ESG Market Alert - May 2024

In this month’s round-up of the latest developments in ESG for UK clients, we cover:

• New ESMA guidelines to use ESG or sustainability-related fund names

• FCA publishes new guidance on the anti-greenwashing rule, to come into force on 31 May 2024

• European Parliament approves new directive requiring large companies to mitigate their adverse impact on human rights and the environment

• Adjusting the aluminium market: Advancing a sustainable metals industry

• From red to green: Labour's ESG agenda

New ESMA guidelines to use ESG or sustainability-related fund names

On 14 May 2024, the European Securities and Markets Authority (ESMA) published its final report containing guidelines on funds’ names using ESG or sustainability-related terms (the ESMA Guidelines). The ESMA Guidelines apply to: (i) all alternative investment funds managed by EU AIFMs; and (ii) all UCITS managed by UCITS management companies.

The ESMA Guidelines aim to protect investors against unsubstantiated or exaggerated sustainability claims in fund names. For this purpose, the ESMA Guidelines set out specific minimum (non-mandatory) recommendations for investment objectives for each category of ESG, impact or sustainability-related terms used in the name of the fund. For example, a fund with environmental or impact-related terms in its name should have a minimum threshold of 80% of its investments meet environmental or social characteristics or sustainable investment objectives for SFDR purposes.

The ESMA Guidelines will now be translated into and published in the EU’s official languages, and will come into force three months after such translation and publication (Application Date). The ESMA Guidelines will apply to all new funds created after the Application Date, whilst AIFMs and UCITS managers of existing funds will have a six months transition period after the Application Date in which to comply

FCA publishes new guidance on the anti-greenwashing rule, to come into force on 31 May 2024

The FCA has published new guidance on the anti-greenwashing rule (AGR), which is set to come into force on 31 May 2024. As the first part of the FCA’s Sustainability Disclosure Requirements, the AGR will apply to communications around ‘sustainability’ related claims by FCA-authorised firms to UK persons, requiring such communications to be: (i) consistent with the sustainability characteristics of their financial product or service; and (ii) fair, clear and not misleading.

Whilst firms are already subject to marketing rules around their products and services, the AGR formalises expectations regarding sustainability-related financial products by requiring firms to meet a more exacting standard of accuracy on an ongoing basis. The FCA is also consulting on extending these disclosure requirements to portfolio managers, to further protect consumers and ensure they can make better informed decisions. 

European Parliament approves new directive requiring large companies to mitigate their adverse impact on human rights and the environment

The European Parliament has approved new rules which will require companies with over 1,000 employees and worldwide turnover of more than €450m, as well as their supply, production and distribution partners, to mitigate negative impacts on human rights and the environment, including with regard to slavery, child labour, biodiversity loss and pollution. The rules will apply to EU-based companies and parent companies, along with non-EU companies, parent companies and companies with franchising or licensing agreements in the EU satisfying the same turnover thresholds.

The rules will require qualifying firms to integrate due diligence into their policies, make related investments, seek contractual assurances from their partners and adopt a transition plan to make their business model compatible with the Paris Agreement warning limit of 1.5°C.

Failure to comply with their obligations could see companies fined up to 5% of their net worldwide turnover and attract liability for damages caused by breaching due diligence obligations, resulting in breaching companies having to fully compensate their victims.

The directive will now be put before the European Council for endorsement, following which it would enter into force. EU member states will have two years to transpose the new rules into domestic law.

Adjusting the aluminium market: Advancing a sustainable metals industry

To align with the EU Carbon-Border Adjustment Mechanism (CBAM), the London Metal Exchange (LME) has introduced a new mandate requiring all producers of approved aluminium products to submit carbon emission data by 2025. The initial submission is due by 15 March, 2025 (with a reference period for the 2024 calendar year), with annual updates to follow.

Producers must provide this data when aluminium attains "LME-grade" status and is applicable to warehouse stores. The LME has confirmed that this requirement will not apply retroactively, such that aluminium already stored in warehouses is exempt.

Aluminium producers that fail to submit the required carbon emissions data face the risk of being delisted from the LME, underscoring the LME's commitment to advancing a sustainable metals industry.

From Red to Green: Labour's ESG Agenda

Ahead of the UK general election, the Labour Party has over the course of the past few months unveiled a comprehensive set of green initiatives aimed at tackling climate change and promoting environmental sustainability. Central to these measures is a significant investment in renewable energy sources, such as wind and solar power, with the ambitious goal of achieving a net-zero carbon economy by 2050.

A cornerstone of Labour's plan is the establishment of Great British Energy, a publicly owned energy company designed to lead the transition to renewable energy. This initiative seeks to ensure energy security, reduce consumer energy bills, and create thousands of green jobs. By focusing on wind, solar, and other renewable technologies, Labour intends to diminish the UK's dependence on fossil fuels, lower carbon emissions, and guide the country towards a sustainable energy future.

In addition, Labour proposes the creation of a Green Bank, a publicly owned financial institution dedicated to funding climate change mitigation projects and promoting environmental sustainability. This Green Bank would support investments in renewable energy, energy efficiency improvements, and green infrastructure projects.

Labour's strategy also includes the formation of a UK Strategic Development Sovereign Wealth Fund, a state-owned investment fund aimed at supporting long-term economic development. This fund would target investments in key industries, infrastructure projects, and innovation initiatives, fostering sustainable growth, job creation, and technological advancement. The fund would prioritise projects addressing societal challenges such as climate change and inequality, while also generating financial returns for the public.

With more than half the world's population heading to the polls this year, significant shifts in key policies are expected, potentially leading to a renewed emphasis on ESG criteria and net-zero commitments. In the United Kingdom, with a snap election scheduled for 4 July 2024, major political parties are preparing to present their manifestos, which will require them to set out their green agendas.

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, Nick Cooke, Bethany Bridges, Hope O’Dwyer, Hanwei Low, Aled Luckman, and Sarah Tillmann.