it is not a mandatory training or licensing regime, the HKMA encourages banks in Hong Kong SAR to adopt the ECF as the benchmark for enhancing the level of core competence and on-going professional development of banking practitioners. The framework for sustainable finance is therefore designed to assist banking practitioners to acquire knowledge and develop professional competencies in green and sustainable finance. The second phase of the ECF on Green and Sustainable Finance (which will focus on upcoming market developments and regulatory trends) will be launched at a later date.

Hong Kong Monetary Authority publishes net-zero transition principles for banks

The Hong Kong Monetary Authority (HKMA) has identified some high-level principles to assist banks in Hong Kong SAR with transition planning. The principles which are set out in a circular issued on 29 August 2023 are based on international bodies’ recommendations for transition plans and incorporate standards such as setting clear objectives and targets, governance, engagement with clients and transparency. The circular has been published as part of the HKMA’s plan to integrate climate risk into its banking supervisory processes, announced in June 2022.

One step closer to re-launching the China Certified Emission Reduction Scheme

After a six-year hiatus in the trading of voluntary emission reductions under the China Certified Emission Reduction Scheme (CCER), China’s voluntary carbon market has made another step towards the relaunch of the CCER. The PRC’s Ministry of Ecology and Environment and the State Administration for Market Regulation jointly published a consultation paper titled “Measures for the Administration of Greenhouse Gas Voluntary Emission Reduction Trading (for Trial Implementation)”, on 7 July 2023, which is expected to replace the previous set of rules governing the CCER. These new rules demonstrate the regulatory authorities’ resolve in improving the credibility of the CCER and put the re-launch of the scheme formally on track. A notable feature of the rules includes adopting a more centralised approach, together with additional rules for the purposes of supervision and monitoring to preserve and enhance market integrity. For more information, see our blog post.

China launches the new regime on green electricity certificate

On 3 August 2023, the National Development and Reform Commission, the Ministry of Finance and the National Energy Administration jointly released the “Notice on Promoting the Full Coverage of Renewable Energy Green Electricity Certificates and Promoting the Consumption of Renewable Energy Electricity” (Circular 1044), which aims to enhance the implementation of China’s green electricity certificate (Green Certificate) regime. Circular 1044 replaces China’s previous “Notice on the Trial Implementation of the Renewable Energy Green Electricity Certificate Issuance and Voluntary Subscription Trading System” (Circular 132) on Green Certificates released in 2017. Compared with Circular 132, Circular 1044 (together with other rules released since Circular 132): expands the coverage of Green Certificates to include renewable electricity generation projects using solar power, conventional hydropower, biomass power, geothermal power, and marine power, and other sources of energy; diversifies Green Certificate trading platforms; specifies the pricing mechanism for Green Certificate trading; and proposes to promote international recognition of the Green Certificates.

193 Chinese outstanding green bonds re-labelled against the Common Ground Taxonomy

On 14 July 2023, the Green Finance Committee (GFC) of the China Society for Finance and Banking released the first batch of 193 Chinese outstanding green bonds meeting standards under the Common Ground Taxonomy (CGT). The CGT was developed by the China-EU co-initiated International Platform for Sustainable Finance. The CGT includes 72 economic activities that have substantial contributions to climate change mitigation and are recognised by both Chinese and the EU taxonomies. The 193 bonds cover areas such as battery manufacturing, energy-saving home appliances, wind power, and public transportation systems. The list demonstrates China’s commitment to opening up China’s green bond market to global investors and enhancing the role of the CGT in facilitating cross-border flows of green capital.

Thailand Taxonomy Board publishes taxonomy for Thailand (Phase I)

In June 2023, the Thailand Taxonomy Board (which consists of 13 agencies from Thailand’s public and private sectors, notably, the Bank of Thailand, the Securities and Exchange Commission and the Thai Bankers’ Association) published the much-awaited Phase I of the Thailand Taxonomy. The Thailand Taxonomy is a voluntary and standardised classification system of economic activities deemed as being environmentally-sustainable, and the primarily focus of Phase I of the Thailand Taxonomy is to define, as well as set out, the metrics and thresholds for activities that reduce greenhouse gas emissions to achieve the climate change mitigation in the sectors which contribute to the highest proportion of carbon emissions – namely, the energy sector and the transportation sector. Moreover, a key objective of the Thailand Taxonomy Board is for the Thailand Taxonomy to be adopted by the stakeholders as a reference tool for making policy or strategy, accessing green funding, and managing opportunities and risks relating to the environment and climate change scenarios. Similar to the ASEAN Taxonomy, the Thailand Taxonomy adopts the traffic light system which divides economic activities into three categories, namely green (i.e. near-zero activities), amber (i.e. transitional activities which have not yet reached zero emissions but which can be improved with viable technologies), and red (i.e. activities which are not compatible with the net zero target). Looking ahead, the Thailand Taxonomy Board also intends for the Thailand Taxonomy to cover other environmental objectives, namely: (i) climate change adaptation; (ii) sustainable use and protection of marine and water resources; (iii) protection and restoration of biodiversity and ecosystem; (iv) prevention and control of pollution; and (v) resource resilience and transition to a circular economy. However, it remains to be seen which of the objectives will be prioritised and covered in Phase II of the Thailand Taxonomy.

Japan’s Financial Services Agency publishes basic guidelines on impact investing

On 30 June 2023, the Financial Services Agency (FSA) published a report by the Working Group on Impact Investment (the Working Group). The Working Group was established in October 2022 to discuss the roles of “impact investment” and measures to encourage impact investments. Amongst others, the report includes the draft “Basic Guidelines on Impact Investment”, and the FSA is seeking market feedback on the draft Guidelines. The public consultation is open until 10 October. The report explains that the purpose of the Guidelines is “to foster common understandings on basic concepts and processes for impact investment, by clarifying the essential elements expected for impact investment that fund-raisers, fund-providers, and other participants in impact investment markets could refer to when structuring and financing investment projects through their own ingenuities and approaches”. The aim is to encourage the impact investment, rather than to restrict any investment or other activities that pursue positive environmental or social impacts. The Guidelines consist of four key principles (intentionality; additionality; identification, measurement and management of impact; and innovation, transformation and acceleration) and emphasise the importance of engagement with investee companies. For more information, see our blog post.

Securities and Exchange Board of India publishes requirement for mandatory certification for ESG ratings providers

On 5 July 2023, the Securities and Exchange Board of India (SEBI) published the SEBI (Credit Rating Agencies) (Amendment) Regulations 2023 (the CRA Amendment). The CRA Amendment essentially requires ESG rating providers (ERPs) to establish an adequate framework to promote transparency and prevent conflicts of interest. The CRA Amendment requires that any person intending to undertake business as an ERP will need to obtain certification from SEBI within a period of six months of the date of the CRA Amendment. The CRA Amendment specifies various eligibility criteria that an ERP must fulfil before it can apply for certification with the SEBI. An ERP should be a company incorporated under the Companies Act 2013 and should specify ESG rating activity as the main object in its memorandum of association. The ERP is required, at all times, to maintain a team of at least four employees specialising in governance, sustainability, social impact/social responsibility, data analytics, finance, information technology and law. Once certified by the SEBI, ERPs are not permitted to undertake any activities outside their designated scope. The CRA Amendment also provides that ERPs are required to adhere to a code of conduct, prevent conflicts of interest, establish an adequate framework to ensure transparency and publish the rating methodology for all ESG ratings on their website. These amendments are part of SEBI’s concerted efforts to promote green financing by improving the reliability of ESG disclosures in the market. They are aimed at mitigating the risk of greenwashing by enhancing disclosure requirements.

Securities and Exchange Board of India further develops its ESG disclosures regulatory framework requiring value chain disclosures

The Securities and Exchange Board of India (SEBI) introduced the Business Responsibility and Sustainability Reporting (BRSR) requirements in May 2021, which requires the top 1000 listed companies in India to disclose sustainability-related information in their annual reports. In June 2023, building on the BRSR framework, the SEBI introduced the “BRSR Core” requirements, which mandates ESG disclosures in line with certain key performance indicators. The SEBI also published a circular on 12 July 2023 mandating that listed companies must also make disclosures for their value chain in line with the BRSR Core requirements in their annual reports. Value chains for this purpose include the top upstream and downstream partners of a listed company, which cumulatively comprise of 75% of its purchases or sales by value respectively. This disclosure requirement will be implemented in a phased manner, with the top 250 listed companies required to make disclosures from FY 2024-2025. Additionally, boards of listed companies must ensure that the assurance provider undertaking reasonable assurance for the purposes of BRSR Core has the necessary expertise to do so.

Securities and Exchange Board of India introduces ESG schemes for mutual funds

On 20 July 2023, the Securities and Exchange Board of India (SEBI) introduced a sub-category for ESG investments under the “Equity schemes category”. This development has been driven by industry demand and the growing popularity of green financing in India. These ESG schemes can be launched under one of several strategies provided, such as Impact investing and Sustainable objectives. The name of the ESG scheme must clearly disclose which of these strategies is being adopted. Mutual funds are also now permitted to invest under multiple ESG schemes with varying ESG strategies. ESG schemes are required to invest at least 80% of the total assets under management in equity and equity-related instruments relating to the scheme’s strategy. The remaining portion of the investment should be consistent with, and not in contrast with, the scheme’s chosen strategy. The SEBI has also mandated that asset management companies must obtain independent reasonable assurance regarding the compliance of ESG schemes with their stated objectives. The board of the asset management company will then need to certify the ESG scheme’s compliance with regulatory requirements based on comprehensive internal ESG audits. These items must be included in the annual report of the ESG scheme.

India publishes draft rules for Green Credit Programme

On 26 June 2023, the government of India introduced the draft Green Credit Programme Implementation Rules 2023 (the GCP Rules), which propose the launch of a nationwide green credit programme as part of the government’s “LiFE” (Lifestyle for Environment) programme. The GCP Rules set up a framework for the grant and trading of green credits, which are units of incentives provided for one or more specified activities which deliver a positive impact on the environment. These green credits will be made available on a domestic market platform, where they can be traded. Green credits can be earned by a range of entities, such as, among others, individuals, farmer producer organisations, cooperatives, forestry enterprises, urban and rural local bodies and private sector bodies. Objections and suggestions were sought on the draft GCP Rules until 24 August 2023.

Indian government specifies emission threshold for green hydrogen

On 18 August 2023, the government of India published the Green Hydrogen Standard for India, which provides a definition for green hydrogen in that it must: (i) be produced from renewable sources; and (ii) adhere to emission limits of two kilograms carbon-dioxide for every kilogram of hydrogen produced. The Standard also states that a detailed methodology for measurement, reporting, monitoring, onsite verification and certification of green hydrogen will be notified in due course. This development is part of the government’s National Green Hydrogen Mission, which aims to make India self-reliant in the sphere of clean energy, and help aid the country’s decarbonisation goals.

The impact of the EU’s Corporate Sustainability Due Diligence Directive on businesses in Asia – Read our blog post

Will “say on climate” votes soon be mandatory in France? – Read our blog post

Biodiversity loss: Regulatory trends in the UK and EU – Read our blog post 

European Commission opens the door for positive engagement on sustainability agreements but more can be done – Read our blog post 

Meet our ESG team: Rachel, Raza, David and Gilly – Read our publications here and here