July 2024: US Climate reporting, ESRS documentation, ESG in the UK, and more

Key highlights from July 2024 in the sustainability space.

1- Update on US Climate Reporting Rules 

Back in October 2023, we had reported that California had adopted first-in-the-US corporate climate disclosure bills. This month, Governor Newsom introduced amendments to delay the compliance deadlines with the bills by two years, deeming compliance with them ‘infeasible’ but confirming that the state remains committed to implementing the regime. California is not alone in its commitment to sustainability related disclosure requirements, with a report published by Fitch on the 9th of July revealing that Washington, New York, Illinois and Minnesota are also going ahead with similar disclosure requirements. The progression of these laws and regulations at state level reveals that thousands of companies operating in the US will - eventually - be required to provide climate-related reporting, even in the potential absence of effective climate reporting rules from the Securities and Exchange Commission.  

2- Activity around ESRS

New material around the European Sustainability Reporting Standards (ESRS) were published this month and should prove particularly useful for companies preparing to disclose under the CSRD in 2025.  First, on the 10th of July, the Global Reporting Initiative (GRI) published a Q&A document on the meaning of the ESRS for existing users of the GRI Standards. Then, on the 25th of July, EFRAG released a study analysing early practices of companies preparing to disclose under the ESRS, highlighting the opportunities and challenges faced by these entities. Shortly thereafter, on the 26th of July, EFRAG issued new explanations of the ESRS as part of its Compilation of Explanations. 

3- Turning point for ESG in the UK as Labour gains power

On the 4th of July, the general election in the UK saw a Labour government gain power for the first time in 14 years, shepherding in a new era for sustainability in the UK. The elections are expected to have significant consequences for ESG in the UK, as the Labour government differs significantly from the preceding Conservative governments on multiple policy outlooks relating to this front. Indeed, the new government has demonstrated a sustained commitment to the energy transition agenda and net-zero policy, highlighting these issues as a key priority during their election campaign. The government is also expected to undertake significant action in relation to Diversity, Equality and Inclusion. The prominence of these issues in the new government’s agenda is promising for the future of ESG in the UK. 

4- New Zealand finalises groundbreaking trade deal to eliminate tariffs on sustainable goods 

On the 2nd of July, New Zealand concluded a pioneering trade deal with Costa Rica, Iceland and Switzerland that will see tariffs removed from hundreds of sustainable and eco-friendly products, according to Trade and Agriculture Minister Todd McClay. The Agreement on Climate Change, Trade and Sustainability (ACCTS) sets an example for multilateral action on climate change, demonstrating how sustainability-enhancing initiatives can simultaneously boost states’ economies.

- Content prepared with the help of Defne Fresko Tasci.

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.