June 2024: EU elections put Green Deal at risk, ISSB harmonization roadmap, Denmark's carbon tax on agriculture, and more

Key highlights from June 2024 in the sustainability space.

1-Right swing in European Parliament elections

European Parliament elections took place between 6-9th of June, resulting in heavy losses for Green parties and associated concerns about the future of the EU Green Deal. It is not expected that existing protections would be rolled back, as the centre of the political spectrum still commands a majority in the Parliament, but its ability to pass new measures to advance the sustainability agenda is put into question. Surprisingly, on June 17, the environment ministers passed a landmark nature restoration law (Regulation on Nature Restoration). While this vote does not negate the fact that it will certainly be more difficult to get ambitious environmental legislation off the ground in the next five years, the Green Deal may well survive. 

2-ISSB promises further harmonisation of global sustainability disclosure reporting 

The 2024 IFRS Foundation Conference, which took place in London on the 24-25th of June, saw an announcement from the International Sustainability Standards Board (ISSB) to the effect that the Board will deliver further harmonisation and consolidation of the disclosure reporting landscape in the next two years, as part of their new work plan. This goal will complement the ISSB’s priority of supporting the implementation of IFRS S1 and S2. As part of this new agenda, the IFRS will assume responsibility for disclosure-specific materials developed by the UK Transition Plan Taskforce, effectively bringing the technical work of the TPT to an end. 

3-Denmark introduces Europe’s first CO2 emissions tax on agriculture

On the 24th of June, the Danish Government agreed to introduce Europe’s first carbon tax on agriculture, at the conclusion of a five-month negotiation with farming and conservation groups. The move is significant, as Denmark is one of the world’s foremost pork and dairy exporters, and is expected to enable the Nordic country to reach its target of cutting 70 percent of its total emissions by 2030. There seems to be broad-based consensus around the tax in Denmark, while New Zealand had to end plans to price agricultural emissions just this month due to widespread pressure from farmers. 

4-Market activity around carbon credits

Throughout the month of June, there was significant market activity around carbon credits, with many million tons of carbon removal credits being sold. Among these is an 8 million tonne removal agreement signed by Microsoft with investment group BTG Pactual, one of the largest nature based carbon removal deals, if not the largest.

- Content prepared with the help of Defne Fresko Tasci.

May 2024: New ESMA guidelines against greenwashing, ISSB/ESRS interoperability & Climate change litigation in France

Key highlights from May 2024 in the sustainability space.

1- EU finalises rules for combatting greenwashing in fund names

On the 14th of May, the European Securities and Markets Authority (ESMA) released final guidelines for the use of ESG/sustainability-related terms in investment fund names. These guidelines are intended to combat the risk of greenwashing in the naming of investment funds, as increased investor demand for sustainable investing has incentivised asset managers to use such labels liberally to attract capital. The document defines thresholds to satisfy before a fund can be called “sustainable”, and establishes a “transition” category for investments that are on the path to becoming green even if they don’t qualify as such just yet. It also specifies exclusion criteria for these different funds, applying stricter Paris-Aligned Benchmark (PAB) exclusions to funds using environmental terms while covering funds using transition related terms with lighter EU Climate Transition Benchmark (CTB) exclusions. To comply with these new guidelines, over 40% of investment funds in the EU may be required to change names or sell certain assets, according to an analysis released by sustainability technology platform Clarity AI. 

2-IFRS Foundation and EFRAG publish interoperability guidance

On the 2nd of May, the IFRS foundation and EFRAG published guidance material to illustrate the interoperability between the ISSB and ESRS* standards. The publication is intended to provide practical support to explain “how companies can efficiently comply with both sets of standards.” The guidance elaborates on the alignment of key concepts such as materiality and explains how a company starting to disclose with either set of standards can ensure compliance with the other. The document was designed to reduce complexity and fragmentation in the market for sustainability disclosure standards, in alignment with the ISSB’s founding ethos of providing a comprehensive global baseline for such standards. This is a welcome development as the disclosure requirements faced by companies are increasingly heavy and difficult to navigate. The guidance should enable companies to better collect, govern and control data, contributing to the comparability of data across the board and enhancing companies’ accountability in this respect. 

*The European Sustainability Reporting Standards are the benchmark followed by companies to disclose under the Corporate Sustainability Reporting Directive. (CSRD) 

3-Criminal complaint against French energy company 

On May 21, three NGOs and eight individuals filed a criminal complaint in Paris against TotalEnergies’ board of directors and main shareholders for their contribution to climate change and its fatal impact on human and non-human lives. The lawsuit relies on articles 223-1, 221-6, 223-7 of the French criminal code and article L. 415-3 of the French environment code. The claimants argue that TotalEnergies’ strategic direction contributed to climate change by expanding fossil fuel extraction as the company figures among the top emitters of greenhouse gases globally. The case comes amid the rising frequency of criminal proceedings related to alleged climate change wrongdoings globally. Notably, the complaint targets natural persons along with the company itself. French courts have previously admitted the liability of a director in involuntary manslaughter cases under specific circumstances. It remains to be seen whether such an argument will be successful in this case, as a direct causal relationship will be difficult to prove. 

- Content prepared with the help of Defne Fresko Tasci.

April 2024: CS3D approved, EU exits Energy Charter Treaty, Climate Change litigation update, and more

Key highlights from April 2024 in the sustainability space.

1-EU Parliament approves CS3D
On the 24th of April, the EU Parliament finally adopted the Corporate Sustainability Due Diligence Directive after much reported controversy in February. The Council agreed on a new compromise in March 2024, dramatically reducing the scope of the CS3D by raising the threshold for the EU companies covered by the rules to those with more than 1000 employees, instead of the initial 500, and to those with a revenue greater than €450 million, up from €150 million. 

While the watering down of the Directive is regrettable, it ensured the adoption of the directive while keeping its core intact, according to the Vice-President of the EU Parliament, Heidi Hautala. The timeline for the implementation of the Directive will start in 2027 for companies that have over 5,000 employees and a turnover of €1.5 billion, and will progressively apply to smaller companies in 2028 and 2029, giving them more time to prepare for implementation.

2-EU Parliament votes for withdrawal from the Energy Charter Treaty 

On the same day where it approved the CS3D, the European Parliament voted to withdraw the European Union from the Energy Charter Treaty (ECT 1998). The treaty is often viewed as an obstacle to climate action as it allows conventional fossil fuel companies to make claims against states adopting clean energy transition policies. The UK had previously announced in February that they would be leaving the ECT. These decisions come following unsuccessful attempts at modernising the treaty in a way that accommodates the EU’s ambitious sustainability agenda through the EU Green Deal.  

3-ECtHR rules on sufficiency of measures combating climate change 

On April 9, the European Court of Human Rights issued rulings in three landmark climate change cases against France, Switzerland and Portugal (among others.) The Court was asked to determine whether the states’ allegedly insufficient measures to combat climate change amounted to a violation of the individual human rights of European citizens as guaranteed by the European Convention on Human Rights (ECHR). While the Court dismissed the cases against France and Portugal on procedural grounds, the case against Switzerland proceeded. In Verein Klimaseniorinnen Schweiz v. Switzerland, the Grand Chamber of the Court decided that Switzerland had not taken the necessary steps to fight global warming and had therefore violated the applicant’s (a Swiss NGO) right to private and family life under Article 8 of the Convention.  

4-SBTi to accept use of carbon credits in relation to Scope 3 emissions

The Science Based Targets initiative (SBTi), an organisation focused on aligning corporate environmental sustainability action with the climate goals of the Paris Agreement, announced on April 9, that they were prepared to accept the use of environmental attribute certificates for the purpose of abatement of Scope 3 emissions. This announcement follows on from their announcement earlier this year that they plan to revise their Corporate Net Zero standard. They have explicitly stated that they will not attempt to validate the quality of carbon credits, instead establishing thresholds relating to the validity of such certificates. 

Nevertheless, this announcement has the potential to significantly increase the global use of energy attribute certificates such as carbon credits. In response, SBTi employees have reportedly issued an open letter, accusing the SBTI board of trustees of “undermining our Standard Operating Procedures and governance processes” as the possibility of using carbon credits could dissuade companies from taking direct action to reduce emissions. 

- Content prepared with the help of Defne Fresko Tasci.

March 2024: SEC Climate Disclosure Rules, French law targeting fast fashion, CSRD transposition in Germany, Digital Product Passports for EU Textiles

Key highlights from March 2024 in the sustainability space.

1-SEC adopts climate disclosure rules

On March 6, the Securities and Exchange Commission (SEC) adopted new climate related disclosure rules for public companies, in line with the April 2024 announced deadline. Echoing the objectives of the ISSB standards, these Rules are the SEC’s attempt at responding to widespread investor demand for more consistent, comparable and reliable information about the financial effects of climate-related risks and how companies manage those risks. 

According to the new rules, climate risks are to be assessed with a view to the actual and potential material impact of any identified climate-related risks on the company’s operations. This is different from the double materiality assessment required by the EU’s CSRD. The rules reflect the SEC’s concern to accommodate views from both sides of the political spectrum, and have been watered down from their original version by significantly limiting reporting requirements for Scope 1 and 2 emissions and removing Scope 3 reporting requirements. Despite these limitations, a coalition of ten Republican states launched a lawsuit in the US Federal Appeals Court to block the implementation of the new rules hours after their adoption. The states argue that the rules exceed the scope of the SEC mandate. The rules were temporarily paused by the 5th US Circuit Court of Appeals as a result of a separate lawsuit initiated by oilfield companies. Overall, the SEC Climate rules have triggered a flurry of lawsuits from both progressive NGOs and conservative stakeholders. 

2-French National Assembly moves to penalize fast fashion 

On March 14, the French National Assembly, voted in favor of a bill designed to  limit the negative environmental impact of brands such as Shein and Temu. The vote came after the revelation that Shein was listing more than 7200 new products on their website everyday, at prices so low that they arguably precluded fair competition. This can only resonate with the forced labour allegations often levied against these same retailers. France introducing legislation to limit the excesses of ultra fast fashion is a welcome development for most. The proposed legislation, which still needs to pass the French Senate, provides for a surcharge linked to the ecological footprint of mass produced items, starting at €5 in 2025, and rising to €10 by 2030. The charge is capped at 50% of an item’s price tag. The bill further limits advertising for fast fashion company, undermining the algorithmically attuned social media marketing favoured by these brands. 

3-German government consults on CSRD implementation law
On the 22nd of March, the German Federal Ministry of Justice launched a consultation on a draft law for the interpretation of the Corporate Sustainability Reporting Directive (CSRD). The consultation closes on April 19. 

With the 6 July 2024 deadline for the transposition of the CSRD into national law draws near, Germany joins 22 out of the 30 countries expected to transpose the directive (27 Member States, Iceland, Liechtenstein and Norway) that have at least launched a consultation on CSRD implementing legislation. 

4-Pilot project about Digital Product Passports presented at event in Sweden

The EU strategy for sustainable and circular textiles, published in March 2022, calls for Digital Product Passports to be mandatory on all textile products offered for sale in the EU by 2030. These are expected to take forms such as QR codes that would link to information about products’ sustainability such as durability and reparability to improve the transparency and traceability of textiles.The details of the operationalization of the DPPs are expected to be clarified by the Ecodesign Sustainable Product Regulation (ESPR).

Ahead of the entry into force of this Regulation, a pilot project overseen by Trace4Value, a program coordinated by the RISE Research Institutes of Sweden, is working to better understand the implementation of these DPPs in practice. On the 7th of March, this project was presented at the DCongress event organised by the Swedish Trade Federation and The Swedish Exhibition & Congress Centre in Gothenburg. Two sustainable fashion brands currently participate in this pilot project, implementing DPPs on their garments. 

- Content prepared with the help of Defne Fresko Tasci.

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.