US
The SEC issued a final rule requiring registrants to provide climate-related disclosures in their annual reports and registration
On 6 March 2024 the US Securities and Exchange Commission (SEC) adopted a long-awaited final rule that requires registrants to disclose climate-related information in registration statements and annual reports [3]. The requirements aim to provide investors with consistent, comparable, and useful information for making investment decisions.
On 4 April, in the face of multiple lawsuits challenging the regulations, the SEC decided to put its climate reporting rule on hold. The SEC said in its ruling the stay does not indicate an abandonment of the rule, which it will continue to defend against a court challenge from Republican attorney generals.
It is worth noting that although the SEC legislation may be held up by further delays, the new climate disclosure rules in California are projected to have a wide-ranging impact on many US companies. It is estimated that more than 5,000 companies [4] with annual revenue in excess of $1bn doing business in California will be required to make disclosures under Senate Bill (SB) 253: Climate Corporate Data Accountability Act (and disclose their scope 1, 2, and 3 emissions, beginning in 2026). Even more companies would be captured under SB 261: Greenhouse gases: climate-related financial risk. SB 261 requires US entities that do business in California with total annual revenue of at least $500m to prepare and submit climate-related financial reports consistent with the Task Force on Climate-related Financial Disclosures (TCFD).
The final rule requires registrants to disclose the following in annual reports and registration statements:
- Impacts of climate-related risks that have had or are reasonably likely to have a material impact on the company’s business strategy, results of operations or financial condition, and the actual and potential material impacts of any identified climate-related risks on the company’s strategy, business model and outlook.
- Activities to mitigate climate-related risks, including quantitative and qualitative descriptions of material expenditures incurred and material impacts on financial estimates directly resulting from such activities, as well as the use of any transition plans, scenario analysis or internal carbon prices.
- Board oversight of climate-related risks and any role management plays in assessing and managing material climate-related risks; any processes for identifying, assessing and managing material climate-related risks; and, whether and how any such processes are integrated into the company’s overall risk management system.
- Climate Policies, including climate-related targets and goals, scenario analysis, internal carbon pricing and transition plans, to the extent that these tools are used by the business and are material.
- Material Scope 1 and 2 greenhouse gas (GHG) emissions disclosure for large, accelerated filers and accelerated filers, including an independent assurance report at the limited assurance level. For large, accelerated filers only, this will increase to a reasonable assurance level following a transition period.
- Financial statement disclosure regarding the effects of severe weather events and other natural conditions.
All domestic and foreign registrants, except for asset-backed issuers, must provide the disclosures. The final rules include a phase-in period for all registrants.
Global
The Net-Zero Banking Alliance has published updated guidelines for climate target setting
The Net-Zero Banking Alliance (NZBA) has adopted a new version of the guidelines for climate target setting for banks [5]. Industry-led and UN-convened NZBA is a group of more than 130 leading global banks committed to financing climate action to transition the real economy to Net Zero by 2050. This is the first time targets will cover banks’ capital markets activities – recognising that for some banks, capital markets arranging and underwriting services provided to clients in the issuance of new debt and equity instruments are their largest source of attributable GHG emissions.
The updated guidelines will also update technical language to keep pace with the changes in practices, methodologies, and data accessibility over the past three years. This includes improvements related to policy engagement and transition planning. The main ambition and fundamental principles of the initial guidelines remain unchanged.
UK
The UK government’s Spring Budget 2024 includes ESG related announcements
The announcements [6] include:
- Confirmation that the provision of ESG ratings will be brought under the regulatory perimeter of the FCA where these assessments of ESG factors are used for investment decisions and to influence capital allocation.
- A further £120m investment for the Green Industries Growth Accelerator (GIGA) to support the expansion of low-carbon manufacturing supply chains across the UK.
- £20m social finance fund announced to support the development of community-led housing schemes over 10 years, to support local communities to deliver the developments they want and need.
Various industry bodies representing investors, banks and other financial institutions welcomed the intention to regulate ESG rating providers. The additional £140m investment towards green and social schemes caused a rather muted response given its modest size.
The Transition Finance Market Review has launched a call for evidence to gather stakeholder input on developing the transition finance market in the UK
In the Green Finance Strategy 2023, the UK government announced plans to establish a market-led review to understand how the UK can become the best place in the world to raise transition finance. This TFMR was formally launched in January 2024 and will report to the UK government in summer 2024.
The TFMR launched a call for evidence [7] that focuses on defining the scope of transition finance, ensuring that transition finance remains integral and credible, understanding the barriers to transition finance, any opportunities for innovative use cases of transition finance and how to build the UK into the global hub for transition finance. The call for evidence is open until 25 April 2024.
EU
Agreement on new rules that ban products made with forced labour
The European Parliament and Council reached a provisional agreement on new rules that prohibit products made with forced labour from the EU market [8], which could be ground breaking in the field of human rights. In contrast to the EU CSDDD, which focuses on environmental and human rights due diligence, the new regulation prohibits products made with forced labour on the EU market.
The EU Commission will investigate suspected use of forced labour in companies’ supply chains when third countries are involved. Once proved, products with the use of forced labour will be withdrawn from the market. A framework will be created, alongside a list of high-risk goods and areas, for enforcing this ban. In addition, a new ‘Forced Labour Single Portal’ is being set up, which will include: guidelines, information on bans, databases of risk areas and sectors, as well as publicly available evidence and a whistle-blower portal.
EU Nature Restoration law hit by new challenges
It has been a bumpy road for the EU Nature Restoration law – legislation seeking to restore and protect natural habitats and ecosystems, including a mandatory target for EU countries to restore at least 20% of the EU’s land and sea areas by 2030. After surviving a Parliament vote in February, the law now faces lack of support (opposition or abstaining) from several member states, including Italy, Netherlands, Sweden, Poland, Finland, Hungary and Belgium [9]; placing the fate of the law in an uncertain position.
Moreover, soothing concerns of EU farmers associated with the more stringent rules may not be easy, especially when considering other factors: inflationary pressures and a less beneficial competitive environment, as the result of the Russian invasion of Ukraine. While the Belgian presidency is intending to work hard to resolve the deadlock, the timing is tight. Any substantial changes to the law would need to go back to Parliament with the last parliamentary session before the EU elections taking place at the end of April.
Deal reached on proposal to regulate packaging and packaging waste
The European Parliament and Council have agreed on updated regulations [10] aimed at decreasing, reutilising and recycling packaging, enhancing safety measures, and promoting the circular economy.
The new measures aim to make packaging used in the EU safer and more sustainable by requiring all packaging to be recyclable, minimising the presence of harmful substances, reducing unnecessary packaging, boosting the uptake of recycled content and improving collection and recycling. The proposal covers a few topics, including less packaging and restricting certain packaging formats, banning the use of “forever chemicals”, encouraging reuse and refill options for consumers, and recyclable packaging, better waste collection and recycling.
ESMA published a consultation on rules for external reviewers of EU green bonds
The EU Green Bond (EuGB) regulation entered into force on 21 December 2023 and will apply from 21 December 2024. The Regulation sets a requirement for firms willing to provide external review services to register with ESMA and comply with specific requirements laid out in the Regulation.
In March, ESMA released draft Regulatory Technical Standards (RTS) [11] related to the registration and supervision of external reviewers under the EuGB Regulation, clarifying the criteria for assessing applications for registration by external reviewers.
The EuGB Regulation requires ESMA to develop a series of RTS and Implementing Technical Standards (ITS). These will be delivered in two main packages. This first and current consultation package covers four draft RTS and 1 ITS on: (i) criteria to be assessed at the time of registration relating to senior management, board members and analytical resources; (ii) criteria to assess sound and prudent management, and management of conflicts of interest; (iii) criteria for assessing knowledge and experience of analysts; (iv) criteria applicable to outsourcing of assessment activities; and (v) the standard forms, templates and procedures for the provision of registration information.
ESMA will consider the feedback received to this consultation and will submit the draft RTS and ITS to the European Commission by 21 December 2024.
ESMA proposed increased transparency on ESG integration in credit ratings
ESMA launched a consultation [12] proposing amendments to EU Credit Rating Agencies Regulation (CRAR) to ensure a better incorporation of ESG factors in the credit rating methodologies and subsequent disclosure to the public, as well as to enhance transparency and credibility in the credit rating process. This proposal is separate to the new regulation of ESG rating providers and focuses on the integration to ESG factors into credit analysis.
ESMA’s supervisory observations, the related input from the European Commission, as well as continued concerns expressed by stakeholders, have indicated a persisting lack of transparency on how CRAs incorporate sustainability factors in their methodologies, when these factors have been deemed credit material. The proposal is aiming to:
- Ensure that the relevance of ESG factors within credit rating methodologies is subject to systematic documentation.
- Enhance disclosures on the relevance of ESG factors in credit ratings and rating outlooks.
- Deliver a more robust and transparent credit rating process through the consistent application of credit rating methodologies.
The consultation is open until 21 June 2024.
European Commission has launched GreenData4All
The GreenData4All initiative, as outlined in the European data strategy, will enhance and expand upon current regulations established by the ‘INSPIRE’ directive regarding the sharing of environmental geospatial data and public access to environmental information, contributing to Europe’s green and digital transformation [13]. The initiative will consider the following objectives:
- Make environmental data sharing available and accessible in a more efficient and future-proof way.
- Respond to the needs of environmental policy development and implementation and enable data-driven environmental monitoring and reporting, increase the quality of evidence on the state of the environment and boost the green data economy.
- Move from a provider-centric to a user-centric approach where every push for making data available is substantiated by a clear user need and / or business value chain.
The initiative is a welcome step towards improving and democratising access to environmental data, which would be imperative to the development of solutions towards decarbonisation of the economy and preservation and restoration of natural ecosystems.
