Welcome to our newly launched ESG Newsletter.
There's a lot happening in the environmental, social and governance (ESG) space, and we don't want you to get lost in the quagmire. In our newsletter, we share our latest ESG insights and identify must-know developments from the UK, EMEA and around the world.
Read on for our August edition, in which we cover climate transition plans, sustainability disclosure standards, the latest on ClientEarth's derivative action against Shell's directors, and much more.
Our latest ESG insights
- UK Transition Plan Taskforce publishes status update and response to disclosure framework consultation
- Global sustainability disclosures: Navigating the landscape
- High Court confirms refusal of permission for ClientEarth derivative action against Shell directors
- FRC kicks off process for adopting new sustainability reporting standards in the UK
- UK changes to flexible work request rights in the offing
UK highlights
Climate transition plans: UK Transition Plan Taskforce publishes status update on proposed disclosure framework
The UK Transition Plan Taskforce (TPT) expects to release the final version of its proposed climate transition plan disclosure framework in October 2023. This is according to TPT's status update published on 27 July 2023 (Status Update). The Status Update also covers:
- TPT's response to its November 2022 consultation in respect of its draft disclosure framework and implementation guidance;
- Recent UK and global developments in transition plan disclosure obligations; and
- A timeline of key TPT publications.
It is clear from the Status Update that while corporates and other stakeholders are generally supportive of the approach taken by TPT in establishing a comprehensive framework for transition plan disclosures, there is still uncertainty as to how TPT's recommendations will be implemented in practice.
Read more - climate transition plans
Sustainability disclosure standards: ISSB-related developments
There have been several recent developments involving the International Sustainability Standards Board's (ISSB) first set of sustainability standards, IFRS S1 (general requirements for disclosures of sustainability-related financial information) and IFRS S2 (specific requirements in relation to climate-related disclosures). We've set these out below, starting with the most recent developments:
- On 2 August 2023, the UK government announced that it will establish the UK Sustainability Disclosure Standards (SDS) based on the IFRS sustainability disclosure standards. The UK SDS, which will set out the requisite corporate disclosures of sustainability-related risks and opportunities, will form the basis of future legislative or regulatory requirements for UK companies. Led by the Department for Business and Trade, the Secretary of State will consider the recommendations from the Secretariat to the UK Sustainability Disclosure Technical Advisory Committee (TAC) and will create the SDS by July 2024 (see the update below on TAC's call for evidence). According to the government announcement, the SDS will only deviate from the IFRS sustainability disclosure standards if absolutely necessary to address UK-specific matters.
- On 27 July 2023, the International Financial Reporting Standards (IFRS) Foundation published for consultation a Proposed IFRS Taxonomy to reflect the disclosure requirements arising from IFRS S1 and IFRS S2. The primary aim of the Taxonomy is to facilitate consumption of sustainability-related information in a digital format (i.e., through tagging) which, in turn, is intended to enhance the interoperability of the ISSB standards with jurisdictional requirements and other sustainability-related standards. The consultation closes on 26 September 2023.
- On 25 July 2023, the International Organisation of Securities Commission (IOSCO), which brings together the world's securities regulators, announced its endorsement of the ISSB standards. In doing so, IOSCO invited its 130 member jurisdictions to consider how they can incorporate the standards into their respective reporting frameworks with a view to delivering consistency and comparability of sustainability-related disclosures globally.
- On 24 July 2023, the IFRS Foundation published a comparison of IFRS S2 with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This follows the Financial Stability Board's announcement on 13 July 2023 that the ISSB would take over the TCFD's monitoring responsibilities. The IFRS Foundation's report found that the requirements of IFRS S2 are consistent with the TCFD's four core recommendations regarding governance, strategy, risk-management and metrics and targets and its 11 recommended disclosures. As such, companies that apply the ISSB standards will continue to meet the TCFD recommendations. The report noted additional requirements in IFRS S2, including the requirements for companies to disclose industry-based metrics, information about their planned use of carbon credits to achieve their net emissions targets and additional information about their financed emissions.
- On 19 July 2023, the Financial Reporting Council, in its role as the Secretariat to the UK Sustainability Disclosure TAC, issued a call for evidence to inform the proposed endorsement of the ISSB standards in the UK. The call for evidence, which closes on 11 October 2023, seeks views on whether application of these standards in a UK context will result in disclosures that are understandable, relevant, reliable and comparable for investors. It also considers technical feasibility, timeliness alongside financial reporting, and proportionality of costs to benefits. This is a noteworthy step towards determining whether, and if so, how, the ISSB standards will be implemented in the UK.
ClientEarth v Shell's board of directors: High Court again refuses application for permission to continue derivative action
On 25 July 2023, the High Court handed down a judgment confirming its earlier decision to refuse environmental law charity ClientEarth's application for permission to continue a derivative action on behalf of Shell plc seeking to challenge its directors’ response to climate-related risks posed to Shell’s business.
Mr Justice Trower dismissed the application on the basis that, in both its written and oral submissions, ClientEarth failed to establish a prima facie case for granting permission, as required by section 261(2) of the Companies Act 2006. Like the court's initial decision, the present judgment shows that it will be difficult for environmental and other campaign groups to use the derivative action procedure to challenge directors' strategic and long-term decision making. The court will not generally interfere in company management decisions, particularly where they require directors to balance competing considerations. Nor is the court likely to grant permission where it considers that the action has been brought for an ulterior purpose, which may be a ready inference where the applicant is a campaign group with a small shareholding. ClientEarth has announced that it will seek permission to appeal the decision.
EU highlights
European Commission adopts Delegated Act setting out first set of ESRS
On 31 July 2023, the European Commission formally adopted the final Delegated Act setting out the first set of European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD). Broadly, the ESRS establish rules for companies to disclose information on sustainability-related risks, impacts and opportunities (IROs) where these IROs are deemed to be material. A draft of the Delegated Act had been published on 9 June 2023 and was open to consultation for a four-week period.
The adopted text does not differ significantly from the draft text in that it retains the Commission's modifications to EFRAG's technical advice, most notably in relation to the introduction of materiality assessments and the additional phase-ins of certain requirements (e.g., reporting companies may omit information on the anticipated financial effects of non-climate environmental issues in the first year they apply the standards), as well as the conversion of mandatory to voluntary disclosures of certain datapoints (e.g., biodiversity transition plans).
As discussed in our earlier briefing, the Commission's modifications to EFRAG's widely-consulted recommendations had been met with concerns regarding data gaps and lack of cohesion with the EU's existing sustainable finance framework. To address some of these concerns, the Commission published an accompanying Q&A, where it emphasised that disclosure requirements subject to materiality are not voluntary. The relevant information must be disclosed if it is material, and a company's materiality assessment process is subject to external assurance in accordance with the Accounting Directive.
The Commission went on to say: "If a company concludes that climate change is not a material topic and therefore does not report in accordance with that standard, it has to provide a detailed explanation of the conclusions of its materiality assessment with regard to climate change. This requirement reflects the fact that climate change has wide-ranging and systemic impacts across the economy."
In light of the ISSB-related developments noted above, companies and other stakeholders will welcome the announcement from the Commission that it has been working to ensure a high level of alignment between the ESRS and the ISSB standards. According to the Commission, if companies reporting in accordance with the ESRS also want to comply with the ISSB standards, they should not have to report separately under the latter.
As a next step, the final Delegated Act will be sent to the European Parliament and Council where it will be subject to a two-month scrutiny period (extendable by two months). The European Parliament and Council may accept or reject the Delegated Act but may not amend it. Once in force, the ESRS will be effective for financial years starting on or after 1 January 2024 for companies within the scope of the first phase of reporting under the CSRD (i.e., companies already reporting under the Non-Financial Reporting Directive).
Heike Schmitz, Partner, offers her views on these latest developments:
Amidst widespread criticism from left and right, the Commission has firmly held its stance by adopting substantially unchanged ESRS. To calm the waves, a few concessions were made along the way. For investors and other external stakeholders, duties have been added to explain if information required under other EU legislation (e.g., the Sustainable Finance Disclosure Regulation) is considered immaterial and to justify if climate change is considered immaterial. For companies that have been concerned about making detailed, cumbersome and unnecessary disclosures, all topical standards (including climate change) are now subject to materiality assessments. It remains to be seen if this will appease the two sides and, more importantly, if the ESRS will pass the EU-wide "field test" starting in 2025 for 2024 with the first wave of reporting. The good news, at least, is that companies now have final texts to work with in order to get their implementation projects up and running.
Global highlights
Spotlight on France: French national assembly adopts Say on Climate amendment as part of green industry bill
On 21 July 2023, in a show of global leadership, the French national assembly adopted a "Say on Climate" amendment as part of the country's green industry bill. The amendment, if adopted, will require listed companies to submit their climate strategies for shareholder approval every three years, with implementation of the strategy put to a vote each year at AGMs. The amendment will be discussed again in September before being debated for a final time in October.
Spotlight on Australia: ASIC commences second greenwashing enforcement proceedings
On 24 July 2023, the Australian Securities & Investments Commission (ASIC) commenced court proceedings in the Federal Court of Australia against Vanguard Investments Australia Ltd, alleging misleading conduct by Vanguard in relation to claims it had made about the ESG-related exclusionary screening applied to investments in Vanguard's Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (the Fund).
According to ASIC, the Fund was exposed to investments in several companies in the oil and gas sector. Yet, Vanguard represented that all securities were screened according to certain ESG criteria to exclude issuers with significant business activities in the fossil fuels industry, among others. ASIC further alleges that Vanguard did not undertake the relevant ESG-related research and screening in relation to a significant proportion of issuers of bonds in the index, and therefore in the Fund overall. ASIC is seeking declarations of misleading and deceptive conduct and civil penalties, as well as orders that Vanguard publicise any contraventions found by the Court to have occurred.
This is ASIC's second greenwashing enforcement proceedings. The first involved a superannuation trustee who is alleged to have made misleading and deceptive statements on their website about seven "sustainable" investment options.
Upcoming
- Heike Schmitz will give a keynote speech on impact and ESG at a European Women on Boards event organised by QBE in Düsseldorf on 21 September 2023.
- Heike Schmitz and Shantanu Naravane will be sharing their insights on ESG matters for funds during an Invest Europe training course taking place 3-5 October 2023.
In case you missed it
- Mika Morissette discusses the ISSB's first set of sustainability standards, IFRS S1 and IFRS S2. Watch her in this video.
- Re-greening the planet: Is the EU charting the way forward with the Deforestation-free Products Regulation?
- Planning for climate transition in the UK: Are you prepared?
Related HSF notes
Disclaimer
The articles published on this website, current at the dates of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action.