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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 March edition in which we cover the UK's withdrawal from the Energy Charter Treaty, new milestones reached with the EU's Corporate Sustainability Due Diligence Directive, and the adoption of the US Securities and Exchange Commission's long-awaited climate disclosure rule.   

Overview of latest ESG developments

UK 

Sustainable finance
Corporate governance
Climate and energy transition
Employment
Diversity, equity and inclusion

EU 

Human rights and due diligence
Greenwashing
Climate and energy transition
Nature and environmental crime

International 

Sustainability disclosures
Transition finance
Corporate governance
Diversity, equity and inclusion

UK

Sustainable finance

Government confirms regulation of ESG ratings providers

The government has confirmed, as part of the Spring Budget, that it will regulate providers of ESG ratings to users within the UK. This follows its consultation last year on the introduction of a new regulatory regime in response to growing concerns over the methodologies and objectives used by ESG ratings providers, particularly their lack of transparency, poor governance, and systems and controls (see our previous blog here). ESG ratings providers will fall within the regulatory perimeter of the Financial Conduct Authority. A full response to the consultation and details of the legislative timeline are expected to follow.

Government responds to Environmental Audit Committee's report on financial sector and UK's transition to net zero

The government has published its response to the House of Commons' Environmental Audit Select Committee's (EAC) report on the financial sector and the UK's net zero transition, which was published in November 2023. In the response, the government rejects the EAC's recommendation to introduce quarterly reporting on how net-zero targets are being met while new oil and gas licenses in the North Sea are being rolled out. The government also declines to engage with the EAC's recommendation to introduce mandatory transition plans for companies. The government does, however, go on to set out its current and forthcoming initiatives to achieve net zero, including:

  • commissioning the Transition Finance Market Review on how best to:
    • scale up transition-focused capital raising;
    • maximise UK-based financial services to develop, structure and export high-integrity transition finance services; and
    • position the UK's professional services as a global hub;
  • consulting on the UK's approach to transition plans, which will consider the role of the UK Transition Plan Taskforce's disclosure framework and help inform the UK's assessment and endorsement of the International Sustainability Standards Board (ISSB) standards;
  • consulting on:
    • the UK green taxonomy;
    • the role of specific interventions to enable the growth of high-integrity voluntary carbon markets; and
    • the UK carbon border adjustment mechanism; and
  • remaining committed to implement the Sustainability Disclosure Requirements, as set out in the 2023 Green Finance Strategy.

Corporate governance

Financial Reporting Council to carry out review of UK Stewardship Code 2020

The Financial Reporting Council (FRC) has announced that it will be carrying out a fundamental review of the UK Stewardship Code 2020 to ensure the Code's principles are still driving the right stewardship outcomes for investors while not unduly contributing to reporting burdens. Among other topics, the review will focus on the extent to which the Code:

  • supports long-term value creation through appropriate investor-issuer engagement that drives issuers' prospects and performance;
  • creates reporting burdens on issuers as well as Code signatories; and
  • has led to any unintended consequences, such as short-termism in targets and outlook for issuers.

The review will be undertaken in phases. The first phase will be a targeted outreach, focused on issuers, asset managers, asset owners and service providers. These discussions will inform the second phase. The second phase will then be a public consultation, which is planned to launch after the 2024 AGM voting season during the summer months.

The revised Code is expected to be published in early 2025.

Pensions and Lifetime Savings Association publishes Stewardship and Voting Guidelines for 2024

The Pensions and Lifetime Savings Association (PLSA) has published its annual Stewardship and Voting Guidelines for 2024, a framework for pension scheme trustees and investors more generally to ensure that companies are held to account on key issues in the AGM season.

The key issues covered in the guidelines include:

  • cybersecurity – the guidelines note that both the shift to remote working and the geopolitical situation have increased cybersecurity risks and say that companies should reflect this in their policies and procedures. There are voting recommendations for investors where companies make poor disclosures on cybersecurity risks in their annual report or where these risks are not adequately managed;
  • AI – a new section on AI says that companies should monitor their use of AI and adopt frameworks for its acceptable use. Investors should consider voting against the re-election of a director if there is evidence of "egregious conduct" attributable to them in relation to the development or deployment of AI;
  • ESG – new guidance has been included on social factors, which are an increasingly important aspect of ESG issues for investors. The guidelines state that, as there is no universally adopted framework on social factors, investors should only vote against a company on social issues where all other avenues for engagement have been exhausted. Biodiversity is also included in the guidelines as an area where companies should be taking action to monitor and measure their impact; and
  • dual class share structures – the PLSA has observed an increase in the use of dual class shares structures. The guidelines state that companies should remove these structures as soon as possible post-IPO and that investors should consider voting against the governance committee chair (or equivalent) where companies have these structures without a sunset clause of seven years or less post-IPO.

The guidelines have also been updated to reflect the 2024 UK Corporate Governance Code (see our blog post for further details on the changes to the Code).

Climate and energy transition

Government opens consultation on UK carbon border adjustment mechanism

The government has launched its consultation on the UK carbon border adjustment mechanism (UK CBAM), seeking feedback on proposals for the design and administration of the mechanism. This follows the government's announcement in January 2024 that it intends to introduce the UK CBAM in 2027, a tariff to address "carbon leakage" from the movement of production and associated emissions from one country to another due to different levels of decarbonisation effort through pricing and carbon regulation (see our January ESG newsletter). The consultation invites views on:

  • what the UK CBAM will apply to, including sector and product scope, as well as exemptions;
  • how the liability for the UK CBAM will be calculated, including principles for the calculation of embodied emissions and the price payable with any adjustments for overseas carbon pricing; and
  • how the UK CBAM will operate, including administration, payment and compliance.

The consultation closes on 13 June 2024.

UK to withdraw from Energy Charter Treaty

The Minister of State for Energy Security and Net Zero, Graham Stuart, has confirmed the UK will withdraw from the Energy Charter Treaty (ECT). The UK's announcement comes after months of talks between European countries to modernise the ECT resulted in a stalemate. The ECT, originally signed in 1994, is a multilateral framework designed to promote international investment in the energy sector and facilitate reliable cross-border energy flows among contracting parties. The treaty also contains investment protection provisions, which permit qualifying investors to bring claims for breach of such protections before international arbitration tribunals.

The UK's withdrawal will take effect 12 months after written notification of the withdrawal to the ECT Secretariat, after which there will no longer be protections for new investments. It is the government's position, however, that the UK remains an attractive destination for investments in the energy sector, with strong legal protections in place for those who invest. Nine EU-member states, including France, Spain, Germany and the Netherlands, have also withdrawn or are in the process of withdrawing from the treaty.

Read more

Chris Packham granted permission to bring judicial review claim against government's net-zero policy changes

The High Court has granted permission to TV nature presenter and environmental campaigner, Chris Packham, to pursue a judicial review claim in relation to the government's net-zero policy changes introduced in September 2023 (see our December ESG newsletter). The changes include delaying the sales ban on new petrol and diesel cars from 2030 to 2035, abandoning requirements on landlords and homeowners to meet energy efficiency targets, and scrapping plans to ban new oil and gas in the North Sea. The court has granted permission for the claimant to argue three grounds, namely that the government:

  • had an ongoing obligation under section 13 of the Climate Change Act 2008 (CCA 2008) to have proposals and policies to meet carbon budgets to achieve net-zero greenhouse gas emissions by 2050, and that it was not lawful for the government to remove key policies without having other policies in place to ensure they will be met;
  • failed to take into account considerations listed under section 10 of the CCA 2008, such as proposals and policies to meet carbon budgets to achieve net-zero emissions by 2050; and
  • failed to properly consult on the changes, in particular, by failing to take into account ongoing consultations relating to the policies that were changed.

The hearing is set to take place later in 2024.

Employment

Government consults on reintroduction of Employment Tribunal fees

The government has conducted a consultation on the introduction of modest fees in the Employment Tribunals (ET) and Employment Appeal Tribunal (EAT). The proposed fees – a £55 claim issue fee for the ET and a £55 appeal fee for the EAT – are said to pay for the running costs of the tribunals and are intended to be proportionate and affordable. Those who cannot afford to pay the fees will be supported by the fee remission scheme. Fees were previously a feature of the tribunals from July 2013 until a 2017 Supreme Court decision quashed the regime, citing its unaffordable and prohibitive nature, which disproportionately affected access to justice.

The consultation closed on 25 March 2024.

Equality and Human Rights Commission publishes guidance for employers on menopause in the workplace

The Equality and Human Rights Commission has published guidance for employers on menopause in the workplace. The resources contained in the guidance offers information on:

  • the menopause and perimenopause;
  • the impact of symptoms on women at work;
  • employers' legal obligations under the Equality Act 2010;
  • making workplace adjustments and preventing discrimination; and
  • having conversations about the menopause.

Diversity, equity and inclusion

Treasury Select Committee publishes report on barriers faced by women in financial services industry

The House of Commons' Treasury Select Committee (TSC) has published a report, Sexism in the City, setting out the findings of its inquiry into barriers faced by women in the financial services industry. This follows a 2017 inquiry into the same issues, and a 2018 TSC report which highlighted a range of barriers for women in financial services that contributed to gender inequity, including poor workplace cultures, unconscious bias and the impact of maternity leave and childcare. The latest inquiry revealed a general lack of progress since the earlier inquiry, with only incremental improvements in the proportion of women holding senior roles. Similarly, the recent inquiry revealed only a small reduction in the average gender pay gap in financial services, which remains the largest gender pay gap of any sector in the UK economy. The inquiry also found that sexual harassment and bullying remain prevalent in the industry.

The TSC report makes a number of recommendations to the government, including:

  • introducing legislation to ban the use of non-disclosure agreements in sexual harassment cases and putting in place stronger protections for whistleblowers in such cases;
  • introducing legislation to mandate the inclusion of salary band information on job advertisements and to ban prospective employers from asking for salary history as part of the job application process; and
  • mandating firms with a pay or bonus gap above a certain threshold to publish a narrative explaining the drivers of the gap(s) and publish an action plan for how they will reduce them.

The government has two months to respond.

EU

Supply chain due diligence

Revised text of Corporate Sustainability Due Diligence Directive receives approval of COREPER and European Parliament Legal Affairs Committee

A compromise text of the Corporate Sustainability Due Diligence Directive (CS3D) was approved by the Committee of the Permanent Representatives (COREPER) on 15 March 2024, marking a significant milestone for the directive which has experienced several setbacks since the start of the year with a number of member states declining to get behind previous iterations of the text. Days after the COREPER meeting, the European Parliament Legal Affairs Committee approved the revised text, signalling a path forward for a final vote in the plenary of Members of the European Parliament on 24 April 2024.

Widely reported as having been "watered down", the revised text significantly reduces the number of companies falling within the scope of the directive. It also extends the timeframe for compliance. Of note are the following revisions:

  • Thresholds – the directive will apply to EU companies with a minimum of 1,000 employees and a turnover of €450 million (the initial proposal was for the directive to apply to EU companies with a minimum of 500 employees and a turnover of €150 million). The same financial threshold applies to non-EU companies.
  • Staged approach for compliance:
    • companies with more than 5,000 employees and €1.5 billion turnover will have three years to comply with the directive;
    • companies with more than 3,000 employees and €900 million turnover will have four years to comply; and
    • companies with more than 1,000 employees and €450 million turnover will have five years to comply.

There are no longer lower thresholds for high-risk sectors.

Also notably, the concept of "chain of activity" has been narrowed. Whereas the Commission's original proposal required in-scope companies to address adverse environmental and human rights impacts across their value chains, the revised text now only applies to:

  • the activities of a company's upstream business partners related to the production of goods or the provision of services by the company, including the design, extraction, sourcing, manufacture, transport, storage and supply of raw materials, products or parts of the products and development of the product or service; and
  • the activities of a company's downstream business partners related to the distribution, transport and storage of the product, where the business partners carry out those activities for the company or on behalf of the company.

The provision of services by downstream business partners, including financial services providers, is excluded from the definition, though a provision has been added for the Commission to prepare a report, within two years of the entry into force of the directive, on the need for additional sustainability due diligence requirements tailored to the financial services industry.

Read more

European Parliament and Council of the EU reach provisional agreement on Forced Labour Products Regulation

The European Parliament and Council of the EU have reached a provisional agreement on new rules banning products made with forced labour from the EU market and their export from the EU. According to a European Parliament press release, national authorities or, if third countries are involved, the EU Commission, will investigate suspected use of forced labour in companies' supply chains. If the investigation concludes that forced labour has been used, the authorities can demand that relevant goods be withdrawn from the EU market and online marketplaces, and confiscated at the borders. The goods would then have to be donated, recycled or destroyed. Goods of strategic or critical importance for the Union may be withheld until the company eliminates forced labour from its supply chains. Firms that do not comply can be fined. However, if they eliminate forced labour from their supply chains, banned products can be allowed back on the market.

The provisional agreement sets out a risk-based approach for authorities to apply when assessing the likelihood of breach under the Regulation. To this end, the authorities should have regard to, among other things, the scale and severity of the suspected forced labour, including whether there may be state-imposed forced labour, the quantity and volume of products concerned, the proportion of the final products likely to be made from forced labour, and the proximity of the economic operators from the risk of forced labour in their supply chains and their ability to address them.

The European Parliament and Council of the EU must formally adopt the Regulation before it is published in the Official Journal. The new requirements will then apply three years after entry into force of the Regulation.

Read more

Greenwashing

European Parliament adopts first reading position on EU Green Claims Directive

The European Parliament has adopted its first reading position on the EU Green Claims Directive. The proposed directive seeks to protect consumers from greenwashing by requiring companies to submit evidence about their environmental marketing claims before advertising products with the use of terms such as "biodegradable", "less polluting", "water saving" or having "bio-based content". To this end, EU member states would have to assign verifiers to pre-approve the use of such claims. Parliament's aim is for use of these claims to be assessed within 30 days, but for simpler claims and products to benefit from quicker or easier verification. It has also decided that green claims about products containing hazardous substances should remain possible for now, but that the Commission should assess in the near future whether they should be banned entirely. Green claims based solely on carbon offsetting schemes will remain banned, though companies could mention offsetting and carbon removal schemes in their ads if they have already reduced their emissions as much as possible and use these schemes for residual emissions only.

The next step is for the Council of the EU to adopt its first reading position.

Climate and energy transition

European Parliament and Council of the EU reach provisional agreement on EU-wide certification scheme for carbon removals

The European Parliament and Council of the EU have reached a provisional agreement on a certification framework for the quantification, monitoring and verification of carbon removals, according to a European Commission press release. This marks a significant step towards the launch of a comprehensive carbon removal and soil emission reduction framework in EU legislation. The framework is aimed at increasing the use of carbon removals, while addressing greenwashing concerns and building trust, as well as encouraging the development of carbon removal technologies, and creating income opportunities for industries and land managers which deploy carbon removal solutions and engage in innovative carbon farming practices.

The agreed criteria will ensure that carbon removals:

  • are correctly quantified;
  • are stored for an agreed long-term period (a minimum of 35 years for carbon stored in products);
  • go beyond existing practices; and
  • contribute to broader sustainability goals, such as by providing positive impacts on biodiversity.

An EU registry will be established within four years to ensure a high level of transparency on certified carbon removals. Until then, the registries of existing certification schemes may be used.

The European Parliament and Council must now formally approve the agreement. Once this is done, the legislation will be published in the Official Journal of the EU and will enter into force 20 days later.

Nature and environmental crime

European Parliament adopts Nature Restoration Law

The European Parliament has adopted the Nature Restoration Law, which sets a target for the EU to restore at least 20% of the EU's land and sea areas by 2030 and all ecosystems in need of restoration by 2050. Originally proposed by the European Commission in June 2022, the regulation is a key component of the European Green Deal, contributing to the EU's climate mitigation and climate adaptation objectives under the EU Biodiversity Strategy.

The law must now be adopted by the Council of the EU before being published in the Official Journal. It will then enter into force 20 days after publication.

For more on the Nature Restoration Law, see our earlier blog.

European Parliament adopts Environmental Crime Directive

The European Parliament has adopted rules on environmental crimes and related sanctions aimed at strengthening ecosystem protection, according to a Parliament press release. Proposed by the Commission in December 2021, the directive is intended to improve the effectiveness of criminal investigations and enforcements and support European Green Deal objectives by addressing the most serious environmental offences. It will replace the existing Environmental Crime Directive, which has been criticised for failing to clamp down on growing rates of environmental crimes, resulting in lasting damage to habitats, species, people's health and the revenues of governments and businesses.

The new directive broadens and clarifies the type of conduct prohibited due to its environmental harms. Up from a list of nine to 20, new environmental offences include timber trafficking, illegal recycling of ships, and illegal trade and handling of chemicals or mercury. Also introduced is a "qualified offence" comparable to ecocide, intended to sanction intentional criminal offences that cause irreversible or long-lasting, widespread and substantial environmental damage. The directive establishes minimum rules on the definition of criminal offences and seeks to harmonise the level of penalties for natural and legal persons across all EU member states.

It is expected that the Council of the EU will adopt the directive without further amendments. The directive will then be published in the Official Journal and enter into force 20 days later. Member states have two years from entry into force to transpose the rules into their national systems.

In related news, Belgium has become the first country in Europe to criminalise ecocide by introducing a new penal code aimed at preventing and punishing the most severe cases of environmental degradation (such as extensive oil spills). The code applies to individuals in the highest positions of decision-making power and to corporations. The punishment for individuals includes up to 20 years in prison, while corporations face fines of up to €1.6 million. In addition, Belgium now recognises ecocide as a fifth "international crime" after war crimes, crimes of aggression, crimes against humanity and genocide.

International

Sustainability disclosures

US Securities and Exchange Commission adopts final climate disclosure rule

The US Securities and Exchange Commission (SEC) has adopted its final climate disclosure rule to enhance and standardise climate-related disclosures by public companies and in public offerings. The long-awaited rule reflects the SEC's efforts to respond to investors' demands for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant's operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rule. While the new rule does not require disclosure of Scope 3 emissions, it requires many publicly traded companies to disclose both their Scope 1 and Scope 2 emissions, as long as they are material. In addition to the disclosure of greenhouse gas emissions, the rule will require companies to reveal to investors their climate-related risks, including by providing information about the financial harm caused by severe weather events like flooding and wildfires. The rule may pose challenges on how it will interact with similar reporting regimes, such as California's Senate Bill 253 and the EU's Corporate Sustainability Reporting Directive.

As expected, announcement of the controversial rule yielded legal challenges from both sides of the political line, as well as industry and environmental groups. In response to a challenge from Liberty Energy and Nomad Proppant Services, the US Court of Appeals for the 5th Circuit has temporarily put the climate disclosure rule on hold. This is despite the SEC's position that the pause is unnecessary because disclosures will not be required until March 2026.

Proliferation of consultations on adoption of ISSB's sustainability standards

There has been a string of recent announcements regarding consultations on the proposed adoption of sustainability standards based on the ISSB standards. Malaysia's Advisory Committee on Sustainability Reporting (ACSR) has published its proposal for a national sustainability reporting framework, which would see the full adoption of ISSB's IFRS S1 (general requirements for disclosure of sustainability-related financial information) and IFRS S2 (climate-related disclosures) by financial year ending December 2027. ACSR's consultation closed on 21 March 2024.

The Singapore Stock Exchange (SGX) is currently consulting on how details of the ISSB standards should be incorporated into its sustainability reporting rules for climate-related disclosures. At the same time, it is seeking feedback on its proposal to make reporting mandatory on the primary components of sustainability reporting from the current "comply or explain" regime. SGX's consultation closes on 5 April 2024.

The Canadian Sustainability Standards Board (CSSB) is also now consulting on its proposed standards for companies to make disclosures on sustainability and climate-related information based on the ISSB standards, though with modifications introduced to align with Canadian-specific needs. CSSB's consultation closes on 10 June 2024.

To support national regulators and other relevant authorities as they design and plan their journey to the adoption or other use of the ISSB standards, the International Financial Reporting Standards Foundation has published a preview of its jurisdictional guide for the adoption or other use of the ISSB standards. The preview also aims to support transparency for capital markets, regulators and other stakeholders by setting out the features of jurisdictional approaches to adoption. A formal jurisdictional guide is expected to replace the preview before the end of June 2024.

For more on the ISSB standards, see our earlier blog.

Transition finance

International Capital Market Association publishes paper on transition finance in debt capital market

The International Capital Market Association (ICMA) has published a paper on transition finance in the debt capital market.

The paper reviews the latest guidance and recommendations on transition finance from both the market and the official sector. It also underlines the progress of international taxonomies to integrate transition, as well as the latest developments on sectoral pathways and industry roadmaps.

The paper concludes by proposing the voluntary adoption of transition plans by the market in anticipation of regulation, and makes available a model structure for integrated transition plans aligning with the Climate Transition Finance Handbook, International Financial Reporting Standards S2 Climate-related Disclosures, European Sustainability Reporting Standards E1, and the UK Transition Plan Taskforce recommendations.

United Nations Environment Programme Finance Initiative publishes updated guidelines for climate target-setting for banks

The United Nations Environment Programme Finance Initiative has published updated guidelines for climate target setting for banks.

The updated guidelines extend the scope of targets to include banks' capital markets activities. This extension reflects that, for some banks, capital markets arranging and underwriting services provided in the issuance of new debt and equity instruments are their largest source of attributable greenhouse gas emissions. The new guidelines also amend technical language to reflect the evolution of practices, methodologies, and data availability in the last three years, including around policy engagement and transition planning.

Corporate governance

UN Global Compact launches "transformational" governance toolkit for corporates

The UN Global Compact has launched its Transformational Governance Corporate Toolkit, which aims to help companies educate their employees and foster transformational governance throughout their organisations. This new resource seeks to promote greater accountability, integrity, and transparency, and is aligned with Sustainable Development Goal (SDG) 16—Peace, Justice, and Strong Institutions. The toolkit includes a self-assessment tool, three business briefs, and provides benefits such as risk mitigation, global alignment, and stakeholder trust. It was developed in collaboration with participating companies and partner organisations of the UN Global Compact Think Lab on Transformational Governance.

Diversity, equity and inclusion

International Association of Insurance Supervisors consults on diversity, equity and inclusion

The International Association of Insurance Supervisors (IAIS) has launched a consultation, in the form of a draft application paper, on supervising diversity, equity and inclusion (DEI). The draft application paper explains why DEI within an insurer is relevant to corporate governance (Insurance Core Principle (ICP) 7), risk management (ICP 8) and corporate culture. It guides supervisors on relevant matters to look at when examining the state of an insurer’s DEI strategies and possible warning signs that an insurer might need to enhance its DEI efforts. It then proposes potential actions that a supervisor can take, either industry-wide or insurer-specific, to address potential and realised DEI issues ranging from the use of soft powers to more formal interventions. Responses are requested by 14 June 2024.

Separately, the IAIS is also preparing an application paper focusing on DEI considerations in conduct of business (per ICP 19) to secure fair treatment of a diverse range of consumers, including those who may have specific needs, be under-served or be experiencing vulnerability. Consultation on that paper is anticipated for Q3 2024.

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UK Head of ESG, London

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Herbert Smith Freehills LLP has a Formal Law Alliance (FLA) with Singapore law firm Prolegis LLC, which provides clients with access to Singapore law advice from Prolegis. The FLA in the name of Herbert Smith Freehills Prolegis allows the two firms to deliver a complementary and seamless legal service.

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