February 2024: CS3D failure, Exxon sues shareholders, Sustainability reporting in China, and more

Key highlights from February 2024 in the sustainability space.

1-CS3D fails in Council vote

The European Union’s Corporate Sustainability Due Diligence Directive (CS3D) faced strong and swelling opposition after the release of its final draft on the 20th of January. Initially scheduled on the 9th of February, the Council vote was postponed after Germany announced that they would abstain followed by an announcement to the same effect by Italy. 

The reluctance of Germany and Italy to back the CS3D follows a recent but considerable chain of disregulatory moves by different EU institutions and member states, including Germany’s attempt to redefine small and medium enterprises to reduce the regulatory burden of the ESRS and a recently approved two year delay on the implementation of sector-specific standards under the CSRD.

The vote on the CS3D was briefly rescheduled for the 14th of February, before being moved again to the 28th. The directive failed in this vote, giving rise to concerns that it might be dead for good given  the approaching EU Parliament Elections. As the composition of the Parliament is likely to change after the next elections, removing the majority support for the CS3D that was in place before Germany’s decision to abstain, the CS3D may have taken its last breath. 

This is a major blow to global human rights according to Volker Turk, the UN High Commissioner for Human Rights, who had urged EU leaders to vote to pass the directive. Overall, this failure does not bode well for the future of the EU Green Deal after the June elections. 

2-Investors pull climate motion after ExxonMobil sues

In January, two minor investors in ExxonMobil (Follow This, an Amsterdam-based green shareholder group, and Arjuna Capital, a US registered investment adviser) had introduced a resolution to urge the company to set more ambitious climate targets at its annual meeting. On the 22nd of January, ExxonMobil unexpectedly responded by suing to prevent the vote on this motion arguing that the shareholders violated SEC rules for such investor petitions.  

On the 2nd of February, the investors responded by withdrawing the resolution, in a move that is likely to have a chilling effect on shareholder activism in corporate America. However, in an even more unexpected turn of events, ExxonMobil decided to press on with the lawsuit. This marks a new stage in the ongoing conflict over ESG investing between publicly listed companies such as Exxon and their more activist-minded shareholders. While corporate actors argue that the proliferation in such politically motivated proposals go beyond the appropriate scope of the proxy ballots in which they are typically introduced, investors have sounded the alarm over the possibility of an illegitimate interference with shareholder rights. 

Exxon has been widely criticised for this move. Natasha Lamb, the chief investment officer at Arjuna capital, said that this amounts to a tactic of intimidation and bullying. 

3-China’s new mandatory sustainability reporting requirements
Three major stock markets in China, the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and the Beijing Stock Exchange (BSE), announced the publication of new sustainability reporting guidelines for listed companies. Beginning in 2026, large companies listed on the Shanghai, Shenzhen, and Beijing Stock Exchanges will have to disclose a range of sustainability information across a range of ESG related topics including climate change, biodiversity protection and rural revitalisation. This complements the National Biodiversity and Strategy Action Plan published by the Chinese Government last month. 

The rules include disclosures relating to Scope 3 emissions and adopt the “double materiality” approach of the EU for the disclosure threshold. They are predicted to apply to 50% of the listed value of these markets, composed of about 500 companies.  

4-Malaysia’s consultation on the ISSB standards

On the 15th of February, Malaysia’s Advisory Committee on Sustainability Reporting (ACSR) published a consultation paper to solicit feedback from stakeholders on the proposed adoption of the ISSB disclosure standards. The consultation period runs from the 15th of February until the 21st of March. The issues currently open for consultation include the proposed timing of the adoption of the disclosures, transition relief for certain requirements, and the implementation of a mandatory external assurance framework. 

This is significant for the global progression of the ISSB standards as Malaysia has joined the UK, Canada, Brazil, Brunei, Myanmar, Nigeria, Kenya, Japan, South Korea and Vietnam in their intention to adopt the ISSB standards into their national regime as mandatory disclosure standards. 

- Content prepared with the help of Defne Fresko Tasci.

January 2024: EU empowers consumers against greenwashing, Biodiversity disclosures, French Greenfin label update, and more

Key highlights from January 2024 in the sustainability space.

1-The European Parliament adopts new law banning greenwashing and misleading product information

On the 17th of January 2024 the EU Parliament adopted a Directive Empowering Consumers for the Green Transition. This vote is seen as a further attempt to protect consumers from misleading marketing practices and to help them make better purchasing choices. The Directive adds a number of problematic marketing habits related to greenwashing to the EU list of banned commercial practices by amending the Unfair Commercial Practices Directive and the Consumer Rights Directive. 

The rules aim to make product labelling clearer by banning the use of generic environmental claims like “natural” and “biodegradable” without supporting evidence. It also increases the focus of producers and consumers on the durability of goods. This Directive is expected to work together with the Green Claims Directive. 

Interestingly, the Directive bans making claims about carbon offsets having a neutral, reduced or positive impact on the environment. Recital 12 of the revised text explains that claims about carbon offsets will only be allowed if they are based on the actual lifecycle of the product, and not on offsetting mechanisms that are outside the product’s value chain. 

2-Biodiversity at the forefront of ESG 

Biodiversity is poised to attract attention and investment throughout 2024, entering the political mainstream. In January alone, there have been numerous biodiversity related initiatives around the world. A focus on integrating biodiversity into essential climate action is clearly developing. 

Importantly, on the 25th of January 2024, the Global Reporting Initiative (GRI) announced the publication of “GRI 101: Biodiversity 2024”. The new standard supersedes “GRI 304: Biodiversity 2016” and will be effective starting January 2026.  This is a major update to the existing standard, facilitating disclosures on the significance and management of biodiversity impacts. The standard is a welcome addition to other biodiversity related regulatory initiatives such as the EU Deforestation Act, the EU Corporate Sustainability Reporting Directive and the TNFD recommendations mentioned above. 

This focus on biodiversity is not geographically limited to Europe, with investors welcoming China’s plans for a biodiversity disclosure framework. The National Biodiversity Strategy and Action Plan (NBSAP), published on the 18th of January, focuses on biodiversity mainstreaming, addressing threats to biodiversity loss, sustainable use, sharing of biodiversity and modernising biodiversity governance. 

Alongside these biodiversity disclosure regimes, it is expected that there will be increasing attempts throughout the year to give legal rights and political representation to nonhuman animals, species and places, in an attempt to increase the legal protection offered to biodiversity. 

3-Inclusion of the nuclear sector into the French Greenfin Label

On the 8th of January 2024, the French Ministry for Ecological Transition and Territorial Cohesion published the new Greenfin Label standards. 

Eligibility criteria were revised to include nuclear energy in the activities that the label can cover. More specifically, it allows labelled investors to invest in businesses with over 5% turnover generated by nuclear energy. For these purposes, nuclear energy has been defined as “all economic activities enabling the production of energy from nuclear technology, including fuel cycle and radioactive waste management technologies (in accordance with current European regulations (EURATOM directive 2011/70) or equivalent).”

This is consistent with the EU Taxonomy, as nuclear energy is seen as one of the key tools to reduce fossil fuel dependence to meet the Paris Agreement goals. 

4-TNFD announces commitment of Early-Adopters

At the World Economic Forum Meeting in Davos, on the 16th of January 2024, the Taskforce on Nature-related Financial Disclosures (TNFD) announced that 320 organisations from over 46 countries have committed to start making nature-related disclosures based on the TNFD recommendations published in September 2023. Firms absent from this Early-Adopters list say they are working out if, when and how they can make the move towards the TNFD recommendations. The firms who are included in the list will publish their disclosures by 2025 at the latest. This does not necessarily mean that they will cover all 14 disclosures. They are expected to phase-in to the disclosures as was the case with the Task Force on Climate Related Financial Disclosures (TCFD) Recommendations. 

These recommendations are intended to provide the tools for the halting and reversal of nature loss under the Global Biodiversity Framework. They provide quantifiable disclosure recommendations relating to nature, a crucial counterpart to the sustainability and climate-related disclosures of the ISSB standards. The ISSB has confirmed that it will look to the work of the TNFD in its future endeavours.

- Content prepared with the help of Defne Fresko Tasci.

December 2023: COP 28 takeaways, CS3D, Australian anti-greenwashing guidance, and more

Key highlights from December 2023 in the sustainability space.

COP 28 : takeaways from a controversial conference

The 2023 United Nations Climate Change Conference (COP 28) took place between the 30th of November and the 12th of December in Dubai, UAE. Under the looming threat of the 1.5°C target being breached in the next five years, and 2023 breaking heat records, tensions were high. The choice of location, given the Gulf Countries’ ties with the fossil fuel industry, and the attendance of more than 2000 fossil fuel executives was controversial. A remark by conference Sultan Al Jaber, that “there is ‘no science’” behind phasing out fossil fuel to stay below 1.5ºC alarmed scientists.

Despite this, a “transition away from fossil fuels” was mentioned for the first time in a final COP agreement, although it was a diluted version of the proposed “phasing-out.”  Countries also committed to tripling the global renewable energy capacity by 2030. Importantly, the “Loss and Damage fund” that was first agreed in COP 27 was operationalized. Emphasis was placed on investing in climate-tech start-ups for the energy transition. However, the operationalization of Article 6.2 and 6.4 of the Paris Agreement was rejected after significant debate. 

The conference highlighted the private sector’s role in the energy transition and while it didn’t meet all expectations, it marked a valuable step toward progress in tackling climate change and its economic impacts.

Provisional Agreement on the CSDDD

 On the 14th of December the EU Parliament and Council reached a provisional political agreement on the “Corporate Sustainability Due Diligence Directive.” The provisional agreement frames the scope of the directive, clarifies the liabilities for non-compliant companies, better defines the different penalties, and completes the list of rights and obligations that companies must comply with. As such, the CSDDD (or CS3D) will require many companies in the EU and beyond to conduct environmental and human rights due diligence on their global operations and value chain, and compel them to adopt a transition plan for climate change mitigation.

Some of the more contested aspects of the agreement have included the definition of the value chain in scope; application of obligations to the financial sector; and penalties and civil liability for non-compliance. The final text of the agreement has not been published yet, as it needs to be adopted by both the Council and the Parliament.

New Anti-Greenwashing Guidance published in Australia 

On the 12th of December 2023, the Australian Competition and Consumer Commission released its final guidance on “making environmental claims”  for businesses. The guidance follows the results of a “greenwashing internet sweep” released in March of this year where the Commission found that more than 50% of companies reviewed made “concerning” environmental and sustainability related claims.  

The guidance contains 8 principles to ensure that environmental marketing and advertising claims made by businesses do not mislead consumers as to the accuracy of their “greenness.” This final version incorporates feedback from over 150 stakeholders across consumer, business and environmental organizations. The guidance provides robust penalties for false or misleading claims. The maximum penalty for each contravention is the greater of either $50 million, 3 times the value of the benefit attributable to the contravention, or 30% of the corporation’s adjusted turnover during the relevant period. It remains to be seen whether the guidance will actually achieve its aim of reducing greenwashing to encourage fair competition. 

SEC announces new deadline for climate related disclosure rules 

The US Securities and Exchange Commission (SEC) has set an April 2024 deadline for several new ESG and climate-related rules following the Biden administration’s rulemaking agenda. These include proposed changes to rule 14a-8, easing filing requirements for shareholder proposals, and new ESG-disclosure rules for investment firms. The most notable are the climate-related disclosure rules, which have faced significant pushback from business groups, Republicans and some Democrats. These rules  would require companies to disclose climate risks likely to impact their business and report on greenhouse gas emissions and certain climate-related financial metrics. 

If adopted, these rules could be at risk. A Republican-controlled Congress could revoke them under the Congressional Review Act, unless blocked by a presidential veto.

- Content prepared with the help of Defne Fresko Tasci.

November 2023: SFDR anniversary, Greenwashing, Tech and sustainability reporting

Key highlights from November 2023 in the sustainability space.

4th Anniversary of the SFDR 

The 27th of November marked four years since the adoption of the Sustainable Finance Disclosure Regulation (SFDR). It has been over two years since the SFDR started applying to entities concerned by the entry-level regulation on the 10th of March 2021. As it stands, the lack of coherence within EU guidance and the lack of clarity of the adopted definitions pertaining to sustainable investment in the regulation seems to be one of the major problems with the SFDR. This lack of clarity has led to a number of greenwashing accusations. With the implementation of the Regulatory Technical Standards (SFDR Level 2) at the start of 2023, at least 300 investment products (more than $125 billion of assets) were downgraded from Article 9 to Article 8 by fund managers in anticipation of heightened reporting requirements. The EU Commission has launched a consultation on the revision (or possible overhaul) of the SFDR in response to these concerns. 

Concerns about greenwashing in sustainability reporting 

According to a new survey by PwC, published on the 15th of November, more than nine in ten investors (94%) believe corporate reporting on sustainability performance contains unsupported claims. The survey includes responses from 345 investors and analysts globally and demonstrates the need for robust disclosures on sustainability. This is in line with the UK Financial Conduct Authority’s recent findings that many firms’ investment products are not aligned with their stated ESG goals. Notably, France addressed the increasing concerns and information needs of investors by excluding fossil fuel companies from its newly created Socially Responsible Investment (SRI) label entirely. 

CDP to align reporting platform with European Sustainability Reporting Standards 

On November 8th, climate research provider and environmental disclosure platform CDP announced that they have entered into an agreement with the European Financial Reporting Advisory Group (EFRAG) whereby they will maximise the alignment of their disclosure system with the recently adopted ESRS. The collaboration aims to support market readiness for quality environmental reporting by accelerating the implementation of the ESRS. As CDP disclosing companies represent nearly 90% of European market value, such an alignment with the ESRS will be valuable both to individual companies and to the market generally. This follows CDP and ISSB’s announcement in November 2022 that the CDP also pursues alignment with the ISSB Climate disclosure standard. 

Data Solutions to Build Sustainability Reporting Capacity 

With the emergence of multiple new sustainability-related disclosure regimes in 2023, companies have been concerned about how to process large volumes of data to comply with these requirements. The Global Reporting Initiative and the IFRS foundation established a new Sustainability Innovation Lab to close the gap between the required disclosures and the sustainability capacity and expertise of companies. The Lab was launched in Singapore on the 20th of November. In parallel, multiple tech solutions were advanced to help companies increase their data collection and processing capabilities. These solutions range from AI based data collection to mapping tools tailored to meet a wide range of disclosure regimes. Tech companies seem to be focusing on the expansion and integration of their existing data management platforms to be able to provide a one-stop shop for data collection and reporting in the future. 

- Content prepared with the help of Defne Fresko Tasci.

OCTOBER 2023: ESRS final adoption, California Climate bills, EU Green Bond Standards, and more

Key highlights from October 2023 in the sustainability space.

European Sustainability Reporting Standards finally adopted, despite strong resistance

EU lawmakers mainly representing the Group of the European People’s Party (EPP Group) in the European Parliament pushed for the rejection of the recently adopted ESRS. They were advocating for replacing the standards with simpler, less burdensome and less expansive sustainability disclosure rules for companies. It is worth noting that these standards had already been watered down from the draft version that EFRAG had produced and exposed for comments from the 30th of April 2022 until the 8th August 2022. This resistance came amid wider pushback against ESG in Europe (including the UK) and in the US. Capital flows into ESG have been declining, and ESG funds just suffered their worst quarter. On October 18, the majority in the Parliament narrowly rejected this push, confirming the adoption of the standards. More than 50000 companies are expected to start reporting under the CSRD in January 2024.

California adopts first-in-the-nation corporate climate disclosure bills 

Two climate disclosure bills signed by California Governor Gavin Newsom on October 7 require large corporations operating in the state to disclose both their carbon footprints (SB 253) and their climate-related financial risks (SB261) starting in 2026. Even though the regulations only apply to companies with revenues over $1 billion and $500 million respectively, the laws are groundbreaking as they are the first of their kind to be adopted in the US. ​​They go beyond proposed federal climate disclosure rules, which would only apply to publicly traded companies and wouldn’t mandate full Scope 3 disclosure. The bills will be implemented by regulations by the California Air Standards Board. In two statements issued accompanying the signed laws, Gov. Newsom instructed the board to monitor the cost impacts of the bills and to make recommendations to streamline both programs.

EU Adopts European Green Bond Standard

The EU Council adopted a regulation creating a European Green Bond Standard that was approved by the Parliament earlier this month. This is the last major step for the establishment of a new European Green Bonds (EuGB) label, aimed at fighting greenwashing and helping advance the sustainable finance market in the EU. The new regulation sets out requirements for issuers wishing to use the label and includes voluntary disclosure guidelines for other environmentally sustainable bonds and sustainability-linked bonds issued in the EU. These disclosures follow a strict set of investment and transparency criteria, including the use of the proceeds from the bonds, the commitment to a green transition plan, and the contribution of the investments to those plans to ensure that investors are confident their investments are financing sustainable business activities and technologies. All proceeds of European green bonds will need to be invested in economic activities that are aligned with the EU taxonomy for sustainable activities in the sectors that are already covered by it. 

Greenwashing and decarbonisation in the aviation industry

As investment in green and sustainable funds increase, companies face intensifying scrutiny over greenwashing allegations. The aviation industry is especially targetted as it accounted for 2% of overall global carbon emissions in 2022. Last June, Austrian Airlines was found guilty by an Austrian court for misleading the public as to its sustainability claims when it advertised flights as carbon neutral, which is not yet technically possible.
While the possibility of such a “carbon neutral” flight seems to be a long way into the future, the European Council adopted the “ReFuelEU Aviation Regulation” last month to accelerate the incorporation by airlines of sustainable aviation fuel (SAF). The regulation aims to mandate the use of 70% SAF by 2050. Rolls Royce announced this month the successful completion of tests on some of its engines using 100% SAF. 

- Content prepared with the help of Defne Fresko Tasci.