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 November edition in which we cover the Competition and Markets Authority's Green Agreements Guidance, UK Transition Plan Taskforce's final disclosure framework, EU developments relating to the European Sustainability Reporting Standards, the Corporate Sustainability Reporting Directive and the Taxonomy Regulation, and more.
Our latest ESG insights
Sustainability
- Row back on ambition? European Commission proposes delays in adoption of sector-specific and third-country company ESRS by two years and reduces number of companies caught by CSRD
- EU Taxonomy developments: Launch of stakeholder request mechanism and publication of FAQs relating to Taxonomy Regulation
- CMA publishes Green Agreements Guidance
Climate
- Global perspectives on climate disputes – A recent history of shareholder claims
- UK government launches call for evidence on Scope 3 emissions reporting
- UK Transition Plan Taskforce publishes final disclosure framework
- High Court rejects climate change based challenge to oil and gas licensing
- The winds of change – What next for public law climate disputes in the UK?
- Climate disputes – A 360-degree perspective
- Court of Appeal rejects second major attempt at a climate-related derivative action
- EU Critical Raw Minerals Act highlights intensifying competition in race to net zero
DE&I
- Changes to harassment law enacted; Acas draft statutory Code on Predictable Work Requests published
- D&I in the UK financial sector – Driving change
UK highlights
UK government launches call for evidence on scope 3 emissions reporting
On 24 October 2023, the Department for Energy Security and Net Zero (DESNZ) launched a call for evidence on Scope 3 greenhouse gas emissions (GHG) reporting. The call for evidence seeks views on the costs, benefits and practicalities of Scope 3 emissions reporting to inform the UK government's decision as to whether it endorses the International Sustainability Standards Board's (ISSB) sustainability standards.
The ISSB's first two standards – IFRS S1 (general requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures) – require entities to report their:
- Scope 1 emissions – direct emissions from owned or controlled sources;
- Scope 2 emissions – indirect emissions from the generation of purchased energy; and
- Scope 3 emissions – the indirect emissions (not included in Scope 2) that occur in the reporting company’s value chain.
As Scope 3 emissions reporting is contained in the Metrics and Targets Task Force on Climate-related Financial Disclosures (TCFD) Recommended Disclosures, under the Listing Rules listed companies are required to report in line with the TCFD in their annual report on a comply or explain basis. However, most Scope 3 emissions reporting remains voluntary under current reporting requirements. For more on the TCFD disclosure regime for listed companies, see our briefing here.
The government acknowledges the complexities associated with identifying and quantifying Scope 3 emissions but, at the same time, recognises the significance of measuring these emissions to prioritise and support decarbonisation efforts. As such, the call for evidence is more likely an exercise in how the government will endorse the ISSB standards rather than whether it will do so. This is especially so given the government's announcement in August 2023 that it will establish the UK Sustainability Disclosure Requirements based on the ISSB standards, which is expected by July 2024. Stakeholders have until 14 December 2023 to respond.
Charities publish voluntary principles for high-integrity natural capital markets
On 23 October 2023, the UK’s largest nature charities, including the Wildlife Trusts, the National Trust and RSPB, published voluntary principles for science-based investment to create high-integrity natural capital markets, in an effort to support the UK government's legally binding commitment to halt the decline in species abundance by 2030, and its pledge to protect and manage 30% of land and sea for nature by 2030 as per the Kunming-Montreal Global Biodiversity Framework. The charities' principles seek to influence market practice and to contribute to emerging government policy and regulation.
Government consults on incorporating social factors into pensions investment decisions
On 19 October 2023, the Department for Work and Pension's Taskforce on Social Factors published a draft guide for consultation across the UK pensions industry. The draft guide proposes over 30 recommendations on how social factors can be better incorporated into investment decisions. Key factors considered include workforce conditions, supply chains, community engagement, consumer protection, and modern slavery. The Taskforce is seeking feedback on the proposals by 1 December 2023.
Competition and Markets Authority publishes Green Agreements Guidance
On 12 October 2023, the Competition and Markets Authority (CMA) published the final version of its Green Agreements Guidance, aimed at assisting businesses with their assessment of the application of the UK competition rules to environmental sustainability agreements entered into between competitors. The aim of the guidance is to ensure that businesses are not unnecessarily deterred from cooperating, in a competition compliant manner, in order to achieve sustainability objectives that benefit consumers. Publication of the final guidance follows consultation on the CMA’s draft guidance in February 2023. The final guidance, while largely reflecting the structure and content of the draft guidance, has been expanded with more detail, further clarifications and additional practical examples which will assist businesses in assessing their agreements.
UK Transition Plan Taskforce publishes final disclosure framework
On 9 October 2023, the UK's Transition Plan Taskforce (TPT) released the final version of its disclosure framework, intended to act as a “gold standard” for UK companies to develop, disclose and deliver their climate transition plans. TPT's framework seeks to offer practical support to companies already disclosing their transition plans on a voluntary basis or those preparing to do so in accordance with international sustainability standards, in particular, the ISSB and the European Sustainability Reporting Standards (ESRS). Given the proliferation of sustainability standards across the globe, stakeholders are likely to welcome TPT’s alignment with ISSB and ESRS.
On 13 November 2023, TPT launched a consultation on seven sector-specific guidance for report preparers to interpret the disclosure framework. The "deep dive" sectors cover (1) asset managers, (2) asset owners, (3) banks, (4) electric utilities and power generators, (5) food and beverage, (6) metals and mining, and (7) oil and gas. The consultation runs to 29 December 2023.
The Financial Conduct Authority (FCA) has welcomed TPT's disclosure framework. In its Primary Market Bulletin 45, the regulator set out plans to consult on guidance that will note its expectations for listed companies’ transition plan disclosures by reference to TPT's disclosure framework. According to the FCA, this will help issuers report more effectively on the transition plan-related aspects of IFRS S2 (ISSB's climate-related disclosure standards), which is anticipated to form a core component of the UK Sustainability Disclosure Requirements and is expected to come into force from 2025.
EU highlights
European Commission proposes delays in adoption of sector-specific and third-country company ESRS by two years and reduces number of companies caught by CSRD
On 31 October 2023, as part of its 2024 work programme, the European Commission (Commission) announced two major proposed changes in relation to the ESRS and the Corporate Sustainability Reporting Directive (CSRD), which are intended to streamline requirements and limit the administrative burden on companies. These are that:
- the deadline for the Commission to adopt sectoral ESRS and ESRS for reporting of sustainability information on third-country companies will be postponed by two years (ie, from 30 June 2024 to 30 June 2026); and
- approximately one million SMEs will no longer fall within the scope of entities required to disclose sustainability information under the EU Accounting Directive (as amended by CSRD), due to the amendment of the thresholds in Article 3 of the Accounting Directive.
The Commission's proposals require the approval of the European Parliament and Council of the European Union.
European Supervisory Markets Authority's report on disclosure of climate-related matters in financial statements
On 25 October 2023, the European Supervisory Markets Authority published a report on disclosure of climate-related matters in financial statements. The report aims to assist issuers in providing more robust disclosures and create more consistency in how climate-related matters are accounted for in financial statements drawn up in accordance with the International Financial Reporting Standards.
Council of European Union adopts regulation creating European green bond standard
On 23 October 2023, the Council of European Union adopted a regulation creating a European green bond standard. The new standard, which seeks to achieve consistency and comparability in the sustainable bond market, introduces uniform requirements for issuers of bonds seeking to use the designation "European green bond" or "EuGB". The proceeds of such bonds must be fully allocated to economic activities that are aligned with the EU Taxonomy.
In addition, the regulation establishes a registration system and supervisory framework for external reviewers of European green bonds. It also includes voluntary disclosure requirements for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU, with a view to mitigating the risk of greenwashing. The regulation will soon be signed and published in the EU's Official Journal, and will enter into force 20 days later. It will apply 12 months after entry into force.
Publication of European Commission Notices – EU Taxonomy FAQs on technical screening criteria and sustainability disclosures
On 20 October 2023, two Commission Notices containing responses to FAQs relating to delegated legislation under the Taxonomy Regulation were published in the EU's Official Journal:
- The Commission Notice on the interpretation and implementation of certain legal provisions of the Taxonomy Climate Delegated Act establishing technical screening criteria for economic activities that contribute substantially to climate change mitigation or adaptation and do no significant harm to other environmental objectives addresses:
- cross-cutting questions applicable to all activities covered in the Taxonomy Climate Delegated Act;
- sector-specific questions on TSC; and
- questions on recurring DNSH criteria.
- The Commission Notice on the interpretation and implementation of certain legal provisions of the Disclosures Delegated Act under Article 8 of the Taxonomy Regulation on the reporting of Taxonomy-eligible and Taxonomy-aligned economic activities and assets addresses:
- general questions, including on the envisaged timeline for the application of Taxonomy-related disclosures and the envisaged approach for Taxonomy-related reporting in relation to the environmental objectives;
- questions on turnover key performance indicators (KPI);
- questions on CapEx KPI; and
- questions on OpEx KPI.
The above Notices complement the first set of FAQs issued in October 2022 and are intended to assist reporting entities in the implementation of the relevant legal provisions. All FAQs are published in the FAQ section of the EU Taxonomy Navigator.
Launch of stakeholder request mechanism for EU Taxonomy activities
On 17 October 2023, the Commission and the Platform on Sustainable Finance (PSF) announced the establishment of a stakeholder request mechanism to capture and address suggestions from stakeholders regarding EU Taxonomy activities, whether in relation to new activities that could be added or potential amendments to the technical screening criteria (TSC) of existing activities. The mechanism allows stakeholders to submit their suggestions through a questionnaire, a method that seeks to promote evidence-based suggestions (scientific and/or technical) to substantiate the relevance of the activity, its compliance with the requirements of the EU Taxonomy Regulation and, if applicable, the suggested substantial contribution and do no significant harm (DNSH) criteria.
The mechanism will continue to run on an ongoing basis, so stakeholders can submit their suggestions at any given time. The PSF will process the first set of responses on 15 December 2023, and subsequent responses thereafter on dates to be confirmed.
Read more - Stakeholder request mechanism
European Banking Authority's report on the role of environmental and social risks in the prudential framework
On 12 October 2023, the European Banking Authority (EBA) published a report on the role of environmental and social risks in the prudential framework of credit institutions and investment firms. The report recommends risk-based enhancements to the risk categories of the Pillar 1 framework; it also develops considerations on the potential use of macroprudential tools. The report explains why the EBA does not support the introduction of a green supporting factor or a brown penalising factors at this stage. The use of such adjustment factors presents challenges in terms of design, calibration, and complex interaction with the existing Pillar 1 framework.
Against this background, the EBA puts forward recommendations for short-term actions to be taken over the next three years as part of the implementation of the revised Capital Requirements Regulation and Capital Requirements Directive.
In particular, the EBA is proposing to:
- include environmental risks as part of stress testing programmes under both the internal ratings-based and the internal model approaches under the Fundamental Review of the Trading Book;
- encourage inclusion of environmental and social factors as part of external credit assessments by credit rating agencies;
- encourage the inclusion of environmental and social factors as part of due diligence requirements and valuation of immovable property collateral;
- require institutions to identify whether environmental and social factors constitute triggers of operational risk losses; and
- progressively develop environment-related concentration risk metrics as part of supervisory reporting.
Taking a medium-to-longer term perspective, the report also presents possible revisions of the Pillar 1 framework, reflecting the growing importance of environmental and social risks. These include:
- the possible use of scenario analysis to enhance the forward-looking elements of the prudential framework;
- the role that transition-plans could play in the future as part of the development of further risk-based enhancements to the Pillar 1 framework;
- reassessing the appropriateness of revising the internal ratings-based supervisory formula and the corresponding standardised approach for credit risk to better reflect environmental risk elements; and
- the introduction of environment-related concentration risk metrics under the Pillar 1 framework.
MEPs table motion to water down ESRS
On 11 October 2023, 44 Members of the European Parliament (MEPs) tabled a resolution to challenge the ESRS. Referencing the high administrative and financial burden on companies due to the complexity of sustainability reporting standards, the resolution sought a new simplified set of sustainability standards to replace the current ESRS. Another motion was tabled shortly thereafter by MEPs in the Identify and Democracy Group. The European Parliament rejected both motions on 18 October 2023.
The ESRS reached the end of their scrutiny period on 21 October 2023 and are on track to being published in the EU's Official Journal. The ESRS will start to apply from 1 January 2024 for financial years beginning on or after 1 January 2024.
International highlights
Hong Kong delays enhanced climate-related disclosures for listed companies pending ISSB’s adoption guide
The Hong Kong Stock Exchange has delayed its proposed amendments to the Listing Rules to enhance climate-related disclosures which were originally targeted for implementation on 1 January 2024. The rule changes are now expected to come into effect on 1 January 2025, which will give more time to the market to prepare for the additional compliance obligations.
Australian Accounting Standards Board's draft climate reporting standards and how they compare to the ISSB
On 23 October 2023, the Australian Accounting Standards Board released its Exposure Draft of the Australian Sustainability Reporting Standards (ASRS) that are intended to apply to reporting entities under the upcoming climate-related financial disclosure regime. It is proposed that the ASRS will establish the goalposts for climate reporting in Australia, as it adopts the ISSB's global standards to suit the domestic landscape.
The Exposure Draft proposes three standards which remain closely aligned with the ISSB’s IFRS S1 and IFRS S2, and build on the Australian Treasury’s second consultation paper released in June 2023. However, there are some notable differences, including in relation to industry-based metrics, Scope 2 and 3 emissions reporting, not-for-profits and a company’s assessment of climate resilience. Consultation on the Exposure Draft closes on 1 March 2024.
Network for Greening the Financial System's long-term climate macro-financial scenarios for climate risks assessment
The Network for Greening the Financial System (NGFS) has published its latest long-term climate macro-financial scenarios for forward-looking climate risks assessments. The scenarios explore the transition and physical impacts of climate change, over a long time horizon and under varying assumptions. The NGFS scenarios have been updated to account for the latest GDP and population pathways and the most recent country-level climate commitments as at March 2023.
The main results of the NGFS scenarios comprise:
- reaching global net zero CO2 emissions by 2050 will require ambitious transition efforts across all sectors of the economy;
- limiting the temperature increase to 1.5°C above pre-industrial levels in an orderly fashion is within reach; and
- physical risks lead to strong negative impacts on GDP.
The NGFS also published three accompanying documents, aimed at providing guidance on the use of these scenarios by central banks and supervisors: a revamped technical documentation; a data user guide; and a technical note on compound risks.
An update of the NGFS (Phase IV) scenarios will be published in the course of 2024. The NGFS welcomes feedback from users on the scenarios in order to continuously improve them.
We're at COP28
We're pleased to announce our sponsorship of the Sustainable Innovation Forum (SIF) at COP28.
The firm will be a strategic partner of the SIF, using its expertise in enabling energy transition technologies within regulatory frameworks to foster collaboration as governments, businesses and investors seek ways to move from ambition to tangible action.
Get in touch to connect with us at COP28.
Not to be missed
- We hosted a knowledge session on decarbonisation in shipping on behalf of Legal Voices for the Future (LVF) on 9 November 2023. Look out for future knowledge sessions from LVF here.
- Heike Schmitz will be moderating a panel on "impact in the investment process" at an ESG conference of the German Alternative Investments Association on 20 November 2023. Register here.
In case you missed it
- Toolkit: Why think about biodiversity in the corporate context?
- The biodiversity questionnaire – Are you ready?
- ESG newsletter UK: October 2023
- Keeping up with ESG in Australia: October 2023
- ESG Tracker SADC Region: October 2023
Related HSF notes
Key contacts*
*With thanks to Hedley Horler, Hareni Aya, Chloe Hooper and Yasmin Brooks 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.