UK / EU / International ESG Regulation Monthly Round-Up – April 2024

UK Developments

UK Sustainability Disclosure Requirements (SDR) and Investment Labels Regime

UK Anti-Greenwashing Guidance Extension of SDR to Portfolio Managers

On 23 April 2024, the FCA published its much-anticipated anti-greenwashing guidance which will apply to all FCA regulated firms from 31 May 2024.  The anti-greenwashing rule is designed to protect consumers by ensuring that the sustainable products and services that they are sold are accurately described.  Our Engage article sets out further details from the guidance which requires that sustainability references are:

• correct and capable of being substantiated;
• clear and presented in a way that can be understood;
• complete; and
• fair and meaningful when comparing products and services.

Extension of SDR to Portfolio Managers

The FCA published an anticipated consultation paper (CP24/8) on 23 April 2024 on extending the  SDR and labelling regime to portfolio managers in proposed rules which largely mirror those introduced for asset managers in November 2023 in PS23/16 (further details on PS23/16 can be found in our previous Engage article here).  The FCA is requesting comments on CP24/8 by 14 June 2024.  The FCA proposes to extend the SDR and investment labels regime to all forms of portfolio management services, including where the portfolio management offering (the agreements or arrangements) are model portfolios, customised portfolios and/or bespoke portfolio management services (tailored to the clients’ needs and preferences).   This Engage article discusses both the proposed extension of the SDR to portfolio managers and the FCA’s anti-greenwashing rule guidance.

Transition Finance

Transition Finance Market Review – Call for Evidence – extended deadline

On 14 March 2024, the Transition Finance Market Review (TFMR) published its Call for Evidence requesting feedback on topics such as scope of transition finance, ensuring credibility and integrity, barriers to applications of transition finance and opportunities for innovation.  TFMR has extended the response time to the consultation from 25 April 2024 until 9 May 2024.  See here for more information.

Nature-related Risks

GFI Publishes Report: Assessing the Materiality of Nature-Related Financial Risks for the UK

On 25 April 2024, the Green Finance Institute (GFI) launched its report  “Assessing the Materiality of Nature-Related Financial Risks for the UK” and synopsis.  The GFI notes that “damage to the natural environment is slowing the UK economy, and could lead to an estimated 12% reduction to GDP in the years ahead - larger than the hit to GDP from the global financial crisis or Covid-19”.  The report analyses how the degradation of natural ecosystems, both nationally and internationally, will impact the UK economy and financial sector. 

UK Transition Planning

UK Transition Plan Taskforce (TPT) publishes final version of sector-specific guidance

On 9 April 2024, the UK TPT published the final versions of sector-specific guidance on climate transition plan disclosures to support companies and financial institutions in their efforts to accelerate the net zero transition and improve access to green finance.  In October 2023, TPT published its Disclosure Framework and sector-neutral implementation guidance.  The sector-specific guidance covers the following sectors:

• Asset managers
• Asset owners
• Banks
• Electric utilities & power generators
• Food & Beverage
• Metals & Mining
• Oil & Gas

TPT have also published additional advisory resources including sector summary guidance on how to undertake a transition planning cycle and a paper on the opportunities and challenges relating to private sector transition plans in emerging markets and developing economies.

UK Climate-related risks

UK government issues consultations on decarbonisation measures

On 21 March 2024, the UK government published a consultation setting out proposals for the design, implementation and administration of a UK carbon border adjustment mechanism (CBAM). The consultation confirms that the CBAM will apply to imports of CBAM goods covered by a specified list of commodity codes in the sectors that have previously been identified (aluminium, cement, ceramics, fertiliser, glass, hydrogen, and iron and steel), the consultation is open for comments until 12 June 2024.  In addition on 30 March 2024, the UK government also published a consultation addressing carbon leakage risks to support decarbonisation. The consultation seeks views on six broad questions to shape the design and implementation of a potential UK CBAM.  The consultation is open for comments until 22 June 2024.

EU and International Developments

Supply Chain Due Diligence

European Parliament formally adopts the Corporate Sustainability Due Diligence Directive (CSDDD or CS3D)

On 24 April 2024, the European Parliament formally adopted at first reading the final text of the controversial CSDDD.  CSDDD will apply to companies operating in the EU with more than 5,000 employees and a turnover of €1.5 billion.  The final part of the approval process requires EU Member States to finalise the CS3D text at upcoming meetings on 15 and 23-24 May 2024, following which it will enter into force 20 days after publication in the Official Journal. For further details on the content of CSDDD see this Engage article.

Nature

ISSB research project on risks and opportunities related to nature and human capital

The International Sustainability Standards Board (ISSB) recently consulted on future opportunities and risks related to nature and human capital.  Following this, it announced on 23 April 2024 that it is starting projects to research disclosure about risks and opportunities associated with human capital, biodiversity, ecosystems and ecosystems services.   It will look at existing initiatives, such as the Task Force on Nature-related Financial Disclosures (TNFD) and consider how to build out the global baseline of sustainability-related financial disclosures.

UN PRI publishes guide to developing a biodiversity policy

On 26 March 2024, the UN Principles for Responsible Investment (UN PRI) published a guide to developing a biodiversity policy for asset owners and investment managers.  The guide includes technical steps that asset owners and investment managers can take as they consider producing a biodiversity policy including how to approach biodiversity from an organisational perspective to include understanding biodiversity considerations, integrating them into investment processes and managing and disclosing the associated risks and opportunities.

ESG Rating Activities

ESMA consults on amendments to the Credit Rating Agencies framework

On 2 April 2024, the European Securities and Markets Authority (ESMA) published its consultation paper on possible amendments to Annex 1 of the Credit Rating Agencies Regulation (the CRA Regulation) (Regulation 1060/2009) and (EU) Delegated Regulation 447/2012 on the demonstration of compliance of credit rating methodologies (the Delegated Act).  The consultation considers amendments to the CRA Regulation and the Delegated Act to ensure that relevant ESG risks are systematically captured in credit ratings and to improve transparency on the inclusion of ESG risks by credit rating agencies in credit ratings and rating outlooks.  The deadline for a response is 21 June 2024 and ESMA’s technical advice is due to be submitted to the European Commission by December 2024.

European Parliament adopts proposed Regulation on ESG rating activities

On 25 April 2024, the European Parliament published a press release announcing that it had voted in plenary to adopt the proposed Regulation on the transparency and integrity of ESG rating activities (2023/0177(COD)). It has also published the legislative resolution that it has adopted.  The text has yet to undergo lawyer-linguist revision but once this has been completed the European Parliament will confirm the final text under the corrigenda procedure.  The earliest this is likely to happen is in September 2024 due to the European elections in June 2024. The Council of the EU is then expected to formally adopt the finalised text following which it can be published in the Official Journal of the EU (OJ) and will enter into force 20 days after its publication in the OJ.  It will then apply 18 months following its entry into force.

European Green Deal

EU Platform on Sustainable Finance intermediate report on monitoring capital flows to sustainable investment

On 4 April 2024, the EU Platform on Sustainable Finance published an intermediate report on monitoring capital flows to sustainable investment. The purpose of the report is to propose a comprehensive monitoring framework to measure the effective contribution of finance towards the objectives of the European Green Deal. The methodology proposed in the report mainly rests on two types of capital flows: capital expenditures in real economy entities, and flows in and from financial markets. It is primarily based on EU sustainable finance regulatory data and definitions, with market standards and definitions complementing the analysis where appropriate.

Climate-related Risks

SEC stays climate disclosure rules pending judicial review

On 4 April 2024, the US Securities and Exchange Commission (SEC) voluntarily stayed implementation of its recently adopted Climate Disclosure Rules (Climate Rules) pending completion of judicial review of consolidated challenges to the rules by the Court of Appeals for the Eighth Circuit.  In its stay order the SEC noted that it intends to vigorously defend the validity of the Climate Rules.  The Climate Rules have garnered much attention in the US and were finally adopted on 6 March 2024 after two years of public debate.  The SEC received over 24,000 comment letters to its proposed rules from numerous interested parties and within the first ten days of their adoption, nine cases were filed challenging the Climate Rules. These cases were brought by individual companies, US states, non-governmental organizations, and climate advocates.  Given these various challenges in multiple forums, on March 19, 2024 the SEC formally asked the Judicial Panel on Multidistrict Litigation to consolidate the cases in a single venue following which the cased were consolidated to the St. Louis-based Eighth Circuit Court of Appeals. The SEC has stated that, notwithstanding its voluntary stay, it intends to vigorously defend the validity of the Climate Rules, and that its previous 2010 climate change-related disclosure guidance, which has been cited in SEC comment letters and enforcement actions scrutinising climate-related disclosures remains effective.  

Potential US Carbon Border Adjustment Mechanism (CBAM) rules

On 16 April 2024, the White House Climate and Trade Task Force announced three focus areas in relation to climate-related risks including the following:

• developing a climate and trade policy toolkit to address carbon leakage, carbon dumping, and embodied carbon in general. Drawing on its experience of negotiations on the carbon border adjustment mechanism (CBAM) with the EU;
• ensuring that it has credible, robust, and granular data to implement smart climate and trade policies; and
• identifying what more can be done in the US and internationally to further position US producers and manufacturers to be the cleanest and most competitive in the world.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter, Melanie Johnson, and Emily Julier.