| Regulatory and Reporting Developments |
United States
Final SEC Climate Rules May Differ from Proposed Rules
The U.S. Securities and Exchange Commission's (SEC) final climate disclosure rules may be released, according to the SEC's flex agenda, as early as April 2023, following two open comment periods that generated nearly 15,000 comments. SEC Chairman Gary Gensler, in an interview with CNBC, signaled that the final rules may include adjustments to the proposed rules, but did not provide further detail regarding the nature of such adjustments. The requirements of the proposed rules that received a high number of comments (Scope 3 emissions disclosures, independent emissions assurance requirements, and financial disclosures) may be areas of adjustment in the final rules. For anticipated timing of the SEC's upcoming sustainability and environmental, social, and corporate governance (ESG)-focused rulemaking, including related to corporate board diversity and human capital management, please see the most recent SEC Rulemaking Agenda.
Please see our client alert for a detailed summary of the proposed climate disclosure rules.
FTC Accepting Comments on Updates to Green Guides
The Federal Trade Commission (FTC) is accepting comments on its updates to the Guides for the Use of Environmental Marketing Claims, known as the "Green Guides," through April 24, 2023. The Green Guides define and standardize the use of sustainability-related terms to prevent false or misleading advertising claims known as "greenwashing." The FTC regularly cites the Green Guides in its enforcement cases, and certain states have incorporated them into state law. Proposed updates could include the addition of guidance on how consumers interpret the term "sustainable," and further guidance on advertising related to carbon offsets or climate change.
Please see our client alert for additional information about the comment period for the Green Guides.
Biden Administration Releases U.S. National Blueprint for Transportation Decarbonization
On January 10, 2023, the Biden administration released the U.S. National Blueprint for Transportation Decarbonization (the Blueprint), a strategy for cutting all greenhouse emissions from the transportation sector by 2050. The Blueprint envisions initiatives by the U.S. Department of Energy, U.S. Department of Transportation, U.S. Department of Housing and Urban Development and the U.S. Environmental Protection Agency, focusing on the economic benefits of U.S. energy independence.
The Fed Announces Pilot Climate Scenario Analysis Exercise
On January 19, 2023, the U.S. Federal Reserve Board (the Board) announced that it is conducting a pilot Climate Scenario Analysis Exercise, in which six major banking organizations will participate and assess their readiness for a changing climate and severe weather events, as well as for the transition to a less fossil fuel reliant economy. The Board anticipates publishing insights gained from this pilot exercise around the end of 2023.
Treasury Department and IRS Issue Guidance on Inflation Reduction Act Tax Provisions
On February 3, 2023, the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS) issued Notice 2023-16, which modifies the definitions of certain vehicle classifications for purposes of the Section 30D new clean vehicle credit, Section 25E used clean vehicle credit, and Section 45W qualified commercial clean vehicle credit by changing the vehicle classification standard by which vans, sport utility vehicles, pickup trucks, and other vehicles are defined.
On February 13, 2023, the Treasury and the IRS issued Notice 2013-17 to establish a program to provide solar and wind power to certain low-income areas and Notice 2023-18 to establish a program to allocate credits for qualified investments in qualifying advanced energy projects. Notice 2013-17 establishes the Low-Income Communities Bonus Credit Program and provides initial guidance for potential applicants for allocations of calendar year 2023 capacity limitation for purposes of supplementing investment tax credit eligibility under Section 48 of the Internal Revenue Code. This guidance applies to owners of certain solar and wind facilities placed in service in connection with low-income communities that are eligible for the Section 48 energy investment credit. Notice 2023-18 establishes the Section 48C(e) program to allocate $10 billion in credits ($4 billion of which may only be allocated to projects located in certain energy communities' census tracts) to qualifying advanced energy projects. Treasury and the IRS expect to allocate $4 billion to Section 48C credits in the first allocation round, with approximately $1.6 billion of these credits to be allocated to projects located in certain energy communities that are either "brownfield sites," metropolitan statistical areas that have substantial employment and tax revenues tied to fossil fuel resource extraction, processing, or transportation, or census tracts with formerly operating coal mines or coal-fired electric generating units. Treasury and the IRS will allocate the remaining credits in future allocation rounds.
California Proposes Climate-Related Bills
On January 30, 2023, California Democratic lawmakers proposed three climate-related bills.
Senate Bill (SB) 261 would require any corporation, partnership, limited liability company, or other business entity formed under the laws of the United States or its states (other than certain insurance companies), with total annual revenues of more than $500 million and that does business in California, to prepare a climate-related financial risk report disclosing its climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk disclosed.
SB 252 would prohibit CalPERS (the Public Employees Retirement System) and CalSTRS (State Teachers Retirement System) from making new or renewed investments of public employee retirements funds in any of the 200 largest publicly traded fossil fuel companies (as established by carbon content in the companies' proven oil, gas, and coal reserves), while also requiring both CalPERS and CalSTRS to liquidate investments in such fossil fuel companies by July 1, 2030.
SB 253 would require the State Air Resources Board to develop and adopt regulations, on or before January 1, 2025, requiring business entities will total annual revenues exceeding $1 billion and that do business in California to publicly disclose their Scope 1, Scope 2, and Scope 3 greenhouse gas emissions annually.
Texas Targets ESG in Government Contracts
Lawmakers in Texas introduced House Bill Number 982 banning Texas state agencies or political subdivisions from entering contracts with a value of $100,000 or more with companies with 10 or more full-time employees unless the contract contains a written verification from the company that it does not, and will not during the term of the contract, use ESG criteria that furthers political policies at the expense of the Texas economy and company shareholders to evaluate a business decision or investment strategy.
European Union
There are several ESG-focused European regulations that have key dates in 2023. See below for a brief summary of these.
Overview of SFDR
The European Union's (EU) Sustainable Finance Disclosure Regulation (SFDR) is focused on improving transparency related to sustainable investment products to prevent greenwashing and to increase investors' ability to rely on sustainability claims by asset managers, pension funds, and insurance firms (entities in the scope of the SFDR definition of financial market participants (FMPs), which are generally EU-based companies with 500 or more employees). The SFDR imposes comprehensive ESG disclosure requirements covering a broad range of metrics at both entity and product levels. The main provisions of the SFDR have been applicable since March 2021. Regulatory Technical Standards (RTS) setting out the content, methodology, and presentation of the sustainability information to be disclosed by FMPs under the SFDR were published in July 2022 in the Official Journal of the EU and were in effect as of January 1, 2023. Among other requirements, FMPs that consider the principal adverse impacts of their investment decisions on sustainability factors must publish the information on those impacts using a prescribed reporting template by June 30 of each year, with the first report due in June 2023.
Overview of EU Taxonomy Regulation
The EU Taxonomy Regulation, which became applicable in January 2022, establishes an EU-wide classification system or framework intended to provide businesses and investors with a common vocabulary to identify whether and to what extent economic activities are environmentally sustainable. If an investment product falls within Article 8 ("light green" funds) or Article 9 ("dark-green" funds) of SFDR, FMPs must disclose whether and to what extent investment in such product is aligned with the EU Taxonomy Regulation using a graphical presentation as set forth in SFDR RTS disclosure templates. As of January 1, 2023, FMPs will need to complete this assessment and disclosure, which satisfies the first two (of six) EU Taxonomy environmental objectives, with the remaining four objectives to be implemented at a later date.
CSRD Goes into Effect; U.S.-Based Companies with EU Operations May Be Impacted
On January 5, 2023, the Corporate Sustainability Reporting Directive (CSRD) took effect. EU member states have 18 months from the effective date to integrate CSRD into their national laws. CSRD will create new mandatory sustainability reporting requirements for companies operating, incorporated in, or listed in the EU. Phase-in compliance periods range between 2024 and 2028 based on the size of companies required to comply.
Please see our client alert for additional information related to the scope of reporting and companies (including U.S.-based companies) subject to the CSRD.
European Central Bank Publishes Climate-Related Statistical Indicators
On January 24, 2023, the European Central Bank published a first set of climate-related statistical indicators to better assess the impact of climate-related risks on the financial sector and to monitor the development of sustainable and green finance, fulfilling another of the commitments of its climate action plan.
EU Launches Green Deal Industrial Plan
On February 1, 2023, the EU, echoing the Inflation Reduction Act in the U.S., launched a new Green Deal Industrial Plan to "enhance the competitiveness of Europe's net-zero industry." The proposal, which is under consideration by European leaders, would make $272 billion USD available to invest in green projects and offer tax breaks to businesses investing in net-zero technologies. The plan aims to assure a "level playing field" globally.
EU Reaches Provision Agreement to Establish Green Bond Standard
On February 28, 2023, the EU published a provisional standard to establish a green bond standard. The standard will be aligned with the EU Taxonomy and allow issuers and investors to invest in green bonds that fund green projects.
EU Adopts New Delegated Acts
The EU adopted two Delegated Acts required under the Renewable Energy Directive to define what constitutes renewable hydrogen in the EU. The first Delegated Act outlines the criteria for classification as renewable liquid and gaseous transport fuels of non-biological origin (RFNBO). The second Delegated Act provides a methodology for calculating RFNBO greenhouse gas emissions as well as renewable hydrogen emissions if hydrogen is produced in a facility that also produces fossil-fuels.
United Kingdom
CMA Bill May Include Greenwashing Fines
The government of the United Kingdom (UK) is expected to introduce the Digital Markets, Competition and Consumer Bill, which would allow the Competition and Markets Authority (CMA) to impose civil fines of up to 10 percent of global turnover for breaches of the law, which may include greenwashing. The CMA has also announced plans to take a "more permissive approach" regarding the enforcement of antitrust rules with respect to agreements between companies aiming to address climate change. The CMA issued new draft guidance to help businesses collaborate on promoting environmental sustainability in a compliant manner, and is seeking consultation on the draft through April 11, 2023.
ASA Updates Guidance for Carbon Neutral and Net Zero Advertising Claims
On February 10, 2023, the UK's Advertising Standards Authority published its updated guidance on misleading claims in advertising around net zero and carbon neutral claims.
Prime Minister Sunak Announces New Department
On February 7, 2023, UK Prime Minister Rishi Sunak announced the formation of four new departments, including the Department for Security and Net Zero. This new department is tasked, in part, with "securing" long-term energy supply of the UK, signaling an increased emphasis on the need for more energy sourced from domestic nuclear and renewable sources.
FRC to Increase Focus on ESG
The Financial Reporting Council, the UK's regulator overseeing auditors, published an update to its statement of intent on ESG challenges, which indicated that it would be focusing on ESG data, materiality, audit quality, TCFD disclosures, corporate governance reporting, and investment management.
UK Government Publishes Review of Net Zero Strategy
Earlier this year, Chris Skidmore MP, the UK's former Energy Minster, published an independent review of the UK's strategy to reach net zero greenhouse gas emissions. The review made 129 recommendations to the government to achieve net zero.
Germany
Germany Introduces New Supply Chain Due Diligence Act
Following the UK Modern Slavery Act and the French Duty of Vigilance Law, Germany adopted the Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz, or LkSG), which went into effect on January 1, 2023. The LkSG sets forth obligations for companies regarding their own business operations as well as their direct and indirect suppliers.
Canada
Government of Canada to Require Its Own Suppliers to Disclose GHG Emissions
Beginning in April 2023, major suppliers to the Government of Canada will be compelled to disclose their greenhouse gas emissions and set reduction targets, in an effort by the Government of Canada to green its operations and support Canada's transition to a cleaner economy.
Asia
Japan Fair Trade Commission Publishes Sustainability Guidelines
On January 13, 2023, the Japan Fair Trade Commission (JFTC) published draft sustainability guidelines, clarifying the types of conduct that could potentially raise antitrust concerns. The JFTC's tentative translation of these guidelines can be found here.
India Regulator Releases Consultation Paper on Proposed ESG Rules
The Securities and Exchange Board of India (SEBI) released a new Consultation Paper on ESG Disclosures, Rating, and Investing. Under the new proposed rules large companies in India may be required to provide assurance on their ESG reporting and supply chain-level ESG disclosures, while ESG investing funds could face tighter portfolio and stewardship criteria, aimed at improving transparency and addressing greenwashing risks.
China Launches System to Forecast Energy Demand
On February 17, 2023, China announced that it had launched a national wind and solar resources climate prediction model to enable provincial authorities to forecast energy demand and supply. The model, which provides data and graphic predictions on major variables in renewable energy supply, such as wind speed and solar radiation, as well as demand-side data such as average local temperature, will be released monthly.
Standards and Frameworks
ISSB Advances Disclosure Standards
The International Sustainability Standards Board (ISSB), recognized as a potential standardized framework for ESG disclosures globally, recently announced that is advancing two disclosure standards (S1 and S2) by the end of the second quarter of 2023, each with an expected effective date of January 2024. The S1 General Requirements include general requirements for disclosing information about significant sustainability-related risks and opportunities. The S2 Climate-related Disclosures build upon the Task Force on Climate-Related Financial Disclosures (TCFD) framework and incorporate Sustainability Accounting Standards Board (SASB) industry-specific standards.
UN Environment Programme Introduces Methodology for Assessing Nature Dependency
The UN Environment Programme (UNEP) and S&P Global launched the Nature Risk Profile, a new methodology for identifying and analyzing companies' dependencies and impacts related to nature. UNEP notes that more than half the world's gross domestic product is dependent on nature. The new methodology aims to enable the financial sector to measure and address nature-related risk by providing scientifically robust and actionably sustainability analytics on nature impacts and dependences.
IAASB Proposed Strategy and Work Plan
The International Auditing and Assurance Standards Board (IAASB) released its Proposed Strategy and Work Plan for 2024-2027. IAASB proposed four strategic objectives: 1) establish globally accepted standards for assurance on sustainability reporting; 2) support the consistent performance of quality audit engagements by enhancing IAASB's auditing standards; 3) strengthen coordination with leading standard setters and regulators; and 4) create more agile, innovative ways of working. IAASB highlighted the role of non-financial information in capital and resource allocation decision-making as a driving force behind the need for assurance. To establish globally accepted assurance standards on sustainability reporting, IAASB plans to work with the International Ethics Standards Board for Accountants and other standard setting bodies to implement an overarching standard for sustainability reporting. The objectives under the 2024-2027 work plan are a continuation of IAASB's current project to establish assurance on sustainability reporting, which ends in 2024. Comments on the proposed 2024-2027 work plan are due April 11, 2023.
Net-Zero Insurance Alliance Protocol
On January 17, 2023, the Net-Zero Insurance Alliance (NZIA), a group convened by the United Nations, announced its first Target-Setting Protocol (the Protocol). The Protocol provides a framework and measurement tools for insurance and reinsurance companies to evaluate their climate change impact. Current NZIA members will have to meet one of three target categories, made up of five target types, by July 31, 2023, and at least one target type in each of the three categories by July 31, 2024, with subsequent members required to establish their first target within six months of membership and setting later targets within a year after that. |
