Welcome to our monthly ESG Newsletter.
There's a lot happening in the environment, 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, EU and around the world.
Read on for our May edition in which we cover the UK government's implementation update on the development of the sustainability reporting standards, the European Securities and Market Authority's long-awaited guidelines on ESG or sustainability-related fund names, the Inter-American Court of Human Rights' landmark decision on the right to a healthy environment, and more.
Overview of latest ESG developments
UK
Sustainability reporting
Greenwashing
Climate and energy
Waste packaging
EU
Sustainability reporting
Greenwashing
- European Securities and Markets Authority publishes guidelines on fund names using ESG or sustainability-related terms
- European Commission and EU consumer authorities take action against 20 airlines for potentially misleading green claims
Human rights and due diligence
- EU ministers approve Corporate Sustainability Due Diligence Directive
- European Parliament adopts Forced Labour Products Regulation
Waste Packaging
Environmental crime
International
Sustainability reporting
Sustainable finance
- Hong Kong Monetary Authority publishes taxonomy for sustainable finance
- UK Sustainable Investment and Finance Association publishes final report in financing future series
Climate and energy transition
UK
Sustainability reporting
Government publishes update on development of UK sustainability reporting standards
The government has published an update on the implementation of the sustainability disclosure requirements in the UK. The update includes a revised timeline for the development of the UK sustainability reporting standards (UK SRS, also known as the sustainability disclosure standards). The framework for the development is described in more detail in a separate policy paper published by the government (see below) and will comprise of two stages: (i) the endorsement of the sustainability standards issued by the International Sustainability Standards Board (ISSB) which will result in the creation of the UK SRS, and (ii) the implementation of the UK SRS through legislation or regulation.
Under the revised timeline, the government is now aiming to make its endorsement decision and create the UK SRS in Q1 2025 (instead of July 2024). Subject to a positive endorsement decision, the Financial Conduct Authority (FCA) will consult on how the UK SRS should apply to UK-listed companies (and how to update the current Task Force on Climate-related Disclosures (TCFD)-aligned reporting requirements in the Listing Rules to the UK SRS) and the government will consult on disclosure requirements against the UK SRS for UK companies that do not fall within the FCA's regulatory perimeter. It expected that these consultations will be carried out in Q2 2025.
In addition to the SRS, the update confirms the government's commitments in relation to:
- Transition plan disclosures. The government says it will consult "shortly" on how the UK's largest companies can most effectively disclose their transition plans. It also notes the FCA's plans to consult on strengthening its expectations for transition plan disclosures with reference to the UK Transition Plan Taskforce's (TPT) disclosure framework.
- The sustainability disclosure requirements (SDR) and investment labels regime for UK-based funds. The government reiterates its plans to consult on whether to broaden the scope of the SDR to include funds under the Overseas Funds Regime, and confirms it will issue a consultation on this in Q3 2024.
- The UK green taxonomy. The government notes that it continues to work at pace to develop a usable and useful taxonomy and that it expects to consult on the taxonomy in "due course".
- Nature-related disclosures. The government notes that it continues to welcome the ongoing commitment of the ISSB to research and develop future standards, which could also include reporting on nature-related risks and opportunities.
As noted, the update was published alongside a framework and terms of reference for the development of UK SRS. This policy paper seeks to provide details of the SRS assessment, endorsement and implementation processes. It also explains how the UK government, regulators, standard setters and advisory committees will coordinate future decisions to implement the SRS.
Subsequently, the FCA published Primary Market Bulletin (PMB) 49, in which the regulator notes that it is updating the timelines previously set out in PMB 45 following the government's implementation update (for more on PMB 45, see our corporate blog post). The FCA will push back its consultation on amending its disclosure rules to reference the UK-endorsed ISSB standards until after the UK rendorsement process is completed in 2025 (originally planned for the first half of 2024). At the same time, the FCA will consult on strengthening its expectations for listed companies' transition plan disclosures with reference to the TPT disclosure framework. In the meantime, the FCA encourages companies to become familiar with the ISSB standards now and to take steps to voluntarily report against them, rather than waiting for the conclusion of the UK endorsement process. The regulator further notes that it may explore additional guidance to support issues subject to its Listing Rules by indicating how reporting based on the ISSB standards can remain consistent with its existing rules based on the TCFD.
Greenwashing
Advertising Standards Agency's annual report identifies climate and environment as priority areas
The Advertising Standards Agency (ASA) has published its annual report, in which it notes that it is prioritising the issues and sectors identified by the UK Climate Change Committee as being key to the delivery of the UK's legal target to be net zero by 2050. This means tackling misleading claims in the energy and transport sectors, including sustainability claims made by airlines and misleading omissions by oil and gas companies. The ASA emphasises the importance of collaboration with regulators such as the Competition and Markets Authority (on shared priorities such as claims for greener homes) and the FCA (on green finance), and government departments such as the Department for Environment, Food and Rural Affairs (on food labelling) and the Department of Energy Security and Net Zero (on the complex issues that underpin carbon neutrality and net zero claims).
Climate and energy transition
Government's climate change plan found to be unlawful for second time
In Friends of the Earth & Ors v Secretary of State for Energy Security and Net Zero [2024] EWHC 995 (Admin), the High Court has found the government's Carbon Budget Delivery Plan to be unlawful. The plan formed part of the statutory process set out in the Climate Change Act 2008 to achieve net zero by 2050. It follows a similar finding in 2022 in relation to the government's Net Zero Strategy. The government is now expected to go back to the drawing board for a third time to produce a report that meets its statutory obligations in relation to climate change.
Key points to note about the case:
- The legally binding statutory duties in relation to climate change require the government to be satisfied that its policies will meet certain targets.
- This requires a realistic assessment of whether certain policies will in fact do so, focusing on risk of delivery to work out whether a policy is likely to miss a target and, if so, by how much.
- Vague, unquantified and incomplete information was not sufficient here and rendered the government’s plan irrational and unlawful as it was based on reasoning not justified by the evidence.
Waste packaging
Government publishes draft regulations on extended producer responsibility
The government has published its draft Producer Responsibility Obligations (Packaging and Packaging Waste) Regulations 2024, following a consultation on the regulations in July 2023. The regulations, once in force, seek to place the responsibility on businesses to pay the full costs of dealing with the packaging they supply and use when it becomes waste. This is to incentivise recyclability and reuse of packaging, and to encourage more domestic reprocessing and overall system improvements and savings. The draft regulations were sent to the EU and the World Trade Organisation in fulfilment of the UK's notification obligations to both (under the Windsor Framework and labelling requirements, respectively). A Q&A accompanying the notification highlights the changes that have been made to the draft regulations since the consultation. These include:
- Revised definition of household packaging. The criteria has been widened to allow packaging to become exempt from being classified as household packaging and thus exempt from disposal cost fees. Packaging sold through third parties can be exempt if it meets "business use only" criteria and public institutions are now treated as the same as a business when considering exemptions.
- Revised reporting of non-glass drinks containers. To reduce the complexity of drinks container reporting, non-glass drinks containers must now be reported as the material which is predominant by weight.
- Clarification of the definition of brand owner. The definition has been clarified to ensure that members of corporate groups whose parent companies are incorporated outside the UK will be obligated for branded packaging.
The regulations are expected to be laid before parliament later in the year with the aim of coming into force by 1 January 2025.
See below for EU developments in relation to packaging and packaging waste.
EU
Sustainability reporting
Delay to publication of sustainability reporting standards under CSRD
The deadline for the EU Commission to publish certain reporting standards under the EU Corporate Sustainability Reporting Directive (CSRD) has been delayed from 30 June 2024 to 30 June 2026.
The CSRD, which came into force in January 2023, sets out sustainability-related disclosures for companies to include in their annual report. Even though the UK is not part of the EU, the CSRD will impact some UK incorporated companies. The European Commission is responsible for adopting delegated regulations setting out the detailed standards to be applied by companies when making the sustainability disclosures under the CSRD. The first of these, the general standards, were adopted in July 2023 (for more details on these standards, see our ESG blog post).
The Commission is now required to adopt the sector-specific standards, and the general reporting standards for third-country parent consolidated reporting, by 30 June 2026. Companies will fall within the scope of the third-country parent consolidated reporting obligation where they are EU subsidiaries, or branches, of non-EU entities which meet certain size thresholds, and where the parent entity’s group has significant turnover in the EU.
The obligation on EU subsidiaries/branches to report in line with the standards adopted by the Commission is unchanged and will still apply from financial years beginning on or after 1 January 2028.
For more details on the CSRD, see our corporate governance snapshot here.
Greenwashing
European Securities and Markets Authority publishes guidelines on fund names using ESG or sustainability-related terms
The European Securities and Markets Authority, the EU securities regulator, has published its long-awaited Guidelines on funds' names using ESG or sustainability-related terms. While the guidelines are not intended to create a "labelling" regime, they effectively set minimum standards for funds using ESG or sustainability-related terms, thereby filling a gap in the industry. EU fund managers and managers of funds marketed into the EU will need to comply with these minimum requirements when using such terms.
European Commission and EU consumer authorities take action against 20 airlines for potentially misleading green claims
In an attempt to ensure alignment of commercial practices across the air travel sector with EU consumer legislation, the European Commission and the EU consumer authorities have jointly sent letters to 20 airlines identifying potentially misleading green practices. These include:
- creating the false impression that paying an additional fee to finance climate projects with less environmental impact or to support the use of alternative aviation fuels can reduce or fully counterbalance the CO2 emissions;
- using the term "sustainable aviation fuels" without clearly justifying the environmental impact of such fuels;
- using terms such as "green", "sustainable" or "responsible" in an absolute way or making other implicit green claims;
- claiming that the airline is moving towards net-zero greenhouse gas emissions (GHG) or any future environmental performance, without clear and verifiable commitments, targets and an independent monitoring system;
- presenting consumers with a “calculator” for the CO2 emissions of a specific flight, without providing sufficient scientific proof of whether such calculation is reliable and without the information on the elements used for such calculation; and
- presenting consumers with a comparison of flights regarding their CO2 emissions, without providing sufficient and accurate information on the elements the comparison is based on.
The letter invites the airlines to bring their practices in line with EU consumer law within 30 days. The authorities will then monitor the implementation of the agreed changes, if any. In the absence of necessary steps being taken to solve the concerns raised, the authorities may decide to take further enforcement action, including sanctions.
Human rights and due diligence
EU ministers approve Corporate Sustainability Due Diligence Directive
EU ministers have approved the Corporate Sustainability Due Diligence Directive (CS3D), the last step in the legislative procedure before the directive's publication in the Official Journal of the EU and entry into force 20 days later. The directive faced several hurdles in recent months, resulting in a significantly watered-down version being agreed in March this year.
Broadly, CS3D requires businesses falling under its remit to conduct and report on risk-based due diligence processes. It aims to ensure that businesses integrate due diligence into everyday actions, and identify, assess and prioritise remedial action for potential and actual adverse impacts. It places the onus on companies to remediate actual adverse impacts, carry out meaningful engagement with stakeholders and establish and maintain a notification mechanism and complaints procedure. Consequences for failure to comply include fines of up to 5% of net worldwide turnover, public naming and shaming and potential claims for damages from impacted individuals. The text agreed in March this year narrowed the scope of the directive to apply to fewer business and delayed its application.
For more on the history of CS3D and the final agreed text, see our blog post.
European Parliament adopts Forced Labour Products Regulation
The European Parliament has formally adopted the Forced Labour Products Regulation, which seeks to ban products made using forced labour from being sold in, or exported from, the EU market. The ban will apply to any product where forced or child labour is used, whether in whole or in part, at any stage of the product's supply chain. This includes the extraction, harvest, production, manufacture, working or processing of any part of the product, but it does not appear to cover logistical services, such as transport and distribution.
The regulation will impact any product (perishable or non-perishable) that is produced or distributed in, or exported from, the EU by businesses (including small and medium-sized enterprises) in all sectors. As such, like the CSRD and the prospective Corporate Sustainability Due Diligence Directive, the regulation will have extra-territorial effect, impacting a broad range of global businesses operating in EU markets.
If businesses are found to be in breach of the ban, products that have not yet reached end-users will be prohibited from being placed on or exported from the market. Where only part of the product is affected, that part may be withdrawn.
A key aspect of the regulation is that any withdrawn parts will not be permitted to be re-exported to third countries. Rather, such products must either be donated, recycled or (as a last resort) destroyed – all at the expense of the relevant business (although it is understood that the regulation contains a new carve-out for specific critical products, which may instead be held in storage until the forced or child labour has been removed from the supply chain).
Competent authorities may also impose penalties on offending businesses. Member states will have discretion in setting and regulating these national penalties, subject to the need for them to be dissuasive, effective, and proportionate.
By way of next steps, the European Parliament must again approve the final text once it receives linguistic finalisation (though this is unlikely to take place until after the European elections). It will then be passed onto the European Council for adoption, which the Council is expected to do without amendment. The regulation will then be published in the Official Journal of the EU and enter into force on the day following its publication. Once in force, member states have 36 months to comply.
Waste packaging
European Parliament adopts Packaging and Packaging Waste Regulation
The European Parliament has adopted the Packaging and Packaging Waste Regulation (PPWR). The regulation stipulates provisions for packaging and packaging waste in EU member states and is intended to create a standardised legal framework.
Packaging and packaging waste material is already regulated in the EU through the Packaging and Packaging Waste Directive. This existing directive requires producers to participate in a compliance process which is implemented by national legislation of member states. Under the existing framework, producers are those entities that produce packaging materials and import packaged goods or sell packaged goods to the customer. All types of packaging materials are regulated (eg, materials used for containing, protecting, handling, delivering or presenting goods).
Changing from an EU directive to an EU regulation means the PPWR will be directly effective throughout all member states rather than being implemented through national legislation. There will therefore be greater harmonisation of measures among EU member states. The same annual compliance regime will apply for existing member state producers but, on top of this, the PPWR will introduce significant changes in the legislative framework and define ambitious targets, boosting "closed loop" recycling and reducing the use of primary natural resources.
The PPWR will introduce a national registration obligation for producers before placing packaging on the market of each member state. Further, it is expected that the Commission will publish implementing acts setting out the registration requirements, again to improve consistency between member states. The PPWR will also introduce various constraints and obligations relating to packaging design, material use and recyclability. Strict targets for the reduction of packaging waste will be introduced rising to at least 15% by 2040 compared to 2018 figures.
By way of next steps, the Council is expected to formally adopt the text (though this is unlikely to happen until after the European elections) after which the regulation can be published in the Official Journal of the EU and enter into force.
We have developed a detailed briefing on the PPWR. To receive a copy, please reach out to one of your main contacts at the firm.
Environmental crime
Environmental crime directive published in EU's Official Journal
The new Environmental Crime Directive has been published in the Official Journal of the EU. It entered into force on 20 May 2024.
Proposed by the European Commission in December 2021, the new directive seeks to improve the effectiveness of criminal investigations and enforcements and support European Green Deal objectives by addressing the most serious environmental offences. It replaces 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 rules broaden and clarify the types of conduct prohibited due to their environmental harms. There are now 20 environmental offences (up from nine under the previous directive), including 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 members states.
Member states now have two years to transpose the rules into national laws.
International
Sustainability reporting
International Financial Reporting Standards Foundation and EFRAG publish interoperability guidance for sustainability standards
The International Financial Reporting Standards (IFRS) Foundation and EFRAG (formerly the European Financial Reporting Advisory Group) have jointly published guidance on the interoperability of the ISSB standards and the European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD).
This guidance will go some way towards addressing concerns around misalignment, complexity and duplication of reporting obligations under the ISSB standards and the ESRS, though there will inevitably continue to be areas of divergence between them. Given ongoing progress in the adoption of the ISSB standards across the globe (several jurisdictions have announced that they will implement or use the ISSB standards whereas several others are currently consulting/have recently consulted on whether they will do so), companies that are likely to be subject to both sets of standards will welcome the guidance, which seeks to bring about efficiencies in collecting, governing and controlling decision-useful data.
It should, however, be noted that since the guidance does not deal with interoperability beyond IFRS S1 (general Requirements for Disclosure of Sustainability-related Financial Information) and IFRS S2 (climate-related Disclosures) on the one hand, and ESRS 1 (general requirements), ESRS 2 (general disclosures) and ESRS E1 (climate change) on the other, it is limited in scope. It is conceivable that further guidance will be published if/when the ISSB issues standards on additional sustainability topics.
Separately, the ISSB has also published the IFRS Sustainability Disclosure Taxonomy, seeking to follow through on its promise to enable investors and other capital providers to analyse sustainability-related financial disclosures efficiently. Use of the ISSB taxonomy by companies is said to enable investors to search, extract and compare sustainability-related financial disclosures as ISSB establishes its global baseline of standards. The taxonomy reflects IFRS S1, IFRS S2 and their accompanying guidance.
Sustainable finance
Hong Kong Monetary Authority publishes taxonomy for sustainable finance
The Hong Kong Monetary Authority (HKMA), Hong Kong's central banking institution, has published a taxonomy for sustainable finance. The taxonomy is said to provide the financial sector with consistent and internationally recognised definitions of "green" and "environmentally sustainable" economic activities, so as to enable informed decision-making on green and sustainable finance and to facilitate capital flows towards sustainable investments. As it stands, the taxonomy encompasses 12 economic activities under four sectors, these being power generation, transportation, construction, and water and waste management. Described as a "living document", the HKMA notes that it will seek to expand the coverage of the taxonomy to include more sectors and activities, including transition activities.
UK Sustainable Investment and Finance Association publishes final report in financing future series
The UK Sustainable Investment and Finance Association (UKSIF) has published its final report in its Financing the Future series. The report suggests three key areas to strengthen the UK's sustainable finance sector. First, it calls on government and policymakers to deliver a clear and world-leading sustainability disclosure regime, by adopting the ISSB standards, introducing mandatory corporate transition plans and crucially, a green taxonomy in the UK. Second, it states that clarification of fiduciary duties from policymakers is needed to tackle the risk-averse culture of investing in the UK. According to UKSIF, the Pensions Regulator "must issue clarification" to make it clearer to pension schemes that factoring in financially material ESG issues and managing associated risks and impacts is consistent with fiduciary duties. It also calls for investment consultants to formally be brought under the FCA's regulatory scope. UKSIF's third recommendation is for the government to embed biodiversity into the regulatory framework by incorporating the Taskforce on Nature-related Financial Disclosures framework, specifically through the support of the creation of a new ISSB standard for biodiversity and nature, IFRS S3.
Climate and energy transition
Inter-American Court of Human Rights enforces human right to healthy environment
The Inter-American Court of Human Rights (IACHR) has issued a landmark decision regarding the right to a healthy environment. In the judgment, the Court found that Peru had breached its obligation to protect the right to a healthy environment (among other human rights) of the community of La Oroya, when failing to protect the community from pollution emitted from a metallurgical smelter.
Key points to note about the case:
- The court found that the State of Peru had a duty to prevent human rights violations by private companies.
- The decision builds on a body of case law and the IACHR advisory opinion OC-23/17, which together have held that a healthy environment is a fundamental right under the Inter-American Convention of Human Rights.
- The majority concurrent opinion of the court went so far as to consider that the obligation to protect the environment is a peremptory norm of international law, ie, a norm accepted and recognised by the international community of states as a whole from which an individual state cannot derogate.
- Notably, the IACHR ordered Peru to adopt and implement measures to ensure that the plant complies with the UN Guiding Principles on Business and Human Rights and implement policies for human rights due diligence and human rights’ protection and remediation measures. The decision emphasises the state obligation to prevent human rights’ violations by private companies, through the adoption of legislative measures, but also makes clear that companies should have regard to the interactions and interdependencies between environmental protection, biodiversity, human rights and sustainable development (and, in particular, to consider environment-related human rights impacts) as part of their human rights due diligence.
Our latest ESG thought leadership round-up
UK
- Tackling greenwashing – a priority for the FCA | FSR and Corporate Crime notes
- UK TPT launches final transition plan sectoral guidance | Climate Change notes
- Government’s climate change plan found to be unlawful for the second time | Climate Change notes
- Retrofitting to Net Zero – an update on the changes and the challenges in the sector | Real estate development notes
- Supreme Court rules UK strike law is incompatible with human rights | Employment notes
- EAT ruling on holiday pay, allowances and series of deductions claims | Employment notes
- EAT clarifies requirement for knowledge of whistleblowing disclosure | Employment notes
- Podcast: Employment Espresso Pods: The Activism Boom in and outside of the office | Employment notes
EU
- The market has voted – looking at the results of the consultation on SFDR published by the European Commission
- What’s in a name? The new ESMA Guidelines for ESG or sustainability-related fund names | ESG Notes
- EU’s due diligence directive is in the home run | ESG Notes
International
- Asia: Whistle-Blower protection | Employment notes
- PRC: New data regulations eases cross border transfer of employee data | Employment notes
- Singapore: New tripartite guidelines on flexible working arrangements | Employment notes
- US: Transformational changes to US labor and employment law? | Employment notes
- Inter-American Court of Human Rights enforces the Human Right to a healthy environment | ESG Notes
- CEOs will be shocked how close they are to tipping points – Can nature-based solutions win market favour?
Don't miss
We're hosting a webinar on emerging themes in climate disclosure and diligence for securities offerings on 24 June 2024 from 11:00am - 12:00pm. The session will cover emerging climate disclosure regimes in the UK and abroad, including the ISSB, CSRD/ESRS, and the US Securities and Exchange Commission's disclosure rules and requirements. To register, please contact Matthew Connell.
In case you missed it last month
- European Court of Human Rights finds first violation of Convention rights based on climate change
- Keeping up with ESG in Australia (April 2024)
- Monthly ESG Newsletter: UK (April 2024)
Related HSF notes
Key contacts
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.