MAY 2022: Mandatory climate disclosures in Canada, Clarifying the scope of the ATS, SEC’s ESG disclosure proposal, Public procurement and ESG in France, TESLA, BNP & more

Key highlights from May 2022 in the sustainability space.

New mandatory climate disclosures in Canada – Beginning in 2024, federally regulated banks and insurers will be required to provide climate disclosures in Canada, in alignment with the TCFD framework. Recognizing that “Climate change and the global response to the threats it poses have the potential to significantly impact the safety and soundness of federally regulated financial institutions, and the financial system more broadly”, the Guidelines aim to support these institutions in developing greater resilience to these risks. The proposed draft is entering a public consultation process and is open for comments.

Clarifying the scope of the Alien Tort Statute –  This month, two US Senators introduced the Alien Tort Statute Clarification Act (ATSCA) in an attempt to clarify the extraterritorial application of the Alien Tort Statute. Finding that “The Alien Tort Statute should be available against those responsible for human rights abuses whenever they are subject to personal jurisdiction in the United States, regardless of where the abuse occurred”, the ATSCA would amend the ATS to clarify that it applies to human rights abuses committed by a national of the United States, an alien lawfully admitted for permanent residence in the United States, or an alleged defendant that is present in the United States, irrespective of the nationality of the alleged defendant. This Act, if passed, would significantly improve the prospects of strategic litigations in US courts concerning violations of human rights abroad.

SEC’s ESG disclosure proposal – When ESG investment includes a “wide range” of funds managing potentially trillions of dollars under management, the Securities and Exchange Commission is proposing to amend the rule under the Investment Company Act that addresses certain broad categories of investment company names that are likely to mislead investors about an investment company’s investments and risks. With the stated design “to increase investor protection” the proposal seeks to improve and clarify the disclosure and recordkeeping requirements for certain funds with a name suggesting an ESG focus.

ESG & Public procurement in France – Decree nº2022-767, which amends the French public procurement Code, halves the spending threshold above which regulated public buyers must design a plan promoting socially and environmentally responsible buys. From 100 million, the new threshold is fixed at 50 million and will be effective starting January 1, 2023.

ESG ratings, the TESLA test – As Tesla Inc. was dropped from the S&P 500 ESG index, its CEO immediately reacted calling ESG “a scam”. The globally recognized sustainability index that ranks companies in terms of their environmental, social and governance (ESG) standards also excluded Chevron Corp and Johnson & Johnson, among other others. Justifying its decision, S&P cited claims of racial discrimination, poor working conditions at a Tesla factory in California, Tesla’s handling of an investigation by the National Highway Traffic Safety Administration after multiple deaths and injuries were linked to the company’s Autopilot system as well as the company’s lack of low carbon strategy. Regardless of Tesla’s shortcomings, the exclusion of the electric carmaker’s from the index while companies such as Amazon or Exxon Mobil remain listed raises the question of what weight should be given to a company’s social and environmental impact in absolute terms rather than relative to its peers.

BNP Paribas’s ambitious climate pledge – In its 55-page Climate Analytics and Alignment Report, BNP Paribas commits not to finance any oil and gas projects and related infrastructure in the Arctic and in the Amazon regions. This geographical exclusion is a first in the industry and its impact will be closely watched.

APRIL 2022: New European Sustainability Reporting Standards, EU anti-SLAPP directive, first SEC enforcement based on ESG disclosures & more

Key highlights from April 2022 in the sustainability space.

Draft European Sustainability Reporting Standards published - The European Financial Reporting Advisory Group (EFRAG) announced the release of its initial draft of European Sustainability Reporting Standards, setting out the proposed rules and requirements for companies to report on sustainability-related impacts, opportunities and risks under the EU’s Corporate Sustainable Reporting Directive (CSRD) which is currently under development. The draft is subject to public consultation until August 8, 2022.

Proposal for directive against SLAPP – The European Commission issued a proposal for a directive protecting persons who engage in public participation from manifestly unfounded or abusive court proceedings (“strategic lawsuits against public participation” or SLAPP). Recognizing SLAPP as an increasingly prevalent phenomenon in the European Union, the Commission’s proposal aims to protect the targets of these litigations and to limit the further expansion of the phenomenon. Under the proposed regulation, courts would be entitled to request security for costs from claimants, and they would offer accelerated early dismissal procedures. Also of note, the proposal includes a shifted burden of proof in early dismissal proceedings, as well as the availability of “effective, proportionate and dissuasive penalties on the party who brought those proceeding.” The feedback period is scheduled to close at the end of June.

ESG listed among SEC Division of Examinations’ priorities for 2022 – In a March 30 press release, the SEC’s Division of Examinations announced it would continue its focus on ESG-related advisory services and investment products and focus particularly on whether registered investment advisors and registered funds are accurately disclosing their ESG investing approaches and have policies and procedures in place to prevent violations of the federal securities laws in connection with their ESG-related disclosures.

SEC first ESG-related enforcement action – In line with its announced priorities, the SEC filed a complaint on April 28, alleging that Vale, one of the largest iron ore’s producers worldwide, published false and misleading information in its sustainability report and other ESG disclosures. The Brumadinho dam had collapsed on January 25, 2019, killing 270 people and causing an environmental disaster at the Paraopeba River. Meanwhile, Vale’s ESG reports and a webinar posted on the company’s website emphasized the company’s commitment to dam safety. This case should be watched closely as it may inform on the various risks linked to ESG-related statements, including enforcement actions.

Meta expands E2EE to all its messaging apps – After commissioning BSR to conduct a thorough Human Rights Impact Assessment of a possible expansion of end-to-end encryption to Messenger and Instagram DMs, Meta is moving forward. The report, which is published in full on Meta’s website, acknowledges the positive human rights impact of end-to-end encryption and makes 45 recommendations to ensure adverse impacts linked to the expansion of E2EE are mitigated.  Significant risks identified by BSR include the inhibition of Meta’s ability to detect, remove and report child sexual abuse and exploitation, the virality of hate speech and harmful misinformation as well as digital recruiting and general use by extremist and terrorist groups. A number of BSR’s recommendations touch on the necessary strengthening of user reporting mechanisms, the efficiency of which will be key to prevent and mitigate serious human rights violations linked to the use of these end—to-end encrypted platforms.

New Duty of Vigilance action against McDonald’s in France – One French and two Brazilian workers’ unions claim that McDonald’s coffee supplier committed serious human rights and environmental violations. Mc Donald’s orange juice supplier is also targeted by the plaintiffs of labor law violations. Mc Donald’s has so far failed to publish a vigilance plan as mandated by the 2017 French law on the duty of vigilance for companies with more than 5000 employees in France or meeting other distinct thresholds. McDonald’s has 3 months to comply and publish its vigilance plan before the three workers’ unions may bring their claims before the Tribunal Judiciaire de Paris.

MARCH 2022: EU sustainable textiles strategy, SEC climate disclosures & more

Key highlights from March 2022 in the sustainability space.

EU Strategy for Sustainable and Circular Textiles. The European Commission shared its EU Strategy for Sustainable and Circular Textiles. Acknowledging that the consumption of textiles in the UE accounts for the 4th highest negative impact on the environment and on climate change, the EU Commission points to fast fashion as the main culprit as the main source of overproduction and overconsumption.  Noting that key stakeholders « are already focusing on increasing the sustainability and circularity of this sector », the Commission could only find that « the transition is slow and the environmental and climate footprint of the sector remains high. »

Notably, the proposed framework includes the introduction of mandatory Ecodesign requirements, waste prevention measures, improved transparency around products’ sustainability characteristics, or the further regulation of green claims .

The Strategy implements  commitments made under  the European Green Deal, the new Circular Economy Action Plan and the Industrial Strategy, and aims to create a greener, more competitive, more modern and more resilient sector. Simultaneously, the Commission simultaneously launched an initiative to define Transition Pathways for the Textiles Ecosystem, which will kick off in the coming months.

SEC climate disclosure rules. While ESG reporting has seen an uptick in recent years, many public companies have never assessed their climate-related risks and incorporated them into their enterprise risk management strategies, let alone reported on them. On March 21, the SEC proposed new rules to enhance and standardize climate-related disclosures for investors.  

Starting as early as FY 2023, registrants will be required to disclose information about climate-related risks that are reasonably likely to have a material impact on its business, results of operations, or financial condition, as well as their greenhouse gas emissions. The Proposal is considering phased-in dates for complying with the rules, to provide additional time for smaller registrants. Indeed compliance deadlines would go from FY 2023 for large accelerated filers to 2025 for smaller reporting companies. SRCs would further be exempt from reporting on their Scope 3 GHG emissions. Comments are expected before May 20, 2022.

New EU-US Privacy framework. Data privacy and security belong to sustainable business conduct and, as such, deserve to be covered here.  On March 25, 2022, the European Commission and the United States announced that they have agreed on a new Trans-Atlantic Data Privacy Framework. After nearly two years of uncertainty, this deal will rebuild transatlantic data data protection. The announced beneficiaries of the framework are the citizens on both sides of the Atlantic, with heightened personal data protection, closely followed by businesses. Indeed, data flows facilitated by the deal underpin “more than $1 trillion in cross-border commerce every year” states a fact sheet issued by the White House. Further details are expected from ongoing cooperation between the European Commission and US government as to how this agreement will materialize.

FEBRUARY 2022: EU proposal for corporate sustainability due diligence and IPPC's dark second report

Two publications to focus on this February 2022 in the sustainability space.

Long-awaited proposal for EU directive on corporate due diligence is finally out -  On February 23, the European Commission adopted a long-awaited proposal for a directive on corporate sustainability due diligence and accountability. After months of delays, French president Emmanuel Macron had announced last December that it would be one of the priorities of the French Presidency of the Council of the European Union. Noting that “Voluntary action does not appear to have resulted in large scale improvement across sectors», the proposal asserts that « Union legislation on corporate due diligence would advance respect for human rights and environmental protection, create a level playing field for companies within the Union and avoid fragmentation resulting from Member States acting on their own.”

Under the proposed framework – which isn’t expected to be finalized until 2023 – companies with over 500 employees and €150 million turnover will have a corporate duty to identify, prevent, stop and mitigate negative human rights and environmental impacts in their operations as well as their subsidiaries and value chains. The proposal envisions that companies with over 250 employees and 40 million turnover operating in high impact sectors such as mineral extraction, agriculture or the textile industry, will also be covered by the regulation but two years after the first group. Non-EU companies generating turnover in the EU aligned with those of groups 1 and 2 mentioned will also be in scope. While small and medium enterprises are not within the direct scope of the proposal, they would likely be indirectly impacted as subsidiaries or part of a covered company’s value chain.

Importantly and similar to what has emerged in the personal data protection world, it is envisioned that Member States will designate a dedicated authority to supervise and enforce the regulation, with a certain level of coordination through a Network of Supervisory Authorities set up by the Commission. Notably, the creation of a specific oversight agency is one of the recommendations made by the French Commission that evaluated the French duty of vigilance law of 2017 which opened the way for a European legislation on this issue, in a report published one day after the proposed directive.

Civil liability is also contemplated by the proposal although the burden of proof will remain on the victims to show that the damages they suffered result from a corporation’s failure to comply with its obligations. The European Parliament’s recommendation submitted in a year ago contemplated a shifted burden of proof, such that “undertakings that prove that they took all due care in line with this Directive to avoid the harm in question, or that the harm would have occurred even if all due care had been taken, are not held liable for that harm.” (article 19 of European Parliament resolution of 10 March 2021 with recommendations to the Commission on corporate due diligence and corporate accountability (2020/2129(INL))

United Nations’ IPPC second report published- the window is closing. A first report, finding that human influence has warmed the atmosphere, ocean and land, leading to rapid and widespread changes of a scale unprecedented over thousands of years and affecting every region across the globe, had laid out five illustrative scenarios driving climate model projections of changes in the climate system. The five scenarios projected a net global surface warming in the near and long term, and drafters warned that even if global net negative CO2 emissions were to be achieved and be sustained, leading to the global CO2-induced surface temperature increase to be gradually reversed, other climate changes would continue in their current direction for decades to millennia. UN Secretary-General Antonio Guterres had called that report a “code red for humanity”.

The second report, titled Climate Change Impacts, Adaptation and Vulnerability, which was published at the end of February, warns that “[t]he scientific evidence is unequivocal: climate change is a threat to human wellbeing and the health of the planet. Any further delay in concerted global action will miss a brief and rapidly closing window to secure a liveable future.” Notably, the authors find that “[c]limate change has caused substantial damages, and increasingly irreversible losses” and that “the extent and magnitude of climate change impacts are larger than estimated in previous assessments”. Chapter 16 lists a number of reasons for concerns (RFCs), some of which “include risks that are irreversible”. As the report clearly states, “[o]nce such risks materialise, as is expected at very high risk levels, the impacts would persist even if global temperatures would subsequently decline to levels associated with lower levels of risk in an ‘overshooting’ scenario.”

JANUARY 2022: New York's push for sustainable fashion, Swiss human rights due diligence law, Dow Jones' new ESG score and more

Here are some sustainability highlights from the month of January 2022:

New York pushes for a sustainable and accountable fashion industry. The Fashion Sustainability and Social Accountability Act was introduced to the state’s assembly early January and has gotten promising attention. Sponsored by Senator Alessandra Biaggi and assembly member Dr Anna Kelles, Assembly Bill A8352 requires fashion retailers and manufacturers doing business in New York and with global revenues exceeding $100 million to map at least 50% of their supply chain across all tiers of production, to disclose environmental and social due diligence policies, and to report on impact reduction targets compliance annually, among other due diligence and transparency obligations. The bill also establishes a community benefit fund for the purpose of implementing environmental benefit projects that directly and verifiably benefit environmental justice communities. Remedies under the bill include monetary damages as well as possible fines up to 2% of annual revenues for revenues higher than $450 million.

Swiss law on transparency and human rights due diligence. The Swiss Code of Obligations (CO) and Criminal Code were revised to incorporate reporting and due diligence obligations with respect to minerals and metals from conflict zones as well as child labor. While the scope of this legislation is limited to companies meeting a certain employees and turnover thresholds, it does include fines. Indeed, anyone intentionally providing a false indication in the reports or failing to maintain those reports may be fined up to 100,000 Swiss francs (approx. $110,000). Negligent behavior is also sanctioned. The new provisions will apply to reports starting in 2023.

Dow Jones launches a new data set to support ESG investing. Going beyond often self-serving company disclosures, Dow Jones’ scoring methodology combines classically used data with news from a wide range of  global sources. Importantly, the scoring model is aligned with SASB Standards. The scoring methodology was created under the leadership of The Wall Street Journal’s editorial team and co-developed with Arabesque S-Ray.   

President Biden signs the Uyghur Forced Labor Prevention Act into law.  Late last month, President Biden signed the Uyghur Forced Labor Prevention Act into law. The Act, designed to “ensure that goods made with forced labor in the Xinjiang Uyghur Autonomous Region of the People's Republic of China do not enter the United States market”, creates an import ban for any goods produced partially or entirely in the region, or produced by one of a number of enumerated entities, unless the importer complies with specific guidance and proves that the merchandise was not “mined, produced, or manufactured wholly or in part by forced labor.” The Act will be effective on June 21, 2022. 

IBM acquires Envizi, a software provider offering decision support tools to help build sustainable businesses. The company’s software automates the collection and compilation of hundreds of data types, facilitates data analysis and management through customizable dashboards, and supports major sustainability reporting frameworks. Envizi will integrate IBM’s Environmental Intelligence Suite, joining other AI-powered software helping organizations create more resilient and sustainable operations and supply chains.

Oeko-Tex launches its own Impact Calculator.  Oeko-Tex, the 30 year-old Swiss certification body widely recognized in the textiles and leather industry, launches its Impact Calculator. Designed to calculate facility and supply chain’s carbon and water footprint, the digital tool provides “an initial estimate and assessment on the materials and process steps that contribute most to their overall environmental impact.” More details are expected on the methodology and alignment with other assessment tools.