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Happy new year and welcome back to our monthly ESG Newsletter.

As with 2023, 2024 is set to be another jam-packed year for ESG-related developments. To keep you in the know, we'll share our latest ESG thought leadership and identify must-know legal, regulatory and industry updates from the UK, EMEA and around the world.

Read on for our January edition in which we cover the UK government's plans to implement the UK carbon border adjustment mechanism, the entry into force of the first set of European Sustainability Reporting Standards and the EU institutions' provisional agreement on the Corporate Sustainability Due Diligence Directive. We also reflect on the outcomes of COP28.

Our recent ESG thought leadership round-up

Sustainability
COP28 and Climate
Real Estate and Planning
Employment

Overview of latest ESG developments

UK 

Litigation
Legislative, regulatory and industry

EU 

CSRD/ESRS
CS3D
Legislative, regulatory and industry
International 
COP28
Legislative, regulatory and industry

UK

High Court refuses ClientEarth permission to bring judicial review against Financial Conduct Authority for approving Ithaca Energy's prospectus

The High Court has refused ClientEarth's application for permission to bring a judicial review of the Financial Conduct Authority's (FCA) decision to approve the prospectus of Ithaca Energy, a UK oil and gas company. ClientEarth sought permission on three grounds:

  • ground one – the FCA erred in law by approving the company's prospectus in circumstances where the prospectus failed to disclose, or describe adequately, the company's assessment of the materiality of its climate-related financial risks, contrary to Article 16 of the UK Prospectus Regulation (UKPR);
  • ground two – the FCA erred in law by approving the prospectus in circumstances where the prospectus failed to adequately disclose or describe the specificity of the climate-related risks associated with the company's securities, contrary to Article 16 of the UKPR; and
  • ground three – the FCA's conclusion that the prospectus contained the necessary information which is material to an investor for making an informed assessment of the company's financial position and prospects, as required by Article 6 of the UKPR, was rationally unsustainable.

Permission was refused on all grounds. In respect of grounds one and two, the court held that as an expert regulator, the FCA was required to make an exercise of judgment as to whether the legal requirements of the UKPR were met, that Ithaca Energy's prospectus plainly did address risks to its business and securities arising out of climate change factors, associated regulatory measures and changes in consumer use, and the FCA considered that the risk factors were adequately described.

In respect of ground three, the court held that it is unarguable and has no realistic prospect of success. The Paris Agreement was identified as a material risk for the business in the prospectus, and while ClientEarth and Ithaca Energy presented competing arguments as to its compatibility with the international climate agreement, the FCA was satisfied that the prospectus complied with Article 6 of the UKPR. According to the court, the claimant did not come close to demonstrating that the FCA acted irrationally, which is a high hurdle to overcome.

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Government confirms intention to implement UK carbon border adjustment mechanism by 2027

The UK government has confirmed its intention to implement a carbon border adjustment mechanism (UK CBAM) by 2027, which will impose a carbon tariff on emissions-intensive industrial goods imported to the UK by the aluminium, cement, ceramics, fertiliser, glass, hydrogen, iron and steel sectors. The UK CBAM will take into account the emissions intensity of imported goods and the carbon price differential between what was applied in the country of origin (if any) and what would have been applied if the goods were produced in the UK. In doing so, the mechanism seeks to address "carbon leakage" – the movement of production and associated emissions from one country to another due to asymmetries in carbon policy and pricing – an area the government consulted on between March and June 2023. The government's announcement follows the adoption of the EU CBAM in August 2023 (see our blog here). There will be a further government consultation on the design and delivery of the UK CBAM in 2024.

Competition and Markets Authority consults on compliance advice for green heating and insulation products

The Competition and Markets Authority (CMA) has published a consultation on its draft consumer law compliance advice for businesses that are marketing green heating and insulation products to consumers. The draft compliance advice is based on the issues identified by the CMA in its May 2023 report on consumer protection in the green heating and insulation sector, which focus on upfront pricing information and claims about product benefits. Although the compliance advice is focused on the green heating and insulation sector, many of the compliance principles will also be relevant to green claims made by businesses in other sectors. Once adopted, the draft compliance advice will provide helpful guidance on the approach that should be taken by businesses that make green claims for their products or services and will complement the CMA's Green Claims Code.

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FCA publishes Primary Market Bulletin 46

The FCA has published Primary Market Bulletin 46 (PMB 46), which contains guidance for market participants on two areas:

  • shareholder co-operation in the context of ESG stewardship and market conduct issues; and
  • sponsor procedures in relation to listed companies' disclosure requirements in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

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EU

First set of European Sustainability Reporting Standards enters into force

Commission Delegated Regulation (EU) 2023/2772, which incorporates the first set of European Sustainability Reporting Standards (ESRS) under the Corporate Sustainability Reporting Directive (CSRD), was published in the Official Journal of the EU on 22 December 2023 and entered into force on the third day following publication.

Applying to financial years beginning on of after 1 January 2024, the Delegated Regulation requires companies in scope of the CSRD to make disclosures in line with the ESRS.

Annex I to the Delegated Regulation contains the following sector-agnostic standards:

  • cross-cutting standards, which establish general requirements (ESRS 1) and general disclosure obligations (ESRS 2):
    • ESRS 1 gives an overview of the ESRS, defines drafting conventions and fundamental concepts (such as double materiality) and outlines the general requirements for preparing and presenting sustainability-related information;
    • ESRS 2 sets out the information that companies must disclose at a general level across all material sustainability matters, including on governance, strategy, impact, risk and opportunity management, and metrics and targets; and
  • topical standards, which set out the specific disclosures companies are expected to make in respect of environmental (ESRS E1-E5), social (ESRS S1-S4) and governance (ESRS G1) matters.

Annex II contains a list of acronyms and defined terms used in the ESRS.

The architecture of the ESRS remains largely unchanged from the draft delegated regulation published by the European Commission (Commission) in June 2023, which the Commission later adopted on 31 July 2023 (for more background, see our earlier notes here and here).

For more on companies in scope of the CSRD, see our Corporate Governance snapshot. Note that the size criteria (balance sheet and net turnover) for micro, small, medium-sized and large companies was adjusted by 25% (to account for inflation) by Commission Delegated Directive (EU) 2023/2775, which was published in the Official Journal on 21 December 2023 and entered into force on the third day following publication.

By way of next steps, the CSRD requires the Commission to adopt a second set of ESRS by June 2024. These will cover sector-specific standards, proportionate standards for listed SMEs and standards for non-EU companies.

EFRAG publishes three ESRS implementation guidance documents for consultation

EFRAG (formerly the European Financial Reporting Advisory Group) has published three guidance documents to address aspects of the ESRS deemed to be the most challenging for implementation. These aspects are:

  • Materiality assessment – the implementation guidance describes the ESRS approach to materiality, illustrates how the materiality assessment is performed and explains how undertakings could take account of other frameworks, standards and sources. The document also includes a set of FAQs on impact materiality, financial materiality, the materiality assessment process, stakeholder engagement, aggregation/disaggregation and reporting.
  • Value chain – the implementation guidance describes how to navigate value chain requirements in the ESRS, and illustrates practical implementation of the requirements through a set of FAQs.
  • ESRS data points – the implementation guidance presents the complete list of detailed requirements contained in each disclosure requirement and related application requirements in an Excel format.

EFRAG invites stakeholders to provide feedback on the three documents by 2 February 2024.

European Securities and Markets Authority seeks feedback on draft guidelines on enforcement of sustainability information

The European Securities and Markets Authority (ESMA) has published, for consultation, draft guidelines on the enforcement of sustainability information. This comes in the wake of the CSRD introducing a new Article 28d in the Transparency Directive, which requires ESMA to issue guidelines on the supervision of sustainability reporting by national competent authorities. The guidelines seek to ensure that enforcement of sustainability information, including sustainability reporting under the CSRD, the ESRS and Article 8 of the Taxonomy Regulation, is carried out in a converged manner and in a way that closely resembles enforcement undertaken in relation to financial information.

To this end, ESMA invites feedback on the draft guidelines, including on:

  • the proposed scope, in particular, to whom the guidelines apply (ie, all competent authorities undertaking supervision of sustainability information under the Transparency Directive), to what they apply (ie, sustainability information published by issuers which have securities admitted to trading on a regulated market and which are required to publish sustainability information under the Accounting Directive, including third-country issuers), and when they apply (ie, sustainability information published from 1 January 2025);
  • the proposed procedures for national competent authorities to examine sustainability information;
  • considerations for national competent authorities to apply when they identify infringements in sustainability information and have to determine the appropriate enforcement action; and
  • the proposed requirements to coordinate enforcement of sustainability information at a European level.

Consultation on the draft guidelines closes on 15 March 2024. The final guidelines are expected to be published in Q3 2024.

European Council and European Parliament reach provisional agreement on Corporate Sustainability Due Diligence Directive

The European Council and the European Parliament have reached a provisional agreement on the text of the highly anticipated Corporate Sustainability Due Diligence Directive (CS3D). If formally adopted, CS3D would impose 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.

The finalised text has not yet been published but even once published, the long journey of CS3D will not be completed until transposition within Member States' laws. The difficult work for companies (including the financial services sector) to implement the requirements is also only just beginning. We are expecting companies to face difficult interpretational and strategic challenges along the implementation journey, together with some heavy lifting in undertaking gap analyses, reviewing and updating policies and procedures, renegotiating supplier agreements and upgrading governance frameworks.

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Commission publishes additional guidance for financial undertakings on KPI reporting under Taxonomy Disclosures Delegated Act

In response to frequently asked questions regarding certain legal provisions of Commission Delegated Regulation (EU) 2021/2178 (the Taxonomy Disclosures Delegated Act), the Commission has published a draft Commission notice to provide further interpretive and implementation guidance to financial undertakings on reporting their key performance indicators (KPIs). The Taxonomy Disclosures Delegated Act specifies the disclosure obligations under Article 8 of the Taxonomy Regulation regarding those of their activities that are Taxonomy-eligible and Taxonomy-aligned. While non-financial undertakings started reporting their Taxonomy KPIs from financial years starting on or after 1 January 2023, financial undertakings start reporting their KPIs from financial years starting on or after 1 January 2024.

The notice covers the reporting obligations of large financial undertakings and financial undertakings admitted to trading on EU-regulated markets in respect of how they finance, invest in or insure Taxonomy-aligned activities. It seeks to clarify the scope of entities subject to reporting obligations, the taxonomy assessment of certain specified exposures. It also addresses the rules relating to the verification and evidence of compliance with the EU Taxonomy, and targeted questions regarding credit institutions, insurance undertakings and asset managers.

For more on the EU's sustainable finance framework, see here.

EIOPA launches consultation on sustainability claims and greenwashing principles

The European Insurance and Occupational Pensions Authority (EIOPA) has launched a consultation of its draft opinion on sustainability claims and greenwashing in the insurance and pensions sectors. To ensure a common approach across the EU, the draft opinion establishes a framework to assist competent authorities in their supervision of insurance and pension providers, and a set of principles for insurance and pension providers to observe when making sustainability claims. The principles are:

  • principle one – sustainability claims made by a provider should be accurate, precise and consistent with the provider's overall profile and business model, or the profile of its product(s);
  • principle two – sustainability claims should be kept up to date, and any changes should be disclosed in a timely manner and with a clear rationale;
  • principle three – sustainability claims should be substantiated with clear reasoning and facts; and
  • principle four – sustainability claims and their substantiation should be accessible by the targeted stakeholders.

EIOPA's consultation closes on 12 March 2024.

European Central Bank and European Systemic Risk Board publish report on macroprudential frameworks for managing climate risk

The European Central Bank and the European Systemic Risk Board have published a report on macroprudential frameworks for managing climate risk. The report proposes three frameworks for relating climate risks to financial stability:

  • a surveillance framework, which takes stock of advances in measuring and modelling the impacts of climate risk and proposes a list of indicators for regular financial stability risk monitoring;
  • a macroprudential policy framework, which outlines both the features of a robust strategy as well as an initial operational design based on existing instruments that can be scaled up as further information and more tailored policy options emerge; and
  • a framework for exploring broader risks arising from nature degradation, which looks at prospective financial stability impacts stemming from nature degradation that could serve to exacerbate the financial stability impacts of climate change.

It is intended that these frameworks, alongside a deeper understanding of climate-related risks to financial stability, will be integrated into ongoing risk surveillance and macroprudential policy assessment.

International 

What COP28 achieved and whether it's enough

13 December 2023 marked the end of the 28th Conference of the Parties to the UN Framework Convention on Climate Change (COP28). Following intense negotiations that went into overtime, the final text of the global stocktake called on countries to contribute to "transitioning away from fossil fuels in energy systems, in a just, orderly and equitable manner" while "taking into account their different national circumstances, pathways and approaches". It is the first time fossil fuels were directly mentioned in a COP decision. For our reflections on what COP28 achieved and whether it's enough, read our article here.

International Capital Markets Association launches voluntary code of conduct for ESG ratings and data product providers

The International Capital Markets Association (ICMA) has launched a voluntary code of conduct for ESG ratings and data product providers, reflecting recommendations from the International Organization of Securities Commissions (IOSCO). The code is intended to be internationally interoperable and may be used by jurisdictions where no local code or regulation is in place. The UK FCA had appointed ICMA and the International Regulatory Strategy Group to develop a globally consistent voluntary code. The final code was published following a consultation period and considered related developments in jurisdictions such as the EU, Japan, Singapore and Hong Kong. Going forward, ICMA will assume ownership of the code.

Network for Greening the Financial System publishes recommendations on developing scenarios for assessing nature-related economic and financial risks

The Network for Greening the Financial System (NGFS) has published a technical document outlining its recommendations toward the development of scenarios for assessing nature-related economic and financial risks. NGFS is a network of 114 central banks and supervisors committed to contributing to the development of climate- and environment-related risk management in the financial sector and mobilising mainstream finance to support the transition toward a sustainable economy.

In March 2022, NGFS released a statement on nature-related risks, recognising that the degradation of nature, and actions aimed at preserving and restoring nature, can have macroeconomic, macroprudential and microprudential consequences. Then in September 2023, NGFS published a conceptual framework for nature-related financial risks. Its latest technical document builds on this previous body of work to assist central banks and supervisors assess how economies and financial systems might be affected by various assumptions of nature-related physical risks and transition policies. The technical document:

  • outlines the challenges related to developing nature-related scenario narratives and offers suggestions that could overcome the local-global tradeoff to serve as starting points for the assessment of nature-related financial risks;
  • reviews a range of modelling approaches for scenarios of two main types, namely nature-economy models and biophysical models, assessing the extent to which those approaches are able to integrate the outputs of nature-specific narratives as inputs to a modelling exercise, and the extent to which they account for the transmission channels through which specific nature-related hazards can propagate in the economy;
  • examines alternative approaches to the examined models to assess nature-related financial risks, with a focus on those that are able to both present multiple hazards in multiple sectors and capture the indirect impacts of these hazards throughout value chains; and
  • concludes with a list of options for central bankers and supervisors, to help them move forward with the development of quantified nature-related scenarios both in the short-term and within a longer-term program.

Not to be missed

Ernst Muller will be speaking on a panel at the Future Minerals Forum taking place in Riyadh, Saudi Arabia on 10-11 January 2024. He'll be addressing the role of ESG in turbo charging mineral development and national economies. More details of the conference can be found here.

In case you missed it

Related HSF notes

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Silke Goldberg

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Climate Change Disputes Energy ESG Europe Governance Sustainable Finance UK

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Silke Goldberg

Partner, London

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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