Welcome to our monthly 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 October edition in which we shine a spotlight on nature and biodiversity-related developments. We also cover the UK government's revised net-zero policy, the European Commission's recent consultations on the Sustainable Finance Disclosure Regulation, California's plans to introduce new climate disclosure laws, and much more.
Our latest ESG insights
- Global toolkit: Why think about biodiversity in the corporate context?
- Global: The biodiversity questionnaire – are you ready?
- UK: GTAG makes recommendations to HMT ahead of consultation on UK Green Taxonomy
- EU: New guidance on principal adverse impacts dos and don'ts – European Supervisory Authorities issue second annual report
- EU: Quo Vadis SFDR? European Commission launches two new consultations
- EU: Sustainable finance – pulling it all together
- EU: CBAM starts to apply
- South Africa: Potential ESG focussed provisions in the new Companies Amendment Bill
Spotlight on nature and biodiversity
Taskforce on Nature-related Financial Disclosures publishes final risk management and disclosure framework
Two years on from its launch in October 2021, the Taskforce on Nature-related Financial Disclosures (TNFD) has published its final framework on nature-related risk management and disclosures.
Announced on 18 September 2023 during a New York Climate Week event, the TNFD's disclosure recommendations are closely aligned with the disclosure recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), replicating the four conceptual pillars of: (1) governance; (2) strategy; (3) risk and impact management; and (4) metrics and targets. In addition to TCFD, TNFD's recommendations are said to be consistent with the global sustainability standards of the International Sustainability Standards Board and the impact materiality approached used by the Global Reporting Initiative, which are incorporated into the European Sustainability Reporting Standards (ESRS).
With the ongoing dependency of nature's inputs to business, coupled with the acceleration of nature and biodiversity loss, the TNFD's recommendations seek to promote the disclosure of clear, comparable and consistent information by companies to investors. This is with a view to help market participants address nature-related risks and to redirect global financial flows towards nature-positive outcomes, one of the goals of the Kunming-Global Biodiversity Framework agreed at COP15 in December 2021.
Accompanying the publication the TNFD's final recommendations are a suite of guidance materials, including on how to get started on the recommendations, the identification and assessment of nature-related issues using the Locate-Evaluate-Assess-Prepare (LEAP) approach and guidance for financial institutions, among others.
Nature Action 100 identifies target companies for engagement on nature-related dependencies, impacts, risks and opportunities
On 26 September 2023, the global investor engagement initiative, Nature Action 100, unveiled a list of companies with which investor participants intend to engage to take steps to address global nature and biodiversity loss. The nature equivalent of Climate Action 100+, Nature Action 100 seeks to drive greater corporate ambition to protect and restore nature and ecosystems, and to mitigate financial risk.
To kick off the engagement process, investors sent letters to 100 companies in key sectors deemed to be systematically important for reversing nature and biodiversity loss by 2030. The letters identify six investor expectations – (1) ambition, (2) assessment and disclosure of nature-related dependencies, impacts, risks and opportunities, (3) time-bound targets, (4) implementation, (5) board oversight and management, and (6) engagement – with a deadline of 30 November 2023 given to companies to respond.
HSF's biodiversity toolkit for corporates
We've launched a biodiversity toolkit for corporates. We want to support corporates to better understand their relationship with nature and biodiversity, and to take steps to address biodiversity-related risks and opportunities.
Take a look at chapters one and two of our toolkit, and stay tuned for further chapters over the coming weeks.
UK highlights
TPR issues first fine for non-compliance with climate change reporting requirements
On 28 September 2023, it was revealed that the Pensions Regulator (TPR) issued its first fine to a pension scheme for failing to comply with the requirement to publish a climate change report as required under the Occupational Pension Schemes (Climate Change Governance and Reporting) Regulations 2021. The regulations, which were developed from the recommendations of the TCFD, require schemes to publishes their climate change report on a publicly available website, free of charge, and within seven months of the scheme's year-end.
TPR, which monitors the publication of climate change reports, contacted the trustees of the scheme in question after it found that it could not locate the report online. The report was published six days later, but the scheme nevertheless incurred the mandatory penalty.
FCA consults on diversity and inclusion framework
On 25 September 2023, the Financial Conduct Authority (FCA) launched a consultation on proposals to introduce a new regulatory framework on Diversity and Inclusion (D&I) in the FCA-regulated financial sector. The proposed framework would establish minimum standards for firms to better incorporate internal governance, decision making and risk management.
The Prudential Regulation Authority (PRA) has also launched a parallel consultation on its proposed rules and expectations aimed at improving D&I in PRA-regulated firms.
The consultations build on ideas discussed in the FCA and PRA's joint discussion paper on D&I in the financial sector published in July 2023 and close on 18 December 2023.
UK government scales back net-zero policy
On 20 September 2023, Prime Minister Rishi Sunak announced the UK government's new approach to its net-zero policy, which includes:
- easing the transition to electric vehicles by pushing back the ban on the sale of new petrol and diesel cars from 2030 to 2035;
- relaxing the 2035 phase-out target for the installation of new gas boilers in homes;
- increasing the Boiler Upgrade Scheme which gives people cash grants to replace their boiler by 50% to £7,500;
- abandoning plans relating to energy efficiency rules for landlords (noting that subsidies for energy efficiency will continue); and
- abandoning plans to ban new oil and gas in the North Sea.
The Prime Minister's announcement appears to indicate a series of U-turns on targets to tackle climate change, which in turn has ignited business and political backlash.
This backlash perhaps echoes the warning against a "stop-start approach" to net-zero policy set out in the independent report, Review of Net Zero, which was commissioned by the Department for Energy Security and Net Zero and the Department for Business, Energy and Industrial Strategy in September 2022.
Over 400 companies and civil society groups have signed an open letter opposing the rollback of the UK's net-zero policy.
UK Trades Union Congress reports UK government to UN International Labour Organisation over new minimum service levels
On 10 September 2023, the UK Trades Union Congress announced it has reported the UK government to the UN International Labour Organisation (ILO) over its new Strikes (Minimum Service Levels) Act 2023, arguing that the legislation does not adhere to international legal standards. The act, which amends the Trade Union and Labour Relations (Consolidation) Act 1992, adds an obligation for some employees to work during industrial action to comply with minimum service levels. According to the government, such an obligation is intended to protect lives and livelihoods by ensuring that the general public can continue to access public services like emergency services and railways. The ILO, however, states that such minimum service levels function as "anti-strike laws" as there are no automatic protections from unfair dismissal for employees that are told to work through strike but choose to strike instead.
Following receipt of the complaint, the ILO's Committee on Freedom of Association (CFA) will examine the case and decide whether to receive it. If it does, it will seek to establish the facts in dialogue with the UK government. If the CFA finds that there has been a violation of freedom of association standards or principles, it will issue a report through the governing body of the ILO and make recommendations on how the situation could be remedied. The UK government may subsequently be requested to report on the implementation of the ILO's recommendations.
European highlights
European Insurance and Occupational Pensions Authority issues opinion on sustainability within Solvency II
On 30 September 2023, the European Insurance and Occupational Pensions Authority (EIOPA) issued an opinion on sustainability within Solvency II, the prudential regime governing insurance and reinsurance companies. EIOPA notes that although Solvency II is well equipped to accommodate sustainability risks and factors, climate change brings considerable challenges to the valuation of assets and liabilities, underwriting, investment decisions and risk measurement. It thus calls on (re)insurance undertakings to implement measures in their business strategies to address climate-related risks such as physical and transition risks.
European Supervisory Authorities publish second annual report on extent of voluntary disclosure of principal adverse impacts
On 28 September 2023, the Joint Committee of the European Supervisory Authorities (ESAs) published their second report on the extent of voluntary disclosure of principal adverse impacts (PAI) under the Sustainable Finance Disclosure Regulation (SFDR).
The SFDR requires the ESAs to take stock of the extent of voluntary disclosures each year. They must do so with the support of the National Competent Authorities (NCAs) and submit an annual report on the result of this review to the European Commission (Commission).
The report contains a summary of the ESAs’ main findings, examples of good and bad practice, recommendations to the Commission and a more detailed description of responses from NCAs to the questions asked during the review. According to the ESAs, the following main areas require improvement:
- explanations for not considering PAI;
- disclosures on due diligence and alignment with the Paris Climate Agreement; and
- availability and accessibility of PAI disclosures
European Commission launches two new consultations on the Sustainable Finance Disclosure Regulation
On 14 September 2023, the Commission launched two new consultations on the SFDR. The consultations seek to review what progress has been made with the implementation of the SFDR since coming into force in March 2021, and to identify how the SFDR framework could be improved to enhance legal certainty, useability and its ability to tackle greenwashing.
The first consultation is addressed to any stakeholder with general knowledge of the SFDR (Public Consultation), whereas the second consultation is targeted at public bodies and stakeholders who are more familiar with the SFDR and the EU’s sustainable finance framework as a whole (Targeted Consultation).
Both the Public Consultation and the Targeted Consultation consider:
- the functioning of the current regime with a focus on clarity and usefulness of disclosures, costs, data and estimates (section 1); and
- SFDR’s interoperability and alignment with other EU sustainable finance legislation, including the EU Taxonomy, the EU Climate Benchmarks, the Corporate Sustainability Reporting Directive (CSRD) and ESRS, sustainability preferences under the current Markets in Financial Instruments Directive (MiFID II) and the Insurance Distribution Directive (IDD), and key information documents for retail investors under the Packaged Retail and Insurance-based Investment Products Regulation (PRIIPs) (section 2).
In addition, the Targeted Consultation considers:
- the utility and appropriateness of entity and product level disclosures and the current form of presentation and publication of disclosures (section 3); and
- the possibility of establishing a product categorisation or labelling regime for financial products and the form this may take (section 4).
The consultations close on 15 December 2023, and the Commission intends to publish a report of its findings in Q2 2024.
Read more - SFDR consultations
Read more - Sustainable Finance - pulling it all together
US highlights
California set to introduce landmark climate disclosure laws
The California State Senate and State Assembly recently approved:
- Senate Bill 253 Climate Corporate Data Accountability Act (SB 253), which will require the California Air Resources Board to adopt regulations by 1 January 2025 for public and private companies operating in California with over $1 billion in annual revenue to begin publicly disclosing their greenhouse gas (GHG) emissions. If the bill is adopted and becomes law, in-scope companies will be required to report on scope 1 and 2 GHG emissions from 2026 and on scope 3 emissions from 2027; and
- Senate Bill 261 GHG: Climate-related Financial Risk (SB 261), which will require companies that operate in California with over $500 million in revenue to report on their climate-related financial risks. If the bill is adopted and becomes law, companies will have to publish a report disclosing their climate-related financial risks and measures adopted to reduce and adapt to climate-related financial risks from 1 January 2026, and biennially thereafter.
The governor of California, Gavin Newsom, has indicated his plans to sign the bills into law.
US Securities and Exchange Commission adopts enhanced rule to prevent misleading or deceptive investment fund names
On 20 September 2023, the US Securities and Exchange Commission (SEC) adopted amendments to the Investment Company Act to strengthen the rule on fund names to prevent misleading investors about a fund's investments and risks. The "Names Rule" previously required registered investment companies whose name suggested a focus on a particular investment type to adopt a policy to invest at least 80% of the value of their assets in those investments. The amendments to the Names Rule will extend this requirement to more funds, including funds with names suggesting a thematic investment focus, such as the incorporation of one or more environmental, social or governance factors.
The amendments will also include a new requirement that a fund reviews its portfolio assets’ treatment under its 80% investment policy at least quarterly and will include enhanced prospectus disclosure requirements for terminology used in fund names.
Once published in the Federal Register, the amendments will become effective 60 days after. Fund groups with net assets of $1 billion or more will have 24 months from the effective date to comply with the amended Names Rules, whereas fund groups with net assets below $1 billion will have 30 months to comply.
US Department of the Treasury announces principles for net-zero financing and investment
On 19 September 2023, the US Department of the Treasury published voluntary principles for net-zero financing and investment, which target financial institutions' scope 3 financed and facilitated GHG emissions. The nine principles seek to promote consistency and credibility in financial institutions' approach to net-zero commitments and to establish a set of best practices.
To this end, the principles call on financial institutions to:
- establish net-zero commitments, which are supplemented by the development and execution of net-zero transition plans (Principle 1), as well as implementation strategies that integrate the goals of net-zero commitments into business and operating procedures (Principle 6);
- establish credible metrics and targets to guide relevant financing, investment and advisory services (Principle 3);
- be transparent about net-zero commitments and progress towards them (Principle 9);
- assess client and portfolio alignment to net-zero targets (Principle 4) and align engagement practices with clients, portfolio companies and other stakeholders to net-zero commitments (Principle 5);
- consider transition finance, managed phaseout and climate solution practices when considering how to realise commitments (Principle 2); and
- establish robust governance processes to provide oversight of the implementation of commitments (Principle 7) and account for environmental justice and environmental impacts where applicable (Principle 8).
Other global highlights
Institutional Shareholder Services launches ESG corporate rating survey
On 25 September 2023, the sustainable investment arm of the Institutional Shareholder Services (ISS), ISS ESG, launched an ESG corporate rating survey, which seeks market feedback on the ISS ESG's global methodology. The methodology draws on international normative frameworks, voluntary disclosure standards, and regulatory regimes and, in particular, on materiality considerations, different use-cases for the ISS ESG corporate rating and the underlying scores and data that make up the rating.
The survey seeks feedback from interested parties by 20 October 2023.
Not to be missed
- 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. Register here.
- Heike is moderating a panel on "life hacks for impact" at a Sustainable Impact in Action Live event taking place in Frankfurt, Germany on 4 October 2023. Find out more here.
- Rebecca Perlman is speaking on a panel about the importance and impact of collaboration to achieve sustainability goals at a British Land event on 18 October 2023. Register here.
In case you missed it
- Keeping up with ESG in Australia: September 2023
- Financial services regulation timeline: September 2023 (see page 9 for corporate governance and page 35 for ESG, climate change and sustainable finance)
Related HSF notes
*With thanks to Tara Theiss, Isabelle Woods, Abi Watkins and Shareka Logan for their contributions to this month's newsletter.
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.