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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 February edition in which we cover the recent initiatives of UK financial regulators, developments in the implementation of the European Sustainability Reporting Standards, the continued proliferation of sustainability reporting standards, and more.

Our recent ESG thought leadership round-up

Overview of latest ESG developments

UK 

Corporate governance
Sustainable finance
Environment

EU 

Human rights and due diligence
Sustainability reporting
Greenwashing
Climate

International 

Sustainability reporting
Climate litigation

UK

Corporate governance

Financial Reporting Council publishes revised Governance Code

The Financial Reporting Council (FRC) has published a revised version of the UK Corporate Governance Code and an updated Corporate Governance Code Guidance. The key changes that have been introduced relate to section one (board leadership and company purpose), section two (composition, succession and evaluation), section four (audit, risk and internal controls) and section five (remuneration). For the most part, the changes apply to financial years beginning on or after 1 January 2025, though companies will have an extra year to prepare for the changes being introduced in relation to reporting on internal controls.

Significantly scaled back from proposals contained in the FRC's May 2023 consultation, the updated version of the Governance Code does not include changes relating to the remit of audit committees on sustainability matters, director time commitment, engagement with shareholders by committee chairs or to provisions in relation to diversity and inclusion.

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Chartered Governance Institute publishes sample terms of reference for board ESG/sustainability committees

The Chartered Governance Institute (CGI) has published sample terms of reference for board ESG/sustainability committees. Companies are not required to have an ESG committee at board level under the UK Corporate Governance Code (nor will it be a requirement to have one under the 2024 Governance Code, which will apply to financial years beginning on or after 1 January 2025). However, the CGI has observed that a number of listed companies have formed ESG committees, with over 35% of the UK's 150 largest listed companies having a board committee specifically for ESG-related matters as of April 2023. In view of this, the sample terms of reference are designed to help companies set out the remit, role and responsibilities of a board-level ESG committee and can be adapted to suit the needs of an individual company. When setting the terms of reference, companies will need to ensure that there is no overlap with, nor gap between, matters falling within the terms of reference for another board committee or which remain reserved to the board as a whole.

Sustainable finance

FCA establishes working group to build capability in sustainable finance across financial advice sector

The Financial Conduct Authority (FCA) has announced that it has established an industry-led working group for financial advisers, focused on building capability in sustainable finance across the financial advice sector. This follows the FCA's publication of a package of measures in November 2023, intended to improve the trust and transparency of sustainable investment products and to support the UK's position as a world-leading, competitive centre for asset management and sustainable investment (see our blogs on the FCA's sustainability disclosure requirements and investment labels and anti-greenwashing rule).

Membership of the group will comprise both small and larger industry participants, as well as stakeholders outside the group to ensure a balanced representation of views, including those of consumers. The Personal Investment Management & Financial Advice Association will provide the secretariat. The FCA will sit as an active observer of the group. It has asked that the group be ready to report on how the advice sector can be supported in delivering good practice in the second half of 2024.

FCA's webpage for sustainability disclosure and labelling regime goes live

The FCA has published a new webpage, which sets out how firms should consider the sustainability disclosure and labelling regime and, where relevant, take steps ahead of the rules coming into effect. In particular, the page highlights that, from 31 May 2024, firms need to ensure their sustainability references are fair, clear and not misleading and are proportionate to the sustainability profile of the product and service. However, firms subject to the naming and marketing rules for asset managers are not required to meet those additional requirements until 2 December 2024.

Furthermore, from 31 July 2024, firms can begin to use a label. There is no deadline for using labels, but firms must ensure that they meet the naming and marketing requirements for products using sustainability-related terms without labels by 2 December 2024. The page also includes an infographic on the timeframes for the implementation of the rules and guidance.

Environment

New developments in England must deliver 10% biodiversity net gain

Developers in England are now legally required to deliver at least a 10% biodiversity net gain (BNG) when building new housing, industrial or commercial developments. Applying to planning applications for major developments only (for the time being), BNG is measured using a statutory metric tool that calculates how many biodiversity units a habitat contains before development and how many units are needed to provide the minimum 10% benefit. This can be achieved through on-site units, off-site units or, as a last resort to prevent delays in the planning system, through statutory biodiversity credits. BNG requirements will apply for small sites (between one and nine dwellings) from 2 April 2024 and provisionally for nationally significant infrastructure projects in late 2025.

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Environment Agency launches Economic Crime Unit

The Environment Agency has launched a new Economic Crime Unit to tackle money laundering and other financial crimes within the waste management sector. The unit will be comprised of two teams: the asset denial team, which will focus on account freezing orders, cash seizures, pre-charge restraints and confiscations; and the money laundering investigations team, which will conduct dedicated money laundering investigations targeting environmental offences.

Environmental litigation – High Court finds group claims must proceed as "global claims" unless individual claimants' losses tied to specific oil spills

In Alame v Shell Plc [2023] EWHC 2961, the High Court has refused to strike out a group action brought against Shell Plc and its Nigerian subsidiary in connection with oil contamination in the Niger Delta. The court rejected the defendants’ argument that the claims should be struck out due to a failure to identify the particular oil spills alleged to have caused each claimant’s loss. However, unless the claimants can plead a more specific case, their claims will have to proceed as "global claims" rather than "events-based" claims as they intended.

The concept of a global claim originates from construction cases. It involves the claimant seeking a single sum as relief for loss or damage suffered due to a combination of breaches or events (as opposed to a specific breach or event) attributable to the defendant. While not always the case, global claims are often brought where a series of events occur giving rise to losses, but where it is difficult or even impossible to identify and establish a causal link between a specific loss and a specific event.

In a construction context, global claims are regarded as difficult to make out and generally to be avoided. Historically, a global claim would usually fail if the defendant demonstrated that it was not responsible for an event which contributed significantly to the loss. However, following Walter Lilly v Mackay [2012] EWHC 1773 (TCC), the existence of such event will not necessarily be fatal to the overall claim if its impact can be assessed and separated out.

The present case is of interest in establishing that the global claim concept extends to claims for environmental contamination based on a series of polluting events, where it may be difficult or impossible to identify which individual event has caused each individual loss. Unless a claimant can plead its case on causation with sufficient particularity, the case is likely to be able to proceed only as a global claim. That remains the case even where the claimants are only required to show that the relevant events made a material contribution to the loss (as the claimants allege here under the applicable Nigerian law on causation): they must still identify which individual events they say made that contribution.

The judge in the present case said she would hear the parties’ further submissions as to the case management implications of her ruling.

Read more

EU

Human rights and due diligence

Vote on Corporate Sustainability Due Diligence Directive faces delay 

A much-anticipated vote on the provisionally agreed Corporate Sustainability Due Diligence Directive (CS3D) was due to take place at a Committee of Permanent Representatives' (COREPER) meeting on 9 February 2024, but this has been pushed back. Two days prior, Germany indicated it would abstain from the vote, joining Italy and Finland. CS3D, which establishes obligations on large companies in relation to their actual and potential adverse impacts on the environment and human rights, whether arising from their own operations or those of their subsidiaries and business partners, has faced controversies such as in relation to its scope, application and establishment of civil liability. It is unclear when the vote is next set to take place.

For more on the CS3D, read our blog.

Council of the EU adopts negotiating position to ban products made with forced labour in the EU market

The Council of the EU has adopted its negotiating position on the regulation prohibiting products made with forced labour on the EU market. This follows the Commission's proposal for the regulation in September 2022, which would see an EU-wide ban on products of any type, including their components, from all sectors and industries, if they have been made using forced labour, including child labour. The Council's position envisages the establishment of a Union Network against Forced Labour Products to ensure coordination between the competent authorities and the Commission in the application of the regulation. It also envisages the creation of a forced labour single portal, which would provide accessible and relevant information and tools, including a single information submission point, a database and guidelines, and access to information on decisions taken. Negotiations with the European Parliament on the regulation are expected to commence soon.

Sustainability reporting

Two-year delay of sustainability reporting standards agreed for specific sectors and non-EU companies

The European Parliament and Council of the EU have reached a provisional deal to postpone, by two years, the adoption of sustainability reporting standards for certain sectors and certain non-EU companies. As part of its 2024 work programme, the Commission had tabled the postponement in October 2023, to streamline reporting requirements and allow companies more time to apply the first set of sector-agnostic European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD) (see our blog).

Adoption of sector-specific standards, standards for small and medium-sized enterprises (SMEs) and standards for third-country companies with a €150 million turnover in the EU had originally been scheduled for 30 June 2024, but the deal between the co-legislators delays adoption of the standards to 30 June 2026. This is not to say the Commission is prevented from publishing sector-specific standards before this date; the provisionally agreed text says, "The Commission shall endeavour to adopt eight of the sustainability reporting standards … as soon as each is ready". These standards will cover sectors such as oil and gas, mining, road transport, food and beverages and agriculture and fisheries.

The European Parliament and Council of the EU must formally adopt the agreement on the delay before it can be published in the Official Journal of the EU (Official Journal) and enter into force.

EFRAG consults on ESRS for listed and non-listed SMEs

EFRAG (formerly the European Financial Reporting Advisory Group) has opened a consultation on two exposure drafts of ESRS for SMEs, one for listed SMEs (LSMEs) and another for non-listed SMEs under the CSRD. The purpose of the former is to establish reporting requirements that are proportionate and relevant to the scale and complexity of the activities and to the capacities and characteristics of LSMEs. This is expected to allow LSMEs to better access finance and avoid discrimination by financial market participants, on the basis that it will ensure availability of standardised sustainability information. The exposure draft applies to SMEs that are public-interest entities, including those whose transferable securities (bonds, shares and other securities) are admitted to trading on a regulated market in the EU, small and non-complex institutions and captive insurers and reinsurers. It will be issued as a delegated act, effective on 1 January 2026 with an additional two-year opt out.

The exposure draft of ESRS for non-listed SMEs is intended to be voluntary, a measure to support SMEs have better access to sustainable finance. It proposes a simple reporting tool to assist non-listed micro-, small- and medium-sized enterprises in responding to requests for sustainability information they receive from business counterparts such as banks and investors. The tool will give non-listed SMEs an efficient and proportionate means to respond to such requests, and to facilitate their participation in the transition to a sustainable economy.

Consultation on both exposure drafts closes on 21 May 2024.

Greenwashing

European Parliament adopts law banning greenwashing and misleading product information

The European Parliament has adopted a new directive that seeks to help consumers make more informed purchasing choices and protect them from companies engaged in misleading market practices. This is according to a Parliament press release, which says the directive will prohibit misleading environmental claims such as "environmentally friendly", "natural", "biodegradable", "climate neutral" or "eco", unless such claims are substantiated. Sustainability labels will also be regulated, with only labels based on official certification schemes or established by published authorities allowed in the EU.

The directive must receive final approval from the Council of the EU before it is published in the Official Journal, after which member states will have 24 months to transpose it into national law.

European Parliament and Council of the EU provisionally agree regulation on ESG rating activities

The European Parliament and Council of the EU have reached a provisional agreement on a proposed regulation concerning ESG rating activities, according to a Parliament press release. The Council issued its own press release. The regulation is intended to improve the transparency and integrity of operations of ESG rating providers and prevent potential conflicts of interest, thereby increasing investor confidence in sustainable products.

ESG rating providers established in the EU will need to obtain prior authorisation from the European Securities and Markets Authority. Providers established outside the EU, but which seek to operate in the EU, will need to obtain an endorsement of their ESG ratings by an EU-authorised ESG rating provider. Another key feature of the agreement is that if financial market participants or financial advisers disclose ESG ratings as part of their marketing communications, they must include information about the rating methodologies used on their website. As for the ratings themselves, the agreement foresees separate E, S and G ratings being given rather than a single ESG metric that aggregates E, S and G factors. This is with a view to allow investors to better target their investment into one of the three areas and have a clearer understanding of the rated entity's credentials.

The European Parliament and Council of the EU must now formally adopt the provisional agreement, after which the regulation will start to apply 18 months after its entry into force.

Climate

European Commission recommends ambitious 90% net GHG emissions reductions by 2040

Under the EU Climate Law framework, the Commission has recommended a GHG emissions reduction by 2040 compared to 1990 levels. The EU Climate Law, which entered into force in July 2021 and enshrines in legislation the EU's commitment to reach climate neutrality by 2050, requires the Commission to propose a climate target for 2040 within six months of the first Global Stocktake of the Paris Agreement, which took place in December 2023. The responsibility to formally table the 2040 climate target will fall on the next Commission, following European elections. The current Commission's recommendation is therefore intended to stimulate a broad political debate and dialogue with stakeholders and citizens.

Alongside its recommendation, the Commission has identified a number of enabling policy conditions that it considers necessary to achieve the 90% target. Chief among them is the full implementation of the existing legislation to reduce emissions by at least 55% by 2030. Others include ensuring the competitiveness of the European industry, a greater focus on a just transition that leaves no one behind, a level playing field with international partners, and a strategic dialogue on the post-2030 framework, including with industry and the agricultural sector.

European Parliament approves new rules to minimise emissions from fluorinated gases

In a deal reached with the Council of the EU, the European Parliament has endorsed a set of rules to further cut emissions from fluorinated gases (F-gases), according to a press release. The new rules introduce strict requirements that prohibit placing on the EU market products containing F-gases. They also seek to promote the uptake of more climate-friendly solutions and establish greater certainty for manufacturers and investors. With specific phase-out dates, the deal anticipates reaching the target of zero hydrofluorocarbons by 2050, in line with the EU's 2050 climate neutrality goal.

By way of next steps, the European Parliament and Council of the EU must formally approve the agreement before it can come into force.

International

Sustainability reporting

Global Reporting Initiative publishes revised biodiversity standard

The Global Reporting Initiative (GRI) has published a revised biodiversity standard, GRI 101: Biodiversity 2024, which supersedes GRI 304: Biodiversity 2016. The updated standard seeks to enable organisations to better understand which decisions and business practices lead to biodiversity loss, where in their value chain impacts occur, how they can be managed, and to make disclosures accordingly.

The release of the revised standard follows a two-year development process, during which time there has been increasing focus on nature and biodiversity-related financial risks. This is due in part to the Kunming-Montreal Global Biodiversity Framework agreed in December 2022, following which there has been significant biodiversity-related developments, including the adoption of the ESRS (notably ESRS E4 on biodiversity and ecosystems) and the publication of the Taskforce on Nature-related Financial Disclosures' (TNFD) recommendations. GRI has said that it worked with organisations such as EFRAG and the TNFD to ensure alignment between existing reporting regimes and standards.

Australian government releases draft legislation for mandatory climate-related financial disclosures

The Australian Treasury released its anticipated policy position and exposure draft legislation for a mandatory climate-related financial disclosure regime, following two rounds of consultation in 2023. The exposure draft reveals that climate-related disclosures will be required to sit in a separate sustainability report, which will form the fourth report within the annual report.

In a step away from previous Treasury commentary, entities will be granted relief for a fixed three-year period from 1 July 2024 to 30 June 2027 for disclosures relating to Scope 3 GHG emissions and scenario analysis only. The exposure draft also indicates a relaxed timeline for assurance requirements, with a proposed phased approach requiring only limited assurance over statements relating to Scopes 1 and 2 GHG emissions until 30 June 2030.

Canadian Sustainability Standards Board to launch public consultation on first sustainability standards

The Canadian Sustainability Standards Board (CSSB) has announced that it will launch a public consultation on the country's first set of sustainability standards, the Canadian Sustainability Disclosure Standards (CSDS) 1 and 2, in March 2024. This is with a view to advance the adoption of sustainability disclosure standards in Canada. CSDS 1 and 2 are said to align with the International Sustainability Standard Board's sustainability standards, IFRS S1 and S2, but with Canadian-specific modifications, including a Canadian-specific effective date and transition relief proposals to support eventual implementation of the standards.

Climate litigation

Friends of the Earth Netherlands announces legal action against ING over fossil fuel financing

Environmental group, Friends of the Earth Netherlands (Milieudefensie), has announced it is bringing legal action against multinational bank and financial serves group, ING, for the alleged breach of its legal societal standard of care by contributing to dangerous climate change. In a notice of liability letter to the Chair of ING, Milieudefensie demands that ING halve its total emissions and to stop collaborating with polluting companies that put futures at risk. Specifically, the environmental group insists that ING:

  • sees to it that its climate policy is in accordance with the 1.5°C target of the Paris Agreement;
  • reduces its emissions by at least 48% CO2 and at least 43% CO2e in 2030 compared to 2019;
  • ensures that it is not linked to adverse climate impacts of large business clients; and
  • engages in conversation with Milieudefensie to give substance to the above measures.

ING has been given eight weeks to respond.

Milieudefensie won a case against Shell in 2021, resulting in the Hague District Court ordering the oil and gas company to reduce its GHG emissions by 45% by 2030 compared to 2019 levels, from its own activities and its entire global value chain, including emissions associated with end-use (ie, Scopes 1, 3 and 3). Shell has appealed the decision.

ExxonMobil files claim in United States to prevent vote on climate shareholder resolution

ExxonMobil (Exxon) has filed proceedings in the United States District Court for the Northern District of Texas to block a climate resolution proposed by activist investors, Arjuna Capital and Follow This, from being put to a vote at Exxon's 2024 annual shareholder meeting to be held in May 2024. The proposed resolution requires Exxon to set Scope 3 emissions targets and dramatically accelerate the pace of its emission-reduction plans.

Exxon alleges that activist investor groups have abused the process of proposing shareholder votes to the extent they are advancing votes "calculated to diminish the company’s existing business". Exxon argues that the resolution violates the Securities and Exchange Commission (SEC) rules for investor petitions, because it is substantially similar to a proposal filed within the past five years, referring to proposals made by Follow This at past Exxon shareholder meetings, which were rejected by 72% of shareholders in 2022, and 90% of shareholders in 2023.

Arjuna Capital and Follow This have since withdrawn their climate proposal and requested that the court dismiss Exxon's claim against them on the basis that there is no case to answer.

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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.

Silke Goldberg