A Compendium of Important ESG Regulation.
The current economic model is still based on “take-make-replace.” It depletes our resources, pollutes our environment, and damages biodiversity and climate.
EU: Communication from the Commission: On making sustainable products the norm
The past two years have witnessed a significant shift in international focus on climate-related risk and business strategy. Countries and agencies have been proposing and implementing a variety of actions designed to improve the reporting of business impact. These proposals have appeared in three different but interrelated domains:
- in taxonomy;
- in securities regulations; and
- in government ESG regulation.
The tables that follow, capture the significant recent activities, by both governments and by agencies, that address climate- and ESG-related reporting and metrics.
A recently active word in the ESG lexicon is’ taxonomy’. A sustainable finance taxonomy can be defined as a classification system to help investors and other stakeholders understand whether an economic activity is environmentally and socially sustainable (or, more precisely, meets the social and environmental criteria defined by the taxonomy).
In practice, sustainable finance taxonomies generally comprise a list of activities that are considered to align with specified social or environmental goals, alongside technical criteria (e.g. performance metrics or thresholds) to assess when those activities are aligned with sustainability goals.
One of the critical questions for the developers of taxonomies is the extent to which national or regional taxonomies (e.g. within the European Union) should align with other taxonomies. Note below, that taxonomies that commenced with the EU, and have quickly spread to other countries. It will be interesting to see how these taxonomies become aligned or interoperable, that is, how they share common principles and metrics, and adopt processes to overcome potential inconsistencies.
Until this year, there has been some lack of conformity among the metrics and standards that may be used for identifying and quantifying sustainability. 2022 has seen the rapid development of three important sustainability standards, All are in draft form at this moment. KPMG has made some preliminary observations:
- SEC – investor focused and reporting on climate
- ISSB – investor focused, with general principles, plus requirement to report across all significant sustainability-related risks and opportunities. Standards presented for industry groupings (~30)
- EFRAG – multistakeholder focused with core principles plus granular requirements for sustainability impacts, risks and opportunities, including double materiality . Focus on data relevance to EU business and EU Green Deal.
There has been major Security Commission activity in 2022 in the field of sustainable business practice. This has occurred, both in anticipation of, and in response to, COP26 and also in response to government establishment of climate and emissions targets. The focus of new reporting activity appears to be shifting:
- from government regulations and directives that have been predominantly unenforced, under-enforced, or not enforceable (recommendations);
- to investor-focused security regulations that are mandatory.
A new database launched by UN Sustainable Stock Exchanges (UN SSE) shows that 69 stock exchanges globally are taking actions in support of enhancing climate-related financial disclosures in their markets
The most common disclosure action taken by stock exchanges has been in adding the TCFD’s recommendations to their ESG reporting guidelines for their markets. While 40 stock exchanges are referencing the TCFD recommendations in their ESG reporting guidelines, three stock exchanges have further provided climate-specific disclosure guidelines (HKEX, JSE and LSEG). The SSE’s Model Guidance on Climate Disclosure makes a case for climate-specific disclosure guidelines given the unique material risks and opportunities that result from climate change.
This shift in activity is visible in the recommendations, guidelines, and mandated requirements outlined in the tables below. Could it be that the financial stakes have risen?
The EU has been active in writing regulations and directives to facilitate alignment with Paris Agreement climate targets and the UN Sustainable Development Goals. These new directives (SFDR; CSRD; CSDD; ESPR) have been written in a much more obligatory tone than previous regulation.
ESG Regulatory Archive
EU Taxonomy Regulation EU 2020R852
The EUTR establishes a classification system (or a taxonomy) which provides businesses with a common language to identify whether or not a given economic activity should be considered when reporting
Specifies six environmental objectives :
- Climate change mitigation
- Climate change adaptation
- Sustainable use and protection of water and marine resources
- Transition to a circular economy
- Pollution prevention and control
- Protection and restoration of biodiversity and ecosystems
Effective 01 Jan. 2022 for climate change mitigation and adaption.
The remaining 4 will be integrated effective 1 January 2023
Asset managers and financial advisers need to disclose the degree to which they commit to being invested in taxonomy-aligned activities within their financial products.
As a result:
- Companies have clearer guidance on sustainable finance initiatives and regulation, which helps in strategic planning and raising capital for these projects.
- Investment managers can design credible green products that meet the approved common standards.
- Retail investors can better compare financial products based on EU TR-aligned activities. Professional investors (portfolio managers) can better compare companies through improved disclosure of EU TR-aligned activities
EU Platform on Sustainable Finance – Report on Social Taxonomy
While most economic activities have detrimental environmental impacts, social taxonomy Identifies the social benefits (e.g., job creation, paying taxes and producing socially beneficial goods /services), as well as human rights benefits.
Affects all financial market participants in the EU
Identifies three social objectives:
- Decent work (including for value chain workers)
- Adequate living standards and well-being for end-user
- Community inclusion
Includes sub-objectives of: health and safety; healthcare; housing; wages; non-discrimination; consumer health; and communities’ livelihoods
Emphasises:” do no significant harm”
Report presented to the European Commission, 28Feb 2022
This is an important effort to align two taxonomies (E and S) and avoid conflicting end objectives between environmental and social sustainability, and to allow investors to compare how funds are aligned with either taxonomy.
The creation of a social taxonomy will soon lead to the establishment of consistent social metrics.
ASEAN Taxonomy for Sustainable Finance (version1)
To serve as a common language across the different jurisdictions to communicate and coordinate on labelling for economic activities and financial instruments.
ASEAN is composed of ten member states, which exhibit varied standards of development and economic activity. The taxonomy is intended as the reference point for sustainable projects and activities in ASEAN, to help issuers and investors understand the sustainability impact of a project or economic activity, to result in a more informed and efficient decision-making process
Version 1 is meant to provide a framework for discussion.
With differing states of development, as well as varying economic and social structures of the ASEAN Member States, it is critical for the ASEAN Taxonomy to facilitate an orderly transition at all levels towards a sustainable ASEAN.
- To show progress to targets, may use traffic light approach as well as metrics.
ASEAN = Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei, Laos, Myanmar, Cambodia and Vietnam
Singapore Green and transition taxonomy
To accelerate the development of green finance by (i) developing a taxonomy (ii) enhancing environmental risk management practices of financial institutions (iii) improving disclosures, and (iv) fostering green finance solutions.
For Singapore-based financial institutions, with particular relevance to those active across ASEAN Member States
After consultation with stakeholders, the issued version expands on a traffic light approach, and adds thresholds for classification.
South Africa Green Finance Taxonomy
Help the financial sector with clarity and certainty in selecting green investments in line with international best practice and South Africa’s national policies and priorities
Official classification or catalogue that defines a minimum set of assets, projects, and sectors that are eligible to be defined as "green" or environmentally friendly
Launched April 1, 2022
- Provides clarity and certainty in selecting green investments in line with international best practices and national priorities and standards;
- Helps unlock large-scale capital for climate-friendly and green investment in South Africa by increasing the credibility and transparency of green activities;
- Reduces financial risks through enhanced management of environmental and social performance;
- Reduces the costs associated with labelling and issuing green financial instruments;
- Supports regulatory and supervision oversight of the financial sector.
EFRAG (European Financial Reporting Advisory Group) European Securities and Markets Authority
EFRAG is a private association, influencing the development of IFRS Standards from a European perspective and developing draft EU Sustainability Reporting Standards, and related amendments for the European Commission. EFRAG’s mission is to serve the European public interest in both financial reporting and sustainability reporting by developing and promoting European views in the field of corporate reporting and by developing draft EU Sustainability Reporting Standards. These standards will likely be used for reporting under the EU Corporate Sustainability Reporting Directive (CSRD).
Propose 13 topics, in considerable granularity, for sustainability impacts, risks and opportunities (i.e. greater scope and detail than ISSB or SEC). The reporting reflects on the company’s impact on the economy, environment and people. Also categorises information differently from TCFD or ISSB. Metrics address EU policy objectives.
Company scope will be the same as the EU Directive on Corporate Sustainability Reporting (CSRD)
same as the EU Directive on Corporate Sustainability Reporting (CSRD)
- EFRAG plans to release 40 industry-specific standards in 2023
- phased introduction beginning Jan 2024
- will require limited assurance initially, moving to reasonable assurance over time
- Lack of conformity between ISSB and EFRAG in terms of industry classification system used (SICS vs NACE) will require mapping between systems
- ESDRs include the concept of double materiality and expand a company’s reporting boundary to its entire value chain.
Global Reporting Initiative
Independent international organization helping businesses take responsibility for their impacts by providing a common language to communicate those impacts. GRI envisions a sustainable future enabled by transparency and open dialogue about impacts
“We are the global standard setter for impact reporting. We follow an independent, multi-stakeholder process. We maintain the world’s most comprehensive sustainability reporting standards. Our Standards are available as a free public good.
“Sets the tone for transparency.”
This is a voluntary standard. Standards have been used internationally in ESG reporting for some time as one of the two primary reporting formats
Will be interesting to see if, and how well, GRI and ISSB standards harmonize once ISSB completed (see ISSB)
ED/2022/S2 Climate-related Disclosures
The IFRS (International Financial Reporting Standard) established a new standard-setting board, the ISSB, in November 2021, The IFRS has global influence in accounting standards, through their initial board, the IASB (International Accounting Standards Board). The former Value Reporting Foundation (VRF), itself a merger of the International Integrated Reporting Council (IIRC) and the Sustainability Accounting Standards Board (SASB), has now merged with the ISSB.
The ISSB is tasked to set up sustainability standards give a global baseline to high quality, transparent, reliable and comparable reporting by companies on climate and other environmental, social and governance (ESG) matters. The inclusion of the former SASB in the Board gives an industry focus to the development of sustainability standards.
IFRS S2 Climate-related Disclosures (Climate Exposure Draft) builds upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporates industry-based disclosure requirements derived from SASB Standards
IFRS S1 General Sustainability-related Disclosure Requirements and IFRS S2 Climate-related Disclosures drafts were released 31Mar2022; feedback closed 31July2022; under feedback review H2 2022; issue planned yearend 2022.
- IFRS S1 sets out the overall requirements for an entity to disclose sustainability-related financial information about all its significant sustainability-related risks and opportunities, to provide the market with a complete set of sustainability-related financial disclosures.
- IFRS S2 builds upon the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD) and incorporates industry-based disclosure requirements derived from SASB Standards.
APRA CPG 229 – Prudential Practice Guide on Climate Change Financial Risks
Guidance on sound practice in relation to managing climate change financial risks
encourages climate risks to be managed within an institution’s overall business strategy and existing frameworks including risk appetite statement, risk management strategy and business plan, with disclosure according to the TCFD.
Observance is “encouraged”
Climate Risk Disclosure in Investment Management
FSC is a peak body which sets mandatory Standards and develops policy for more than 100 member companies in one of Australia’s largest industry sectors, financial service. FSC provides guidance on sound practice in relation to managing climate change financial risks.
This Guidance Note develops a set of common considerations for the investment management industry on the following topics:
- approach to assessment of emissions in portfolios, setting net-zero targets and aligning portfolios to net zero targets;
- appropriate product labelling and avoidance of greenwashing; and
- application of Taskforce on Climate Related Financial Disclosures (TCFD) reporting to asset managers
Provides up to date guidance
Effective as of 3 August 2022
Capital Markets Modernization Taskforce Final Report
Taskforce reporting to the Ontario government (Toronto Stock Exchange) on activities for ‘modernization’
Issued recommendation to government
Two to five years
- Recommended issuers be required to disclose material ESG information, in particular on climate change
- Endorsed certain standards of the Taskforce on Climate-Related Financial Disclosures
Resolutions on ESG disclosure
Companies listed on the Egyptian Stock Exchange, and companies operating in non-bank financial activities
To submit environmental, social, and governance disclosures related to the financial effects of climate change in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD)
Mandated with 2023 annual report
The decree presents two levels of compliance: Listed companies and non-banking financial companies with issued capital of at least EGP 100 mn need to make an annual ESG disclosure, and listed companies and non-banking financial companies with issued capital of at least EGP 500 mn or more will need to report on performance indicators that align with recommendations from the TCFD.
Reporting on TCFD recommendations: Guidance on Climate Disclosures
To assist companies on complying with TCFD recommendations
HKEX listed companies
Circular on Business Responsibility and Sustainability Reporting (BRSR) by listed entities
A step towards bringing sustainability reporting at par with financial reporting
Applicable to the top 1000 listed entities
Include an overview of material ESG risk and opportunities (including an entity’s approach to mitigating or adopting to the risks along with financial implications); sustainability related goals/targets and performance against these; and specific environment and social related disclosures.
Issued 2021 voluntary for FY 2021-2022 mandatory from FY 2022-23
Securities & Exchange Board of India (SEBI)
Circular to licensed corporations, Management and disclosure of climate-related risks by fund managers; Amendments to Fund Manager Code of Conduct on TCFD recommendations: Guidance on Climate Disclosures
To direct managers to take climate-related risks into consideration in their investment and risk management processes and make appropriate disclosure
Fund Managers managing collective investment schemes. requirements cover governance, investment management, risk management and disclosure.
Represent a notable departure from existing Business Responsibility Reports
CMISA: Circular on Investment related to environmental, social and corporate governance, cyber and technology risks
Financial institutions to consider ESG (environment, social, and governance) factors and developing risks (such as cybersecurity and technology risks) insofar as they might affect the performance of an investment portfolio
Requirement to present ESG procedures and policies and publish them annually.
Published Nov 1, 2021
CMISA (Capital Markets, Insurance and Savings Authority)
CMISA has not set uniform parameters, and has let institutions set their own methodology as seems best to them
CMISA: Circular on Risk Management for Regulated Financial Service Providers
To create a risk management framework for financial service providers. It does so by examining both the responsibility imposed on the regulated entity and the domino effect a risk management failure could trigger in one of the related entities, due to the relations and interconnectivity between these entities.
Regulated financial service providers.
Requirement to consider, then with18 months to complete the necessary preparations (to appoint a risk manager with the purview to work independently and formulate and obtain the board of directors’ approval for a risk management plan.)
Published June 2022
CMISA (Capital Markets, Insurance and Savings Authority)
The Capital Markets, Insurance and Savings Authority has not set uniform parameters, in order to avoid determining the analysis for the institutions, and to let them set their methodology in accordance with the method that seems best to them
Model Guidance for Companies on Reporting on ESG information
A reference for listed companies to consider ESG disclosure.
This guidance was originally created by the Sustainable Stock Exchanges Initiative and translated into Japanese by Japan Exchange Group.
Model Guidance for Companies on Reporting on ESG informatio
Investors are now taking into account ESG factors when evaluating mid- to long-term corporate value. Japanese and overseas entities have published standards, frameworks and guidance on ESG disclosure, but listed companies struggle to tell between them and want more information in Japanese
To be a helpful reference material for companies wanting to improve their mid- to long-term corporate value by understanding ESG and the spread of ESG investment, progressing their ESG activities in a way fitting to the company, and enacting dialogue with investors and other stakeholders.
Published by Japan Exchange Group, Inc. and Tokyo Stock Exchange, Inc.
Japan’s National Action Plan on Business and Human Rights (2020-2025)
Lists a series of measures related to business and human rights to be implemented by the Government, as well as expectations for business enterprises to promote introducing human rights due diligence
Government and industry
Climate Innovation Finance Strategy 2020
From Ministry of Economy, Trade and Industry (METI) - Against the backdrop that global society, in particular, emerging countries in Asia and other regions, requires an enormous amount of investments to achieve decarbonization, the importance of the roles played by finance is growing for the purpose of not only promoting “green” investments (e.g., those in renewable energy), but also encouraging investment in companies committed to “transition” to a society which steadily advances low-carbonization and decarbonization or to “innovation” to dramatically decrease the emissions of carbon dioxide.
Applies to investors and operational companies in Japan and abroad.
TCFD Guidance 2.0
From Ministry of Economy, Trade and Industry (METI), promotes disclosure in line with the TCFD recommendations
Basic Guidelines on Climate Transition Finance
To strengthen the position of climate transition finance ( “transition finance”) as a means of financing transitions, especially in hard-to-abate sectors, and introduce more funds in order to contribute to achieving the 2050 carbon-neutral goals and the Paris Agreement
A reference for the fundraiser, the financier, and other market participants when they consider concrete actions to transition finance.
Is consistent with he International Capital Markets Association (ICMA) “Climate Transition Finance Handbook”
Code of Conduct for ESG Evaluations and Data Providers
Issues regarding current status of ESG evaluation and data by ESG data providers, including transparency, and fairness of evaluation, were pointed out in a report by the Expert Panel on Sustainable Finance in June
The Japanese Financial Services Agency has addressed these concerns with this Code of Conduct
Draft issued 12 July 2022. – public comment closed 5 Sept 2022
Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act 2021
Large financial institutions including banks, registered investment schemes, licenses insurers, issuers of equity or debt securities, and listed NZ companies
To produce climate-related disclosures. Reporting must be against the standards issued by XRB, which will be developed in line with the TCFD
Must make disclosures on their 2023 financial year by 2024 (at the earliest)
“One way of reading the Climate Change Commission’s draft advice is as a warning that high-carbon investments will be increasingly risky as we get closer to meeting the Government’s climate targets,”
Sustainability Guidelines for Companies
Helps issuing companies understand the context, characteristics and market best practices in ESG factor disclosures
Includes definitions, benefits of reporting ESG aspects, recommendations for preparing a sustainability report, standards, international methodologies and performance indicators
Sustainability Reporting Guidelines for Publicly Listed Companies
Enable listed companies to measure and monitor their contributions towards achieving universal targets of sustainability, such as the UN's Sustainable Development Goals as well as national policies and programs, such as AmBisyon Natin 2040
All listed companies
Comply or explain
Philippines Securities and Exchange Commission
Sustainability Reporting Guidelines
Guidelines to encourage using internationally accepted reporting frameworks such as GRI when developing reports and seeking third part assurance
Requires every issuer to prepare an annual sustainability report, which must describe the issuer's sustainability practices with reference to the primary components set out in Listing Rule 711B on a 'comply or explain' basis
Sustainability Guidelines for Companies
Tool for companies to position themselves correctly to become more attractive for international investments
Provides companies an up-to-date roadmap on environmental, social and corporate governance (ESG) issues
UK Financial Stability Board: Task Force on Climate-related Financial Disclosures (TCFD)
One of the essential functions of financial markets is to price risk to support informed, efficient capital-allocation decisions. To carry out this function, financial markets need accurate and timely disclosure from companies. Without the right information, investors and others may incorrectly price or value assets, leading to a misallocation of capital.
The Financial Stability Board (FSB) created the TCFD to develop recommendations on the types of information that companies should disclose to support investors, lenders, and insurance underwriters in appropriately assessing and pricing a specific set of risks—risks related to climate change
Recommendations for companies to disclose how they manage the financial risks and opportunities that climate change poses to their business
Provides recommendations and guidance on disclosures in: governance; strategy; risk management; and metrics and targets.
Published in 2015
The recommendations from this early task force are now considered ‘foundational’, and are being referenced and gradually implemented across the globe
UK London Stock Exchange Group: ESG Report Guidance
Make companies more aware of the importance of providing high quality ESG information, and engaging investors on sustainability-related issues
ESG reporting is not just for larger companies. This is about all issuers, regardless of size, reporting relevant and material information to investors so that they can make better informed investment decisions
UK Greening Finance: a roadmap to sustainable investing
To ensure that the information exists to enable every financial decision to factor in climate change and the environment
In 2019, the UK became the first major economy to commit in law to net zero greenhouse gas emissions by 2050. In 2021, the government set in law to cut emissions by 78% by 2035 compared to 1990 levels.
UK TCDF Guidance on Metrics, Targets, and Transition Plans
To address recent developments … provides additional guidance for preparers regarding disclosures of climate-related metrics and targets and key information from transition plan
2022 update to TCDF
Users identified: financial impacts on capital expenditures and allocation; and financial implications under different climate-related scenarios, as the most useful to disclose.
The Companies (Strategic Report) (Climate-related Financial Disclosure) Regulations 2022
Requires climate-related financial disclosures in their strategic report, with disclosure in line with TCFD recommendations provide
Applies to listed companies (a traded company, a banking company, an authorised insurance company and a company carrying on insurance business which in each case satisfy various conditions, including that of having more than 500 employees)
Requires disclosure in line with TCFD recommendations
Dodd-Frank Wall Street Reform and Consumer Protection Act – Section 1502
Written out of concern that the trade of 3TGs was funding "extreme levels of violence in the eastern Democratic Republic of the Congo, particularly sexual- and gender-based violence, and contributing to an emergency humanitarian situation therein...
Companies that are publicly traded in the US
Annual report to the SEC that demonstrates the efforts to identify the sources of the 3TGs used in their products
In 2017, the SEC stated that it would suspend enforcement of the due diligence and audit requirements of the conflict minerals regulation
US Securities and Exchange Commission Climate Risk Disclosure Rule
As investment dollars have followed the interest in ESG, the regulatory focus from the SEC has needed to increase to assure appropriate reporting
Applies to all companies listed on US security exchanges
Significant increase in reporting on climate risk required:
- Disclosure of material climate risks and impacts;
- GHG Scope 1 & 2, with 3 if material; targets or transition plans
- Targets for energy use, emission reduction, nature conservation, and use of offsets.
Under final review by SEC following close of Public comment 17June2022
First reporting due with Fiscal 2023 yearend (in 2024)
A significant number of public entity corporate tenants, real-estate lenders, and real-estate investors will have to make disclosures about their real-estate holdings. Given that real estate accounts for a significant component of scopes 1 and 2 GHG emissions, compliance will include the emissions that come from real-estate footprints. If enacted, the SEC’s rule would mean both public and private real-estate companies must provide this insight to their tenants, investors, lenders, and other stakeholders.
EU Conflict Mineral Regulation EU 2017R821
In politically unstable areas, armed groups often use forced labour to mine minerals. They then sell those minerals to fund their activities, for example to buy weapons. These so-called 'conflict minerals', such as tin, tantalum, tungsten and gold, can find their way into our mobile phones, cars and jewellery. To stem the trade in conflict minerals, the EU passed this regulation to stop:
- conflict minerals and metals from being exported to the EU;
- global and EU smelters and refiners from using conflict minerals, and;
- mine workers from being abused.
EU estimated 800-1000 companies would be affected by this regulation
Requires importers to follow OECD Due Diligence Guidance for Responsible Supply chains from Conflict-affected and High-risk Areas
Took effect 1 Jan 2021. Enforcement by each EU Member State Responsible Authority
- Significant lack of visible reporting of the results of National Responsible Authorities’ activities
- In March 2022 the EU closed a call for tender to “Review the functioning and effectiveness” of the regulation.
EU Sustainable Finance Disclosure Regulation for Financial Institutions (SFDR) EU 2019R2088
Reduce greenwashing and the overstating of green credentials.
Nearly of 334 environmental claims reviewed by the EC were found to be false or deceptive, or 37% included purposely vague and misleading statements
Applies to all financial market participants (“FMPs”) and financial advisors (“FAs”) in the EU. Includes investment and mutual funds, UCITS, insurance-based investment products, and pensions
- The adverse impacts of investment decisions on sustainability factors
- Consideration of sustainability (ESG) risk in investment processes
- Provision of sustainability information with respect to financial products
Applies from 10Mar2021.
Some taxonomy-related product disclosures from 1Jun2022
Implementation has been complicated by concomitant development of taxonomy.
EU Directive on Corporate Sustainability Reporting (CSRD)
The CSRD wants companies to disclose how their sustainability/ business strategies align with limiting global warming to 1.5C and how they contribute to the EU’s own climate goals.
All companies listed on EU regulated markets, large companies meeting two of these three:
- a balance sheet total of > EUR 20,000,000
- a net turnover of > EUR 40,000,000
- an average of >250 employees.
Extraterritorial companies listed on EU markets along with their EU domiciled subsidiaries.
Reporting reflects a ‘double materiality perspective’, reflecting both the inwards and outwards impacts of a company impact/impact materiality = outwards).
Companies are to report on:
- Strategy & business model and its resilience
- Sustainability targets & indicators set, and progress to them
- All environmental-related matters that are affected by or affect their business
- Social considerations (working conditions, human rights, etc.
- Governance processes;
- External and internal risk management
Passed EU Parliament 21Jun2022
Oct31, 2022 First set of standards: guidelines on double materiality and on information quality.
Oct31, 2023 Second set of standards: Connectivity, levels of reporting; retrospective/ prospective information, and Public Good
This is an important step in the EU development of a regulatory framework
EU Draft Directive on Corporate Sustainability Due Diligence (CSDD) EU2022D0051
Directive establishes a corporate due diligence duty. The core elements of this duty are identifying, bringing to an end, preventing, mitigating and accounting for negative human rights and environmental impacts in the company’s own operations, their subsidiaries and their value chains.
EU-companies which have:
- more than 500 employees and a net worldwide turnover of more than EUR 150 million; or
- more than 250 employees and a net worldwide turnover of more than EUR 40 million—provided that at least 50% of this net turnover was generated in a “high-risk” sector
Non-EU companies which have:
- net turnover of more than EUR 150 million in the EU; or
- net turnover of more than EUR 40 million but not more than EUR 150 million, provided that at least 50% of its net worldwide turnover was generated in one of the “high-risk” sectors noted above
even if they do not have a physical presence in the EU.
- Integrate due diligence into policies.
- Identify actual or potential adverse human rights and environmental impacts (that run contrary to multilateral environmental conventions), arising from their own operations or those of their subsidiaries and, where related to their value chains, from their established business relationships
- Prevent or mitigate potential impacts, bring to an end or minimise actual impacts.
- Establish and maintain a complaints procedure.
- Monitor the effectiveness of the due diligence policy and measures
- Publicly communicate on due diligence.
Public enforcement => Member State National Authorities fines
Private => civil liability claim
23Feb2022 Proposed to EU Parliament and Council – awaiting approval
Once adopted, Member States will have two years to transpose the Directive into national law
Will take until late 2024 - early 2025 to be turned into national laws….
Ecodesign Requirements for Sustainable Products EU 2022R0095 (ESPR)
Establishes a framework to set ecodesign requirements for specific product groups to significantly improve their circularity, energy performance and other environmental sustainability aspects. It will enable the setting of performance and information requirements for almost all categories of physical goods placed on the EU market. It will enable the setting of performance and information requirements for almost all categories of physical goods placed on the EU market
It will enable the setting of performance and information requirements for almost all categories of physical goods placed on the EU market
The framework will allow for the setting of a wide range of requirements, including on
- product durability, reusability, upgradability and reparability
- presence of substances that inhibit circularity
- energy and resource efficiency
- recycled content
- remanufacturing and recycling
- carbon and environmental footprints
- information requirements, including a Digital Product Passport
Draft published 30Mar2022
- The new “Digital Product Passport” will provide information about products’ environmental sustainability. It should help consumers and businesses make informed choices when purchasing products, facilitate repairs and recycling and improve transparency about products’ life cycle impacts on the environment. The product passport should also help public authorities to better perform checks and controls.
- The Commission has stated it would start legislating for high-impact industries with gaps in sustainability rules, such as textiles, furniture, mattresses, tyres, detergents, paints, and lubricants, iron, steel, and aluminium.(see EU COMMUNICATION FROM THE COMMISSION: On making sustainable products the norm COM_2022_140)
EU COMMUNICATION FROM THE COMMISSION: On making sustainable products the norm
The current economic model is still based on “take-make-replace.” It depletes our resources, pollutes our environment, and damages biodiversity and climate. It also makes Europe dependent on resources from elsewhere.
To address these problems, the EU aims to move to a more circular economy model based on more sustainable products, to ensure that by 2030:
- a significant part of the products on the EU market are designed to be more durable and energy- and resource efficient, reparable, recyclable, and with preference for recycled materials
- companies from all over the world are able to compete on a level playing field without being undercut by others that leave society to deal with their environmental damage
- consumers have access to the information they need to make more sustainable choices, are better protected against practices harmful to the green transition and have longer-lasting products
- companies can access the data they need to ensure environmental sustainability and circularity of their products and business models
See proposed Ecodesign for Sustainable Products Regulation
EU Green Bond Standard 2021/0191 (COD)
To better regulate the green bond market, improve its supervision, reduce greenwashing, and add clarity when money goes to gas or nuclear.
For all bonds that are marketed as green, transparency requirements are introduced, including being aligned with the taxonomy legislation on the use of proceeds derived from the bond issuance
To avoid ‘brown’ companies (i.e. with highly polluting industries) using the EuGB label to pretend to be greener than they really are, the amended proposal requires that all EuGBs have verified transition plans. The text also ensures that all issuers of green bonds have processes in place to identify and limit the principal adverse impacts of their activity. Finally, it prohibits all issuers from countries that are on the EU’s grey or blacklist of tax havens from issuing EuGBs
Economic and Monetary Affairs Committee proposed changes 17May2022.
under negotiation with Member States 8Jun2022
Law on corporate due diligence, for the avoidance of human rights abuses (Due Diligence Law)
Aims to protect the rights of people who produce goods for the German market.
Modelled after the United Nations Guiding Principles on Business and Human rights. They rest on three pillars:
- The duty to protect human rights. This is referring to states, whose job it is to ensure their citizens’ human rights are established and protected
- The responsibility to respect human rights. This is addressed at companies, who have to make sure their operations are conducted adhering to the international/national human rights legislations
Access to remedy. This pillar underscores the right of victims of corporate human right abuse to seek remedy before courts
Applies to all companies employing at least 3,000 employees (1Jan2023) and at least 1000 employees 1Jan2024
Companies’ responsibility is to extend along their entire supply chain, graduated in line with the opportunities they have to exert an influence. Companies must realise their obligations in their own field of business and vis à vis their direct suppliers. Indirect suppliers are involved as soon as the company receives substantiated reports of human rights violations at that level.
- Establish a risk management process
- Conduct risk analysis
- Publish a declaration of principles (Grundsatzerklärung) and implement preventive measures
- Implement counter measures
- Establish grievance mechanisms
- If a company gets “substantiated knowledge” about risks with indirect suppliers, they have to conduct risk analysis, preventive measures, measures to minimize the risk, and update their declaration of principles
- Publish a yearly report
- scheduled to go into effect on 1 January 2023
- The Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) is responsible for the implementation and enforcement of the law
- Violation could bring fines of up to 2% of annual revenue
The law asks for “adequate/appropriate” measures. What this would look like depends on the:
- Type and scope of a company’s business activities
- Degree of influence of a company over the company violating human rights
- Severity/reversibility of the violation/potential violation
- Type of contribution to a risk for human rights/ the environment
US Department of Labor; Customs & Border Protection (CBP) : Uyghur Forced Labor Prevention Act
The UFLPA establishes a rebuttable presumption that any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the XUAR (Xinjiang), China, are not entitled to entry at any of the ports of the U.S
any goods, wares, articles, and merchandise mined, produced, or manufactured wholly or in part in the XUAR
Proof that the Scope has not been transacted
CBP activity commenced June 22, 2022
preliminary determinations should start arriving by August 29 ,2022.
Enforcement: US DoL, CBP
- The Obama administration imposed tariffs of 250% on solar modules from China. China then moved the majority of production (or shipping) to: Malaysia-31%, Vietnam-29%, Thailand-26% and Cambodia-6%. It should be interesting to see if this sourcing is identified by USCBP.
- It will take several months to see the extent of application of the Act as well as the implications for the need for good traceability
- The solar industry has been strangely silent on the topic....
US Inflation Reduction Act
To make down payment on deficit reduction to fight inflation, to invest in domestic energy production and manufacturing, to reduce carbon emissions by roughly 40 percent by 2030, and to allow Medicare to negotiate for prescription drug prices
Includes a $7500 tax credit for electric vehicles
Requires portions of critical battery materials to be extracted or processed in the United States
By 2026, vehicles will need to have 80% of critical materials sourced domestically or from a country with which the US has a free trade agreement.
- Materials account for 2/3 of EV battery costs.
- Cobalt unlikely to contribute to qualifying for credit, but lithium and to a much lesser extent nickel will contribute
- This could lead to greater penetration of lithium iron phosphate batteries (no nickel, no cobalt)