ESG Market Alert – March 2023

In this month’s ESG Market Alert, we cover:

• Preparedness for deforestation legislation;
• Emerging messages around COP28;
• Women in business; and
• Market Practice Development: ESG risk management features in latest annual reports

Preparedness for deforestation legislation

The EU has introduced new legislation, due to come into force in May/June 2023 and followed by an 18 – 24 month implementation period depending on the size of the company, which will ban the import of products linked to deforestation.

Companies that either place and make available on, or export from, the EU market certain products will be obliged to conduct due diligence and submit a “due diligence” statement to the competent authorities via a designated information system (to be established by the European Commission), confirming that their goods have not led to deforestation and/or forest degradation anywhere in the world after 31 December 2020. Relevant products which will be caught by the legislation include the likes of cattle, cocoa, coffee, palm-oil, soya and wood, amongst others.

This is likely to have a far reaching impact across the corporate sector, as companies will need to review both their own supply chains and also entities in which they hold investments or are planning to invest, with a view to taking concrete steps to demonstrate their compliance.

Emerging messages around COP28

The news that the 2023 United Nations Climate Change Conference (“COP28”) would be led by Sultan al-Jaber, the Minister of Industry and Advanced Technology in the United Arab Emirates (the “UAE”), was met with considerable criticism from green activists. The criticism stemmed from al-Jaber’s role as the chief executive of Abu Dhabi National Oil Company (“ADNOC”). Despite the opposition from activists it appears that al-Jaber will still lead COP28. 

In response to public opposition, al-Jaber held a public relations pitch in which six key themes emerged as to how COP28 will be run by the UAE team:

1. There will be a focus on “inclusion” at the conference, which will be achieved in part by bringing in women, youth activists and delegates from developing nations; 
2. The team, controversially, want to give the private sector a central role in COP28 which will be facilitated by al-Jaber, a chief executive, running the meeting;
3. They plan to emphasise the importance of green innovation and climate technology. Al-Jaber’s message is to view climate change as an opportunity, but critics question whether this is solely an “opportunity” for the private sector;
4. The team also plan to incorporate biodiversity goals into COP28;
5. They will back calls to overhaul the multilateral development banks and introduce new blended finance initiatives from international financial institutions and multilateral banks so that climate finance can be distributed to poorer nations; and
6. They do not plan to dispense with the 1.5 degrees Celsius limit goal and claim that “course correction” to reduce emissions can mean that this goal is still achievable by 2030. To counter the criticism that ADNOC and the UAE have been a substantial source of emissions putting this goal at risk over the past decade, al-Jaber has argued that they are channelling profits from fossil fuels into green energy, using Masdar (the green energy company which al-Jaber runs) as an example of the progress.

Despite the controversy, the advantages of al-Jaber’s involvement may include: (i) the UAE using its financial resources for the purposes of mitigation and adaptation in the field, particularly as al-Jaber appears eager to prove critics wrong; and (ii) helping to build coalitions for positive climate change, given the UAE’s relatively central position.

Women in business

Good news may be on the horizon for improving gender diversity within UK based corporates. In 2022 UK women created a record number of new companies - according to the ‘Rose Review Progress Report’ (published in February 2023 and led by Alison Rose, Chief Executive of NatWest Group, and MP Kevin Hollinrake), women in the UK established over 150,000 new companies in 2022, more than twice the number created in 2018.

The government-commissioned Rose Review of Female Entrepreneurship was set up in 2019 and concluded in 2022. Since then, government-led initiatives such as the ‘Investing in Women Code’ (the “Code”) have been introduced. The Code is intended to support organisations that finance female entrepreneurs. 190 banks, venture capital firms, angel syndicates and other financial services organisations, including private equity and pension funds, have all now signed up to the Code. Founding signatories of the Code include the Royal Bank of Scotland, Barclays Bank, Metro Bank, UK Business Angels Association and Santander, amongst others.

At the crux of the Rose Review was the gender disparity between female entrepreneurs and their male counterparts in respect of attaining business-backed funding. The 2019 Rose Review further identified that the funding barrier faced by women came at a hefty price tag for the UK economy, with an untapped market value of £250 billion. The results from the Rose Review Progress Report shed light on the need to continue ensuring adequate transparency and support in the funding process for female entrepreneurs in the UK.

Market Practice Development: ESG risk management features in latest annual reports

Pro-ESG advocates are posing financial risks to companies, as claims of “greenwashing” or allegations against companies failing to address climate change sufficiently with ESG-friendly products put further pressure on a number of major banks and asset managers as they attempt to adopt ESG investment strategies.

The latest annual reports for various fund and asset managers in the United States, including BlackRock and Blackstone, have noted disputes over sustainable investments by some shareholders and legislators. The threat of similar disputes is also evident in the annual reports for various major banks and industry leaders, as these companies are increasingly gearing up to deal with a rising number of ESG-related claims in the future. Language such as that found in a major global bank’s annual report is becoming increasingly common: “We consider greenwashing to be an important emerging risk that is likely to increase over time, as we look to develop capabilities and products to achieve our net zero commitments, and work with our clients to help them transition to a low-carbon economy.”

Climate risk, in particular, is increasingly becoming embedded into major banks’ wider risk-management frameworks and in some instances is even being identified as a “principal risk” for the bank in question. Larger institutions are also evaluating climate risk considerations as part of transaction due diligence for select loan commitments and mortgage origination processes.

Whilst we are not yet seeing these larger institutions disclose ESG-related claims as contingent liabilities in their formal financial statements in their annual reports or material provisions being recorded, it is apparent that as greater focus is placed on ESG measures, companies are acknowledging that the likelihood of legal proceedings and investigations in relation to such measures is also on the rise.

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.

ESG Academy: New and improved resources

Of the many ESG tools we’ve released, the one we hear you say you love the most is our ESG Global Vision Tool, our free online guide to global ESG rules and regulations, so we’ve set to work enhancing and improving it for you.

We’ve introduced a side by side ESG Litigation Guide that allows quick access to targeted information about ESG disputes, allowing maximum insight into the development of procedures on ESG issues and their handling by case law.

We now also offer enhanced functionality across our original tool, including the ability to generate a report, set alerts, and compare countries. All of our reporting is regularly updated and we are constantly adding new countries to our coverage. We hope you use and enjoy!
 

Authored by Nicola Evans, Patrick Sarch, Rita Hunter, Bryony Widdup, Alexandra Miller, Scott Prior, Olivia Drawbell, Muhammad Gangat, Zuzanna Krzyzos, Hannah Okorafor and Sibylla Ward.