4 October: CSDDD trilogues – key sticking points

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12 October: COP28 – key issues and what to expect

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26 October 2023: Unlocking potential for social mobility – improving opportunities in Asia

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Global: EFRAG and GRI confirm high level of interoperability of their reporting standards

On 4 September 2023, the European Financial Reporting Advisory Group (EFRAG) and the Global Reporting Initiative (GRI) published a joint statement on the high level of interoperability achieved between the European Sustainability Reporting Standards (ESRS) under the CSRD and the GRI Standards. In the EFRAG press release, EFRAG’s Administrative Board President points out that “the efforts made by the GRI and EFRAG Sustainability Reporting teams will prevent the need for double reporting by companies resulting in a user-friendly reporting system without undue complexity.” The joint statement provides that “in keeping with the requirement formulated in the CSRD to adopt a double materiality approach and to take account of existing standards, the ESRS have adopted the same definition for impact materiality as GRI and have leveraged GRI’s expertise. ESRS and GRI definitions, concepts and disclosures regarding impacts are therefore fully or, when full alignment was not possible due to the content of the CSRD mandate, closely aligned.” According to the statement, entities reporting under ESRS are considered as reporting with reference to the GRI Standards. Based on the ESRS adopted by the European Commission in July 2023 (see our previous blog post), EFRAG and GRI will publish a list of the ESRS disclosure requirements and data points that correspond to GRI disclosure requirements and data points. EFRAG and GRI are considering how to enhance their technical cooperation in the future, including through working on a digital taxonomy and a multi-tagging system for their respective standards. 

EU: Commission proposes to adjust SME and large companies size criteria for inflation

On 13 September 2023, the Commission published for consultation the Proposal to adjust SME and large companies size criteria for inflation. The draft Delegated Directive would amend the thresholds in the Accounting Directive to adjust the criteria for all types of companies by 25% (subject to rounding up). The Commission noted that since 2013, these size thresholds have remained unchanged. The proposed increase in the size criteria will not only reduce the scope of application of the presentation, audit, and publication requirements for financial statements set out in the Accounting Directive but also reduce the scope of application of the CSRD and the Taxonomy Regulation for large undertakings, small and medium-sized undertakings that are listed, and large groups. This is in line with the Commission’s commitment to rationalise and simplify reporting requirements, with the aim to reduce such burden by 25%. The consultation closes on 6 October 2023. The Commission will likely follow up with a legislative proposal by mid-end October 2023.

UK: TNFD publishes final recommendations for nature-related risk management and disclosure

The Taskforce on Nature-related Financial Disclosures (TNFD) has published the final version of its recommendations on a framework to identify, assess, manage, and disclose nature-related issues. The ultimate aim of the TNFD framework is to “position nature risk alongside financial, operational and climate risk and help to shift capital flows to nature-positive outcomes”. “Nature” encompasses land, ocean, freshwater, and atmosphere – and so goes further than the concept of “biodiversity”. The publication of the 14 recommended nature disclosures and accompanying guidance marks the culmination of two years of consultations, including pilot testing by over 200 companies and financial institutions. For more information, see our blog post. 

Global: ICMA publishes blue bonds guide

On 6 September 2023, the International Capital Market Association (ICMA), together with the International Finance Corporation (IFC), United Nations Global Compact (UN Global Compact), United Nations Environment Programme Finance Initiative (UNEP FI), and the Asian Development Bank (ADB), published a global practitioner's guide for bonds to finance the sustainable blue economy. This is a significant step for the development of the “blue bond” market and, when used in conjunction with the ICMA Principles, acts as additional thematic guidance for use of proceeds bonds (such as green bonds or sustainability bonds) that finance projects supporting the sustainable blue economy. The voluntary guidance provides market participants with criteria, practices, and examples for “blue bond" lending and issuances. It also provides information on the key components involved in launching a credible “blue bond", how to evaluate the environmental impact of “blue projects", and the steps needed to facilitate transactions that preserve the integrity of the market. While this voluntary guidance is focused on bonds, it may also be applicable to other debt instruments such as loans (and, if being used for loans, ICMA recommends that the guidance be considered alongside the Green Loan Principles and the Sustainability-Linked Loan Principles). According to the new guide, the Green Bond Principles (GBP) recognise “blue bonds” as bond issuances with the objective of emphasizing the importance of the sustainable use of maritime resources and of the promotion of related sustainable economic activities. Green bonds that finance 100% blue projects can be labelled by an issuer as “blue bonds.” Such “blue bonds” would also be considered as “green bonds” as long as they align with the four core components of the GBP. Blue projects can also be financed under “sustainability bonds” that were designed to encompass both green (blue) and social projects. 

Global: ICMA updates Sustainability-Linked Bonds Principles Q&A

On 26 September 2023, the International Capital Market Association (ICMA) and the Executive Committee of the Principles updated its Q&A related to Sustainability-Linked Bonds (SLBs). The Q&A are intended to complement the Sustainability-Linked Bond Principles (SLBP), providing additional information on how to interpret the guidance set out in the SLBP and to illustrate practical application on transactions reflecting market developments in this product. These Q&A replace the 2022 version. The main updates relate to selection of key performance indicators (KPIs), considerations for selecting credible sustainability performance targets (SPTs), and reporting requirements under the SLBP. In addition, the Q&A now contemplate sovereign issuers throughout. For more information, see our blog post.

Global: NGFS publishes reports on climate-related litigation risks

On 1 September 2023, the Network for Greening the Financial System (NGFS) published two reports on climate litigation risks. 

The Report on climate-related litigation: recent trends and developments provides an update outlining the most recent trends and developments in climate-related litigation that have occurred since their 2021 Report. In particular, the NGFS expects that climate-related litigation will continue to increase in volume and develop in terms of the nature, scope, and addressees of legal action. For instance, litigation may begin to expand beyond the topic of greenhouse gas emissions, to encompass the topic of biodiversity loss, due to increasing recognition of the climate-biodiversity nexus. They also anticipate that some of this litigation may become more closely linked to the development of climate-related legislation, particularly in the fields of greenwashing, climate disclosures and corporate due diligence, with a consequent impact on transition risks. This may become particularly relevant for the financial sector, where the recent expansion of regulatory reporting requirements may increase the likelihood of cases being taken directly against financial institutions. It is crucial that central banks and supervisors, as well as regulated entities, are fully aware of climate-related litigation as a source of risk for the economy and the financial sector. 

The Report on micro-prudential supervision of climate-related litigation risks contains an analysis of the potential impact of climate-related litigation on financial institutions and a review of current regulatory and supervisory practices. To highlight specific climate-related litigation risk considerations, the report provides a toolbox of supervisory options that range from low to high intensity. The report also introduces preliminary principles for quantifying exposure to these risks. 

EU: Commission consults on SFDR

The European Commission has released its consultation on the implementation of the Sustainable Finance Disclosure Regulation (SFDR). As expected, the Commission is interested in understanding how the SFDR has been implemented and any potential shortcomings, including in its interaction with other parts of the European sustainable finance framework. The consultation has been issued as two papers: (i) the first paper is a public consultation aimed at those individuals and organisations with only a general knowledge of the SFDR; and (ii) the second paper is a “targeted consultation” aimed at gathering feedback from those public bodies and stakeholders that are more familiar with the SFDR and the EU’s sustainable finance framework as a whole. For more information, see our blog post. 

EU: ESAs publish second report on the extent of voluntary disclosure of PAI under SFDR

Following on from their first annual report to the European Commission in July 2022, the European Supervisory Authorities (ESAs) recently published their second annual joint report on the extent of voluntary disclosure of principal adverse impact (PAI) under the Sustainable Finance Disclosure Regulation (SFDR). The report provides an overview of good examples of best practice on disclosures and areas for improvement, as well as including a set of recommendations for national competent authorities to ensure appropriate supervision of financial market participants' practices. The results show an overall improvement in the application of voluntary disclosures compared to the previous year, and disclosures appear easier to find on websites compared to the previous year. However, there is still significant variation in the extent of compliance with the requirements and in the quality of the disclosures both across FMPs and across jurisdictions. For more information, see our blog post.

EU: ECB speech on the risks of climate litigation in the banking sector

On 4 September 2023, the European Central Bank (ECB) published a speech given by Frank Elderson, ECB Supervisory Board Vice-Chair and Executive Board Member, on addressing the risks of climate and environment-related litigation in the banking sector. Mr Elderson noted that the ECB finds that banks still need to make significant progress in increasing their awareness of climate and environment-related litigation risk, and that they need to be better prepared to address this risk. He referred to the recent reports prepared by NGFS (see above) that had identified this as an emerging source of risk for the financial sector back in 2021. Banks need to be aware that in certain jurisdictions the impact of climate-related litigation could impact the viability of their business models.  And to address this source of litigation risk, banks should start putting in place their Paris-aligned transition plans, which should be realistic, transparent and credible.  

Luxembourg: CSSF communication regarding the launch of ESMA Common Supervisory Action on sustainability risks and disclosures in the investment fund sector

In July 2023, ESMA launched a Common Supervisory Action (CSA) with National Competent Authorities (NCAs) on the adequacy of sustainability-related disclosures and the integration of sustainability risks across the EU. The goal of the CSA is to assess the compliance of supervised asset managers with the relevant provisions in the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation and relevant implementing measures. Following this, the Luxembourg financial services regulator, the CSSF, has reached out to those in-scope UCITS managers and AIFMs to gather information from them necessary to address the issues put forward by the CSA. For more information, see our blog post. 

UK: GTAG publishes reports on UK Green Taxonomy

Ahead of the anticipated UK government consultation on its Green Taxonomy this autumn, the Green Technical Advisory Group (GTAG) published two independent advice papers in August 2023 with advice to the UK government on several issues related to the development of a UK Green Taxonomy. In particular on: (i) the scope, coverage and reporting considerations; and (ii) implementing an effective reporting regime for the UK Green Taxonomy. This follows an independent advice paper earlier this summer on streamlining and increasing the usability of the Do No Significant Harm (DNSH) criteria. For more information, see our blog post.

In September 2023, GTAG published two further reports: (i) a report on the treatment of green financial products under an evolving UK Green Taxonomy; and (ii) a report on operational considerations for taxonomy reporting: assessing and dealing with data gaps and the use of proxies. The objective of the first paper is two-fold: firstly, it provides GTAG’s recommendations on how activities previously considered environmentally sustainable (i.e. “green”) are affected when the UK Green Taxonomy is implemented; and secondly, it covers how taxonomy-aligned activities, products and investments are treated as the taxonomy evolves over time. The objective of the second paper is to provide GTAG’s recommendations on how to ensure data gaps are minimised to support more robust and decision-useful taxonomy disclosures, without placing undue burden on businesses. For more information, see our blog post.

US: SEC order on misstatements regarding ESG investment process

On 25 September 2023, after a two-year investigation, the Securities and Exchange Commission (SEC) charged DWS Investment Management Americas (DWS), which is a subsidiary of Deutsche Bank, in respect of misstatements regarding its ESG investment process. To settle the charges, DWS have agreed to pay US$19 million in penalties (see SEC press release and SEC order). The SEC found that DWS had made misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG integrated products, including certain actively managed mutual funds and separately managed accounts. The SEC also found that DWS had marketed itself as a leader in ESG that adhered to specific policies for integrating ESG considerations into its investments , but that, from August 2018 until late 2021, DWS had failed to adequately implement certain provisions of its global ESG integration policy as it had led clients and investors to believe it would. The SEC order also found that DWS had failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG integrated products were accurate. 

In a statement following the SEC announcement, DWS noted that the SEC examination found “no misstatements in relation to our financial disclosures or in the prospectuses of our funds,” and that there was no intent by the firm to defraud, adding that the firm has already taken steps to address the weaknesses identified by the SEC. In an interview with Financial News, DWS chief executive Stefan Hoops indicated that “being transparent on what we found and how we corrected it is what clients deserve”. The interview highlights a number of changes DWS have put in place following the investigation, including an overhaul of its group sustainability council which has been changed into a committee of the executive board, creation of a sustainability oversight office within the chief financial officer’s division, and creation of a dedicated sustainability strategy team. 

The SEC’s enforcement action and the various steps taken by DWS following the investigation highlight the importance of having the right ESG governance systems in place, including processes, policies, procedures, and controls. For more information on the different types of ESG liability risks, of which greenwashing is just one, see the Linklaters Guide to ESG & Greenwashing: Risks and Routes to Liability.

Global: UN Report on climate goals

On 8 September 2023 the UN published a report on the global stocktake which provides an assessment of the collective progress towards achieving the goals of the Paris Agreement. The report concludes that global emissions are not in line with modelled global mitigation pathways consistent with the temperature goal of the Paris Agreement, and there is a rapidly narrowing window to raise ambition and implement existing commitments in order to limit warming to 1.5 °C above pre-industrial levels. According to the report, urgent action is needed to increase both the mitigation ambition of nationally determined contributions (NDCs) and the implementation of measures to achieve their targets. Achieving net zero carbon emissions requires systems transformations across all sectors and contexts, including scaling up renewable energy while phasing out all unabated fossil fuels, ending deforestation, reducing non-CO2 emissions, and implementing both supply- and demand-side measures. The global stocktake is a process for countries and stakeholders to see where they are collectively making progress towards meeting the goals of the Paris Agreement. The stocktake takes place every five years, with the first-ever stocktake scheduled to conclude at the UN Climate Change Conference (COP28) at the end of this year. For more information, join us for a pre-COP webinar on 12 October where we will be discussing key issues and what to expect at this year’s  climate summit.   

EU: Key ESG takeaways from Commission President’s State of the Union speech

On 13 September 2023, the Commission President, Ursula von der Leyen, made her annual State of the Union speech to the European Parliament where she emphasised how crucial it is for the EU institutions to finalise agreement on the legislative proposals already presented. The speech, along with accompanying letter of intent and summary of main initiatives, give a high-level indication of the initiatives that are likely to be included in the Commission's Work Programme for 2024, which is expected to be announced sometime in October 2023. The main new initiatives in the context of the Green Deal include: (i) Clean Transition Dialogues with the industry to develop an approach for each industrial ecosystem, including agriculture; (ii) a European Wind Power package to help alleviate challenges of the EU’s wind industry, fast-track permitting even more and improve the auction systems (according to press reports, the Commission will present this proposal on 24 October); (iii) launch an anti-subsidy investigation into electric vehicles coming from China; and (iv) strategic dialogue on the future of agriculture in the EU – following very heated negotiations over the proposal for a Nature Restoration Law, von der Leyen stressed the need for “more dialogue and less polarisation” when it comes to protecting biodiversity and EU farmers.The Commission also intends to publish, in the first quarter of 2024, a Communication which will start the process to establish an interim greenhouse gas emissions target for 2040. This Communication will set the ground for a later draft law setting the 2040 target. The Commission President also made references in her speech to the ecological wealth of Europe’s water bodies and wetlands, as well as the threat posed by droughts to EU food production.

EU: Parliament adopts the Renewable Energy Directive

On 12 September 2023, the Parliament formally adopted the proposal for the amended Renewable Energy Directive. The previous version of the Directive (RED II) entered into force in 2018 and has been legally binding since June 2021. In July 2021, the Commission proposed another revision of the Directive, raising the 2030 renewable energy target from 32% to 40%, as part of the ‘Fit for 55’ package supporting the EU's revised target to reduce greenhouse gas emissions by at least 55% below 1990 levels by 2030 (see our previous blog post). Less than a year later, following Russia’s invasion of Ukraine and the need to accelerate the EU’s independence from fossil fuels, the Commission proposed to further increase the target to 45% by 2030. The text adopted by the Parliament reflects the political agreement reached between the Parliament and the Council on 30 March 2023. The Council is expected to also formally adopt the Directive at first reading. 

Main provisions of the adopted text include the following: (i) binding target of at least 42.5% by 2030, but with an additional 2.5% indicative top up that would allow to reach 45%; (ii) industry would increase their use of renewable energy annually by 1.6%; (iii) 42% of the hydrogen used in industry should come from renewable fuels of non-biological origin (RFNBOs) by 2030 and 60% by 2035; (iv) gradual increase in renewable targets for heating and cooling, with a binding increase of 0.8% per year at national level until 2026 and 1.1% from 2026 to 2030; and (v) accelerated permitting procedures for renewable energy projects (a 12-months or 24-months deadline depending on the type of installation). 

EU: Energy Efficiency Directive published in the OJEU

On 20 September 2023, Energy Efficiency Directive 2023 was published in the Official Journal of the EU and will enter into force in 20 days from the publication date. The legislative process started with the Commission proposal in July 2021 (see our previous blog post) as part of the ‘Fit for 55’ package, which was supplemented by an additional proposal as part of the REPowerEU plan in May 2022 (see our previous blog post). The amended Directive lays down rules to implement energy efficiency as a priority across all sectors (the “Energy Efficiency First" principle). The Commission in its press release highlighted, in particular, the following main changes introduced by this new version of the Directive: (i) a legally binding target to reduce final energy consumption at EU level by 11.7% in 2030; (ii) an annual energy consumption reduction target of 1.9% for public sector as a whole and extension of annual 3% buildings renovation obligation to all levels of public administration; (iii) increase of annual energy savings to 1.3% (2024-2025), then 1.5% (2026-2027) and 1.9% from 2028 onwards; (iv) obligation for Member States to prioritize vulnerable customers and social housing within scope of their energy savings measures; (v) obligation for businesses, depending on their energy consumption, to have an energy management system or carry out an energy audit; and (vi) monitoring of energy performance of data centres. EU member states will have two years to transpose most of the measures into their national legislation.

EU: Trilogues on Critical Raw Materials Act can commence

On 14 September 2023, the Parliament adopted its negotiating position on the proposal for a Critical Raw Materials Act (CRMA). On 30 June 2023, Council also adopted its position on the Act so trilogue negotiations can now commence. The CRMA establishes a framework for ensuring a secure and sustainable supply of raw materials listed in the Act. The CRMA distinguishes between “strategic” and “critical” raw materials” - the former (which include copper, lithium, nickel and rare earth elements for magnets) are considered essential for the green transition and receive greater support.  

In its initial proposal (see our previous blog post), the Commission suggested achieving by 2030 a 10% EU extraction capacity of ores, minerals and concentrates, and a 40% EU processing capacity and 15% EU recycling capacity for strategic raw materials. Both the Parliament and Council have suggested increasing the processing target to 50%. In relation to recycling, Council has suggested to increase the recycling target to meet 20% of the EU’s annual needs for strategic raw materials, instead of the European Commission’s initial proposal of 15%. The Parliament, however, has suggested to set the recycling goal at 10% of the EU’s annual consumption along with a separate target to collect, sort and process 45% of strategic raw materials contained in the EU’s waste “taking into account technical and economic feasibility”. Both the Council and the Parliament voted to add aluminum as a strategic raw material. The Parliament has also introduced a number of provisions meant to strengthen environmental and social requirements of mining projects. Mining, refining and recycling projects that seek to be recognised as strategic (and therefore enjoy faster permitting and more funding) would be assessed based on whether they give communities affected by their operations the right to give or withhold consent for projects.

EU: Political agreement reached on Empowering Consumers to Green Transition Directive

On 19 September 2023, the Parliament and Council reached a provisional political agreement on a Proposal for a Directive as regards empowering consumers for the green transition, which contains measures to improve consumer information on product durability, as well as on a ban on greenwashing and other unfair commercial practices. The new provisions are part of the first Circular Economy Package and amend the Unfair Commercial Practices Directive and the Consumer Rights Directive. For companies, the new rules may provide some more legal certainty in a field that is factually difficult and legally largely unregulated. However, based on the currently available information, the new rules will entail new obligations and potentially give rise to new liability risks that companies must be aware of. For more information, see our blog post.

EU: Rules on CBAM reporting published in the OJEU

On 15 September 2023, the Commission Implementing Regulation on the Rules for the application of Carbon Border Adjustment Mechanism (CBAM) as regards reporting obligations was published in the Official Journal of the EU. It entered into force on 16 September 2023 and applies directly in all Member States. The CBAM is a system of carbon certificates to cover the embedded carbon emissions in products being imported into the EU (for more information, see our client briefing). 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 Commission also published guidance for EU importers and non-EU installations on the practical implementation of the reporting rules.

UK: Prime Minister announces new approach to net zero

UK Prime Minister Rishi Sunak set out his “new approach” to achieving Net Zero by 2050 in a speech on 20 September 2023. Announcements in the speech included the postponement of a ban on the sale of new petrol and diesel cars and vans from 2030 to 2035 and relaxation of the requirement for households to replace existing boilers with heat pumps. At the same time, the Prime Minister announced that there will be comprehensive new reforms to energy infrastructure and a “spatial plan” for that infrastructure in an effort to give industry certainty. An increase in cash grants for households replacing fossil fuel boilers with low carbon alternatives like heat pumps from £5,000 to £7,500 was also announced (and has since translated into a huge increase in requests to heat pump installers, according to industry). In addition, the Prime Minister promised to speed up planning decisions for the most nationally significant infrastructure projects and to speed up and simplify grid connection (currently one of the most significant challenges to the UK achieving its Net Zero ambitions, for more on which see our article). The measures announced were ultimately a mixed bag and reflect conflicting political pressures upon the Government in advance on an anticipated general election in 2024. Notwithstanding this, Mr Sunak confirmed that the UK will “still meet our international commitments and hit Net Zero by 2050.

UK: Government update on the introduction of non-price factors into renewables CfD auctions

In April 2023 the Government launched a call for evidence on the introduction of criteria other than cost for assessment as part of its auction process for Contracts for Difference (“CfD”) for renewable projects. The purpose of introducing non-price factors (“NPFs”) is to incentivise projects and developers to deliver broader value to society and the environment across the wider supply chain, rather than simply rewarding the lowest cost projects. Consideration of NPFs is becoming more common around the globe. The renewables industry is open to the introduction of NPFs where such criteria are carefully designed, implemented and monitored to ensure sustainable societal and environmental value and transparency whilst enabling the CfD to remain bankable.

In its September response, Government confirmed the feedback with which it agreed and set out points on which it is still considering the next steps for this particular policy. For more information, see our blog post.

UK: Update on the Energy Bill

The Energy Bill (previously known as the Energy Security Bill) is still making its way through Parliament. After the House of Lords approved all but one of the House of Commons’ latest amendments in the first week of September, Parliamentary recess during party conference season means that the timing for the Commons’ review of this final change is likely to be towards the end of October. The expectation is now that Royal Assent will be given at the beginning of November 2023.

The Energy Bill provides the framework for the Government's plans to reform the UK's energy systems to ensure security of supply, develop resilience in the system and enable the UK to reach its net zero ambitions. The Bill provides the mechanism through which the Government's hydrogen and CCUS business models will be implemented and puts in place structures for systemic reform of the energy system, such as the statutory basis for a new Independent Systems Operator and Planner (known outside of the Bill as the Future Systems Operator).

Germany: New BAFA guidance on the Supply Chain Due Diligence Act

The Federal Office for Economic Affairs and Export Control (BAFA) has published further practical guidelines for the interpretation of the Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG), which are of substantial practical relevance to entities concerned. In particular, it provides: (i) an update to its FAQs; (ii) guidance on the application of the LkSG to the credit and insurance industry; and (iii) guidance on cooperation in the supply chain, supplemented by FAQs for small and medium-sized enterprises as well as an executive summary. The guidance on cooperation in the supply chain has caused significant uncertainty among businesses. It not only complicates implementation of the Act in practice, but leaves companies with more questions than answers, effectively expecting them to square the circle. For more information, see our blog post. For an extended overview on the various guidance documents in German, see our German corporate newsletter. For information and documents on the LkSG issued by BAFA in English, see here.

EU: Pay Transparency and Equal Pay: European landscape

Lack of pay transparency has been identified as a major hurdle in closing the EU’s gender pay gap. With women reported to earn on average 13% less than men in 2020, the EU took a bold step forward by introducing the EU Pay Transparency Directive. In an effort to tackle pay discrimination and increase pay transparency, the Directive creates new and far-reaching information and reporting obligations for employers. The Directive came into force in June 2023 and Member States will have three years to transpose it into national law. 

Explore our dedicated webpage with useful resources to guide you through the Directive’s obligations, including our cross-border guide analysing the degree of change that will be required to comply with the Directive’s obligations across the key European jurisdictions.

UK: Financial services regulators publish consultation papers to boost diversity and inclusion

In consultation papers published on 25 September 2023, the UK’s financial regulators - the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) - have set out proposals to boost diversity and inclusion across the sector. A link to the FCA’s consultation can be found here, along with the PRA’s consultation here. The long-awaited consultations follow the regulators’ discussion paper published in 2021. The proposals outlined in the consultations include new rules and guidance which focus on misconduct, such as bullying and sexual harassment, posing a risk to healthy firm culture, and how firms should take action against employees for such behavior. The proposals also look at requiring firms to develop diversity and inclusion strategies, collect, report and disclose diversity data, and to set targets to address under-representation. The consultations close on 18 December 2023. The regulators have committed to develop final rules on the proposals to be published in 2024. For more information, see our client briefing.

Climate change litigation against oil companies continues

State and local governments continue to initiate litigation against oil companies for environmental harms. In September 2023, the state of California filed suit against five major oil companies “for creating, contributing to, and/or assisting in the creation of state-wide climate change-related harms in California.” The complaint alleges the oil corporation defendants deceived the public and policymakers on the catastrophic consequences of fossil fuel use for decades—leading to delayed responses to global warming. The lawsuit seeks damages and equitable relief, including funds for abatement of public nuisance and natural disasters caused by the gas companies.

Similar state-led actions are currently pending throughout the U.S. In June 2023, Multnomah County, Oregon also sued major oil companies alleging that the businesses executed a decades-long scheme to sell fossil fuel products and deceptively promote these products as harmless to the environment, despite fossil fuel usage causing extreme and deadly climate events. The lawsuit specifically highlights a summer 2021 heatwave with record-high temperatures that led to double-digit fatalities due to overheating, as well as destruction of property. 

U.S. courts uphold ESG and DEI policies

As anti-ESG and anti-Diversity, Equity, and Inclusion (DEI) lawsuits continue across the U.S., several courts have ruled to uphold various ESG rules and policies. In September 2023, a U.S. federal district court in Texas granted summary judgment, and thus dismissed, a lawsuit brought by 25 states challenging the U.S. Department of Labor’s (DOL) Final Rule on Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights (the “Final Rule”), which permits retirement advisers to consider climate and other ESG factors when selecting investments and exercising shareholder rights. The lawsuit argued that, among other things, the Final Rule oversteps the DOL’s authority under the Employment Retirement Income Security Act (ERISA) and is arbitrary and capricious. The court disagreed, holding that the Final Rule does not violate ERISA and granting summary judgment in favour of the DOL. 

Also in September 2023, a U.S. federal district court in Washington granted a motion to dismiss a shareholder derivative lawsuit brought by a conservative advocacy group against a major coffeehouse chain. The complaint alleged that the coffee company’s DEI policies violated state and federal civil rights laws by discriminating based on race and that the company’s board and executives are violating their fiduciary duties by upholding these policies. In the order granting the motion to dismiss, the court rejected the plaintiffs’ arguments, noting that that the plaintiff filed this action “to advance its own political and public policy agendas” and that the complaint “has no business being before this Court and resembles nothing more than a political platform.” 

New regulatory and enforcement actions addressing greenwashing

Federal regulators and state governments continue to adopt policies and bring enforcement actions addressing climate change and greenwashing. In September 2023, the U.S. Securities and Exchange Commission (“SEC”) adopted amendments to the Investment Company Act “Names Rule,” which addresses categories of investment company names likely to mislead investors about an investment company’s investments and risks. The amendments to the Names Rule require more funds to adopt an 80 percent investment policy—investment companies whose names suggest a focus in a particular type of investment must adopt a policy to invest at least 80 percent of the value of their assets in those investments— and funds must review its portfolio assets at least quarterly to assess that its complying with the 80 percent investment policy. This includes firms with names that reference a thematic investment focus, such as the incorporation of ESG factors. 

Also in September, the SEC brought an enforcement action against a global asset management company for alleged misstatements regarding its ESG investment process (see Greenwashing & Litigation section above).

California Legislature Passes Landmark Climate Disclosure Laws

Also in September 2023, the California state legislature passed two landmark bills—the Climate Corporate Data Accountability Act (“SB 253”) and Greenhouse Gases: Climate-Related Financial Risk (“SB 261”). The new legislation will require certain large public and private companies that conduct business in California to make public disclosures regarding their Scope 1, Scope 2 and Scope 3 greenhouse gas (“GHG”) emissions and their climate-related financial risks. For more information, see our publication. 

Korea Fair Trade Commission publishes guidelines to address greenwashing

It has been reported that greenwashing claims have increased in South Korea, with 4,558 cases in 2022 (an increase of approximately 1675% compared to 272 cases in 2021). Against this backdrop, the Korea Fair Trade Commission (KFTC) has amended its “Guidelines for Review of Environment-Related Labelling and Advertising” (the Guidelines), with effect from 1 September 2023. The amendments are aimed at addressing greenwashing concerns and reflect relevant notifications issued by the Korean Ministry of Environment, such as the “Notification on Management System for Labelling and Advertising of Environmental Properties”, as well as guidance issued by other countries. The Guidelines set out the following seven criteria for reviewing and assessing the fairness of environment-related labelling and advertising: authenticity; clarity; considerableness; sustainability; consideration of the product’s life cycle; specificity; and completeness. Notably, the Guidelines focus on a product’s life cycle, split into the following three stages: (i) composition of raw materials or resources; (ii) production and usage; and (iii) disposal and recycle. The Guidelines require that the label or advertising accurately reflects the overall environmental impact of the product throughout its life cycle. The Guidelines include guidance on what may constitute unfair conduct giving rise to greenwashing claims e.g. falsity or exaggeration, deception, unfair comparison, and slander. The Guidelines also include a requirement for companies marketing their environmental targets to have detailed implementation plans (including staff and resources required) in place to support achieving these targets. Companies operating in South Korea ought to review these Guidelines carefully to mitigate risks of greenwashing in their labelling and advertising.

South Korea proposes Bill on Human Rights and Environmental Protection for Sustainable Business Management

On 1 September 2023, South Korea published draft legislation on environmental and human rights due diligence. The “Bill on Human Rights and Environmental Protection for Sustainable Management of Companies” in its current form mandates companies with more than 500 full time employees or generating profits of more than KRW 200B in the previous fiscal year (Article 5), to conduct environmental and human rights due diligence on an annual basis (Article 6). The disclosure standards, including timing and method of reports by companies and any inspection report are to be set separately under a Presidential Decree (Article 13(3)). The Bill also mandates a grievance handling mechanism to be established by each company (Article 6), as well as a victim compensation fund, to be funded by the government, fines collected for breaches of the Bill, and donations or other contributions (Article 36).

China passes in principle trial rules on greenhouse gas voluntary emission reduction trading

At its ministry-level meeting on 15 September 2023, the PRC’s Ministry of Ecology and Environment passed, in principle, the “Measures for the Administration of Greenhouse Gas Voluntary Emission Reduction Trading (for Trial Implementation)” (see our September 2023 ESG Newsletter for further information on the consultation paper). The meeting also promoted the need to optimise the market for greenhouse gas voluntary emission reduction trading, publish methodologies in respect of greenhouse gas reduction projects, and establish registration institutions for greenhouse gas reduction projects. For more information, see our blog post.  

China releases disclosure principles for sustainable investments by private fund managers

On 4 September at the 2023 Global PE Forum, the Beijing Private Equity Association released the “General Principles for Disclosure of Sustainable Investment Information for Private Investment Fund Managers”. The General Principles are the first group standards with respect to sustainable investment and ESG in the private equity industry around the globe. The General Principles aim to guide private equity fund managers through standardisation of industry-wide sustainable investment information disclosures, and promote more comprehensive, transparent and accurate disclosures more broadly. The core disclosure system under the General Principles has a three-dimensional construct: sustainable development outline; sustainable operation; and sustainable investment. In particular, the General Principles also encourage fund managers to disclose their previous year’s annual reports in the form of sustainable investment/ESG reports by the end of April each year.

China’s “Law on Construction of Barrier-free Living Environment” comes into effect

On 1 September 2023, China’s “Law on the Construction of a Barrier-free Living Environment” came into effect with the objective of improving vulnerable social groups’ access to public facilities. The new law focuses on clarifying the management system for constructing a barrier-free living environment that has higher quality of facilities and spaces, enriched content for information exchange, and a wider scope of social services. As China’s first specialised law relating to barrier-free environments, the new rules demonstrate China’s commitment to providing equal access to facilities and information to, and protecting the rights of, the disabled and elderly.

Indonesia issues regulations on carbon trading through a carbon exchange

The Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) issued “OJK Regulation No. 14 of 2023 on Carbon Trading Through Carbon Exchange” (OJK Regulation 14 / 2023), which took effect as of 2 August 2023. This regulation provides a general regulatory framework for carbon trading through a carbon exchange in Indonesia and confirms OJK as the relevant regulatory, licensing and supervisory government authority. OJK Regulation 14 / 2023 classifies carbon units as “securities” which are, therefore, eligible to be traded through a carbon exchange. Before being traded, the carbon unit (which might take the form of either a “Technical Approval on Business Operator’s Emission Threshold” or a “Green House Gas Emission Reduction Certificate”) must be registered with the Climate Change Control National Registration System and with the relevant carbon exchange. Overseas carbon units not registered under the Climate Change Control National Registration System may be registered after being registered, validated and verified by an international registration institution and if compliant with OJK requirements. In terms of the carbon exchange, it must take the form of an Indonesian limited liability company with minimum paid-up capital of IDR100bn (not originating from loans) and obtain a business licence from OJK. A foreign legal entity may hold a maximum of 20 per cent. shares in the carbon exchange, but without any special rights (including veto rights in the appointment of directors and commissioners). To implement OJK Regulation 14 / 2023, OJK issued OJK Circular Letter No. 12/SEOJK.04/2023 (OJK Circular 12 / 2023) which regulates the technical and procedural provisions of carbon trading through a carbon exchange, particularly on the licensing procedures and requirements for the carbon exchange. On 18 September 2023, OJK issued a business licence as a carbon exchange operator to the Indonesian Stock Exchange (which issued some technical rules on the actual carbon trading activities within the carbon exchange). The first carbon trading was launched by the Indonesia Stock Exchange on 26 September 2023.

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