UK / EU / International ESG Regulation monthly round-up – June 2024

EU and International Developments

1. EU Sustainable Finance Disclosure Regulation (SFDR)

1.1 ESAs publish opinion on SFDR assessment

On 18 June 2024, the EBA, EIOPA and ESMA (together the ESAs) published a joint opinion on the assessment of the Sustainable Finance Disclosure Regulation ((EU) 2019/2088) (SFDR).  The ESAs' opinion follows a comprehensive review of the SFDR Framework by the European Commission which was launched in September 2023.  (The Commission published a summary report of the public contributions of its review last month but the Commission’s report is yet to be published.)  

The ESAs' recommendations include the following:

• The Commission could consider introducing a product classification system, based on regulatory categories or sustainability indicators, to help consumers navigate the broad selection of sustainable products and support the full transition to sustainable finance.  The ESAs encourage, at least, categories of "sustainability" and "transition".
• A sustainability indicator could refer to environmental sustainability, social sustainability, or both, illustrating to investors the sustainability features of a product in a scale.
• Options for product categorisation and sustainability indicators should be consumer tested and consulted upon. 
• Sustainability disclosures should cater to different investor needs and consider different distribution channels, including digital ones, and ensure consistency of the information provided.  The Commission should prioritise only essential information for retail investors (although professional investors may benefit from more detailed information).
• The Commission could carefully reflect on whether to include other products within scope of the SFDR to ensure harmonised disclosures for products currently in scope of the SFDR and any other products that could be brought within scope.

2. EU and International Anti-greenwashing Rules

2.1 ESAs final reports on anti-greenwashing in the financial sector

On 4 June 2024, the ESAs published their final reports on greenwashing in the financial services sector, in response to the European Commission’s request for input on greenwashing risks and the supervision of sustainable finance policies:

• EBA Final report on greenwashing monitoring and supervision
• ESMA Final report on greenwashing
• EIOPA Final report: advice to the Commission and opinion on sustainability claims and greenwashing in the insurance and pension sectors.

The ESAs have taken a co-ordinated approach on greenwashing risks.  Each of the final reports outlines the current supervisory response to greenwashing risks under the respective ESA’s remit.  The ESAs note that national competent authorities (NCAs) are already taking steps around supervision of sustainability-related claims and consider how sustainability-related supervision can be gradually enhanced. 

2.2 Green Claims Directive: Council of the EU adopts its general approach

On 17 June 2024, the Council of the EU announced that it had adopted its position (general approach) on the Commission's proposal for a new EU directive on the substantiation and communication of environmental claims (the Green Claims Directive).

The Green Claims Directive is expected to create uniform EU standards, including a ban on general claims like "climate neutral" and a requirement of evidence for sustainability-related claims.  The Directive will also set minimum requirements for the substantiation, communication and verification of explicit environmental claims and will control the use of environmental labels.  The Council's general approach will form the basis for informal trialogue negotiations with the European Parliament and the Commission following June's European elections.

The general approach seeks a number of amendments to the Green Claims Directive including in relation to scope and transparency with the aim of making a clearer distinction between explicit environmental claims and environmental labels and clarification as to which obligations apply to each category.

2.3 ISO’s First Net Zero Standard

On 27 June 2024, the International Organization for Standardization (ISO) announced that “work is underway to develop ISO’s first international standard on net zero”.  The aim of the standard is to “provide clarity on the net zero transition, robust requirements, and ultimately enable independently verified and comprehensive climate action”.

The standard builds upon the existing ISO Net Zero Guidelines to turn it into an independently verifiable international standard.  The ISO will be collaborating with thousands of experts across more than 170 countries over the next 18 months and the standard is expected to be released in November 2025, during COP30.

3. Climate related risks

3.1 A member of the ECB Single Supervisory Board has confirmed that the ECB is poised to impose fines on ‘a few banks’ for their failure to assess and manage climate risk. This is indicative of the ECB supervisory risk appetite – although the vast majority of banks who were taken to task co-operated with ECB supervisors to avoid fines and these fines may not be high, they will send a signal of intent.  Firms should anticipate more intensive scrutiny from the ECB and national competent authorities on ESG risk management, particularly as the newly adopted CRD6 expressly includes a requirement on supervisors to stress test firms’ assessment and management of short, medium and long term ESG risks including transition finance plans.

4. Nature

4.1 EU Nature Restoration Law

On 17 June 2024, the Council of the EU announced that it had adopted the EU Nature Restoration Law (the Nature Regulation). 

The Nature Regulation aims to restore at least 20% of the EU’s land and sea areas by 2030 and all ecosystems in need of restoration by 2050.  The Nature Regulation adopts measures that are intended to not only preserve, but restore, nature and it sets legally binding targets and obligations for nature restoration in each of the specified ecosystems, including terrestrial to marine, freshwater and urban ecosystems.  The Nature Regulation will shortly be published in the Official Journal of the EU and enter into force immediately thereafter.

By way of background, the European Commission proposed a nature restoration law on 22 June 2022, under the EU biodiversity strategy for 2030, which is part of the European Green Deal.  The Nature Regulation is intended to contribute to the EU reaching its international commitments, in particular the Kunming-Montréal Global Biodiversity Framework agreed at the 2022 UN Biodiversity Conference (COP15).

According to the European Commission Impact Assessment Report prepared for the Nature Regulation, nature restoration efforts yield a high return on investment (depending on the ecosystem type).  This showcases the potential of investing in nature restoration across various sectors and highlights the growing awareness of the interconnection between nature, the economy and finance. Please see here for more information.  

4.2 TNFD and EFRAG publish ESRS correspondence mapping

On 20 June 2024, the Taskforce on Nature-related Financial Disclosures (TNFD) and the European Financial Reporting Advisory Group (EFRAG) jointly published a mapping of the correspondence between the European Sustainability Reporting Standards (ESRS) and the TNFD’s recommended disclosures and metrics. 

The assessment highlights the alignment between the two frameworks, showing that all 14 TNFD recommended disclosures are reflected in the ESRS.

4.3 TNFD publishes final guidance for eight real economy sectors

At London Climate Action Week, after a period of consultation, TNFD has published:

• Additional guidance for financial institutions, including recommended disclosure metrics
• Guidance on how to approach upstream and downstream value chains
• Final sector guidance for: aquaculture, biotechnology & pharmaceuticals, chemicals, electric utilities & power generators, food & agriculture, forestry & paper, metals & mining and oil & gas, including LEAP guidance and recommended disclosure metrics
• Draft sector guidance for fishing, engineering, construction and real estate, construction materials, beverages, apparel and accessories and footwear are open for consultation from 4 July 2024 until 27 September 2024.

5. Climate-related disclosure

5.1 Second edition of NGFS guide on climate-related disclosure for central banks

On 19 June 2024, the Network for Greening the Financial System (NGFS) published the second edition of its guide on climate-related disclosure for central banks.  The NGFS first published the guide in December 2021.

The revised guide is organised around the four thematic areas identified by the Task Force on Climate-Related Financial Disclosures (TCFD), namely governance, strategy, risk management, and metrics and targets.  Through the guide, the NGFS aims to complement the original TCFD recommendations, providing additional guidance for central banks.

In a related press release, the NGFS identifies the headline disclosure recommendations set out in the revised guide:

• Governance.  Disclose the institutional climate-related objectives and decision-making process of the central bank as well as climate-related governance structures for specific areas and functions.
• Strategy.  Disclose climate-related impacts related to the central bank as well as the strategy (in terms of adaptation, capacity building and communication) for handling these impacts.
• Risk management.  Disclose the processes for managing climate-related risks at the central bank, focusing on identification, assessment and integration.
• Metrics and targets.  Disclose metrics and targets relating to the central bank's management of climate-related risks and exposure to climate-related risks and opportunities.

The revised guide distinguishes between foundational (referred as "baseline") and complementary (referred to as "building block") disclosure recommendations, acknowledging that there is no one-size-fits-all solution.  The NGFS intends to build on the revised guide to further strengthen its role as a forum for central banks to share their practical experiences and support one another in enhancing their climate-related measures.  It will also explore whether the revised guide could be adapted to facilitate nature-related disclosures.

6. Transition Plans 

6.1 ISSB seeks to harmonise corporate climate transition plan disclosures

As part of its new two-year work plan, on 24 June 2024, the International Sustainability Standards Board (ISSB) published a Feedback Statement and announced plans to publish guidance to harmonise how companies publish details on their net zero transition plans to support implementation of IFRS S1 and IFRS S2.  

The ISSB recognises the “proliferation of voluntary initiatives in the sustainability disclosure landscape” and seeks to support work to streamline and consolidate frameworks and standards for disclosures about transition plans.  To this end, the ISSB is coordinating with a number of partners, such as the Greenhouse Gas (GHG) Protocol, CDP and the Global Reporting Initiative (GRI).  In addition, the IFRS Foundation will assume responsibility for the disclosure-specific materials created by the Transition Plan Taskforce which will be sited in the IFRS Sustainability Knowledge Hub.

UK Developments

7. General Election

7.1 Due to the General Election in the UK on 4 July 2024, there has been less regulatory activity then normal. We expect a tick-up in activity during July 2024.

8. Corporate Governance

8.1 IoD publishes consultation on Code of Conduct for Directors 

On 6 June 2024, the Institute of Directors (IoD) published a consultation document on the Code of Conduct for Directors (the Code).  The Code is voluntary and is not designed to burden directors.  It is designed to be a practical tool to help directors make better decisions and give guidance to directors asking themselves “what would a responsible director do in this situation?”

The Code is structured around six key Principles of Director Conduct (the Principles) inspired by the Seven Principles of Public Life (aka the Nolan Principles):

1. Leading by example
2. Integrity
3. Transparency
4. Accountability
5. Fairness
6. Responsible business

In particular, Principle 6 (Responsible business) emphasises a directors’ responsibilities extending beyond the organisation and encompassing broader impact on society and planet.  The voluntary undertakings given by directors on this topic include considering the consequences of decisions made on society, local communities and the environment; avoiding prioritising short-term financial interests of shareholders above the long-term interests of the organisation as a whole.

Responses to the consultation on the Code are invited before 16 August 2024.

9. Financial Stability and Climate-related Risks

9.1 European Commission report on monitoring of climate-related risk to financial stability

On 28 June 2024, the European Commission published a report on the monitoring of climate-related risk to financial stability, based on the mandate given by the Commission’s 2021 Strategy for Financing the Transition to a Sustainable Economy.  The report takes stock of the analytical work being carried out in the EU, identifies key challenges related to measuring the impact of climate-related risks on financial stability and outlines the policy responses taken so far.  Despite limited available analyses, the report covers both the transition and physical risks of climate change.

The report finds that:

• the impact on financial stability varies substantially between countries and economic sectors;
• the findings point to potential systemic risks; and
• sector-specific and economy-wide stress tests have shown that all financial market participants are impacted to varying degrees. 

The report considers, in particular, the impact of adverse scenarios on banks, insurers and investment funds.

The Commission notes that there remain challenges in quantifying the impact of climate-related risks on financial stability.  As the stress tests contribute to an ongoing learning process by the industry, supervisors and regulators, the analyses will need to be refined and complemented, to capture all the relevant exposures, risks and information.  The Commission suggests that current estimates on the impact of climate-related risks should be considered as a floor estimate for the real impact of climate-related risks, as the current projections are likely to underestimate the overall impact of  climate change.

Building on the ongoing analytical work and the findings of the Fit for 55 exercise, and as part of its overall strategy, the Commission will assess further improvements to the micro- and macroprudential frameworks for banks and non-banks. 

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,Dominic Hill, Emily Julier, and Jessica Dhodakia.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}