ESG Market Alert - October 2024

EU approves 12 month delay to deforestation legislation

On 16 October 2024, the EU Council approved the delay of the implementation of the EU Deforestation-free Products Regulation  (2023/1115) (EUDR). Originally set to come into force in December of this year, EUDR has now been pushed back until 30 December 2025 for large companies (those with more than 250 employees), and 30 June 2026 for SMEs (Implementation Date), in order to give both corporates and member states more time to establish and adapt their due diligence systems.

EUDR limits the imports and onward sales of certain restricted products, namely cattle, cocoa, coffee, palm oil, rubber, soya and wood, including derivative products such as foodstuffs, beauty products, pneumatic tyres, paper products, and charcoal (Restricted Products).  EUDR applies to both “Operators” who place or export relevant products in or to an EU market, and “Traders” who are otherwise in the supply chain and make the Restricted Products available in an EU market.

Operators and Traders must ensure that the Restricted Products that they supply are:

• not sourced from land that has been deforested since 31 December 2020;
• produced in accordance with the relevant laws of the country of production; and
• are covered by a detailed due diligence statement, submitted to the EU Information System, confirming compliance with EUDR requirements.  

In connection with this delay, the Commission also released FAQs and further guidance, for those who must comply with EUDR. The full list of Restricted Products is available at Annex I of the EUDR.

Guiding banks towards sustainable futures: UNEP FI’s new guidance

On 8 October 2024, the United Nations Environment Programme Finance Initiative (UNEP FI) published new the Responsible Banking Blueprint and the Priorities for Responsible Banking, each of which are aimed at assisting banks that have signed up to the UN Principles for Responsible Banking (PRB). Over 345 banks representing over half of the global banking industry and US$98.7 trillion assets have signed up to implement the PRB.

The Responsible Banking Blueprint provides UNEP FI members with a framework to align their operations with global sustainability goals (including the UN Sustainable Development Goals and the Paris Agreement) and implement the UNEP FI's Priorities for Responsible Banking which are as follows: climate change, nature and biodiversity, healthy and inclusive economies, and human rights (Priorities).

In particular, the Responsible Banking Blueprint:

• identifies four categories for impact management, namely: policies and processes, portfolio composition and financial flows, client engagement, and advocacy and partnerships, and gives examples in respect of each of the Priorities as to how these might be implemented; and
• gives examples of targets for member banks to set across each of the Priorities and ways in which member banks can demonstrate progress.

The Responsible Banking Blueprint will be reviewed and updated every 3 years.

IFRS publishes guidance on sustainability reporting standards

On 25 September 2024, the International Financial Reporting Standards Foundation (IFRS) published guidance (Guidance) for the application of the International Sustainability Standards Board (ISSB) reporting standards IFRS S1 and S2 (Standards) which will come into effect in January next year, and are designed to respond to the capital markets’ critical need for a global baseline for climate and other sustainability disclosures. As of May of this year, over 20 major jurisdictions representing roughly 55% of global GDP (including Australia, Brazil, Canada, Hong Kong and the UK) have agreed to use the Standards.

The Standards consolidate climate disclosure regimes, with a particular focus on how to measure and report greenhouse gas emissions to investors. The Guidance acknowledges that the IFRS disclosure regime will be easier for some companies or industries to adopt than others which may require more time to develop their disclosure capabilities. The Guidance therefore stresses that companies:

• should make use of the Standards’ transition reliefs that include (i) a phased introduction of the requirements (including with respect to the scope and timing of disclosures), and (ii) a proportionality regime (which takes into account the skills, capabilities and resources of the company when applying certain requirements of the Standards); and

• must communicate the extent to which they are applying the Standards in order to help investors and other stakeholders understand the reporting provided at different stages of the company’s compliance journey.

The Guidance is the latest in a series of publications designed to support the implementation of the Standards. Other resources to support the application of the Standards can be found here.

While the Standards are currently focused on climate reporting, the IFRS/ISSB will spend the next two years researching a set of standards in respect of biodiversity, ecosystems and ecosystem services and human capital, with the goal being to harmonise global sustainability standards.

Trump v Harris: An overview for ESG investors

On 5 November 2024, Americans will go to the polls to determine whether former President Donald J. Trump or Vice President Kamala Harris will be elected as the next President of the United States, and the electoral result will likely have a significant impact on the future of responsible investing in the United States.

Harris has historically been a vocal supporter of progressive environmental policy. Although she has downplayed this stance on her campaign trail, she has also not deviated from the existing policies of the Biden regime under which ESG investing has gained traction. Whilst she has been significantly less vocal of late, her administration would likely be characterised by the following:

• support for mandatory disclosures of climate-related risks and carbon emissions;
• continuing incentivisation of ESG investment under the Inflation Reduction Act (IRA), which allocated approximately US$369 billion toward the production of clean energy, emissions reduction, and tax incentives for individuals and families to make energy-efficient improvements; and
• significant investment into green infrastructure projects, including liberalising the leasing system under which the federal government approves energy and infrastructure projects.

Harris’ environmental policies would likely encourage and reward an ESG-orientated investment approach, facilitating the growth of disclosure regimes and incentivising investment in more “environmentally friendly” assets. Her focus on climate action (along with her support for policies on corporate governance, labour rights, and social equity) could drive long-term value creation in ESG-focused portfolios.  

By contrast, Trump’s campaign has emphasised deregulation of the fossil fuel industry and prioritised economic growth and the United States’ energy independence. In particular, Trump has:

• outlined his intention to withdraw from the Paris Agreement, under which nations are committed to keeping the global temperature no more than 2°C above pre-industrial levels;
• promised to scrap “offshore wind” projects, instead supporting the continued use of nuclear power as clean energy solutions, and drilling for oil and natural gas; and
• historically opposed mandatory climate-related financial disclosures and, in his previous administration, rolled back many environmental regulations established under the Obama administration. A second Trump term would likely prioritise deregulation also, supported by the rightward shift in the federal courts and the Supreme Court’s recent decision overturning the Chevron doctrine, which hands judges (rather than federal agencies) the power to interpret regulatory law.

While Trump’s deregulation and tax policies might boost economic growth and corporate profits, his plans to deregulate the energy sector and promote fossil fuels would undermine investments in the renewable energy industry and other green technologies. Further, Trump’s commitment to deregulation undercuts efforts made to establish ESG-focused reporting regimes, making ESG investing less transparent, more difficult to measure, and out of step with global trends.

ESG Counsel

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximize positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

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Authored by John Connell, Nicola Evans, John Livesey, Alastair Young, India Maddison, Srishti Chhajer, Hannah Dingemans, Kieran Farrelly, Emily Louise, Beatrix Mosey, Aphrah Raja, and Makar Rozhkov.