ESG Weekly Update – February 1, 2022

1 February 2022

Switzerland: New Human Rights Due Diligence and Reporting Mandates Take Effect

Certain Swiss companies are now required to prepare an annual report setting out ESG-related matters, including disclosures on employment, human rights and corruption alongside other social and environmental issues. The new rules apply to Swiss public interest companies (Gesellschaften des öffentlichen Interesses or sociétés d’intérêt publique) with 500+ employees and an average balance sheet over two years of 20 million francs or sales revenue of 40 million francs. When determining whether a company meets these thresholds, it must consider both Swiss and foreign undertakings under its control. Specifically, companies in scope must include in their reports:

1. a description of their business model;

2. a description of the policies adopted in relation to environmental, social, employment, human rights and corruption matters, including the due diligence applied;

3. a presentation of the measures taken to implement these policies and an assessment of the effectiveness of these measures;

4. a description of the main risks related to the ESG matters referred to above and how the undertaking is dealing with these risks, in particular the risks:

a. that arise from the undertaking's own business operations, and
b. that arise from its business relationships, products or services, provided this is relevant and proportionate; and

5. the main performance indicators for the undertaking's activities in relation to the ESG matters referred to above.

In cases where a company has published a different report that covers similar matters, the company must still meet the requirements under the due diligence and reporting law, and is required to publish a supplementary report in cases where certain of the requirements are not met.

The new annual reports must be published online following approval from company management and must remain publicly available for at least ten years.

In addition, companies with a head office or principal place of business in Switzerland that may be involved with conflict minerals or may have child labor in their supply chains have additional due diligence obligations and are required to produce an annual report on these issues. The due diligence obligations include maintaining a management system which takes into consideration the following:

1. the supply chain policy for ores or metals that contain tin, tantalum, tungsten or gold that potentially originated from conflict-affected and high-risk areas;

2. the supply chain policy for products or services in relation to which there is a reasonable suspicion of child labor;

3. a system by which the supply chain can be traced; and

4. risks of harmful impacts identified in the company’s supply chain and its risk management plans.

The annual reports related to these specific issues must be published online within six months of the conclusion of the company’s financial year.

Failure to comply with the new requirements could result in a fine, with willful failure to produce and make publicly available the annual reports, or providing false information in them, subject to a fine of up to 100,000 Swiss francs, and negligent failure to do so subject to a fine of up to 50,000 Swiss francs.

The new reporting standards entered into force on January 1, 2022, and will apply to reporting periods starting in 2023.

Links:
Swiss Code of Obligations (Articles 964a-964c and 964j-964l)
Swiss Criminal Code (Article 325ter)


EU: European Banking Authority Finalizes Pillar 3 Disclosures for ESG Risks

In 2013, Pillar 3 of the EU’s Capital Requirement Directives (CRD) introduced mandatory disclosures relating to financial institutions’ risks, capital adequacy and policies for risk management. Since the 2018 publication of the European Commission’s Action Plan on Sustainable Finance, the European Banking Authority (EBA) has worked to increase the efficiency of Pillar 3 disclosures by developing a comprehensive framework with consistent and comparable disclosures, including for relevant ESG items.

On January 24, the EBA added detail to the ESG aspects of this disclosure framework by publishing its final draft implementing technical standards (ITS) on Pillar 3 disclosures on ESG risks. These ITS seek to ensure that stakeholders are well informed about institutions’ ESG exposures, risks and strategies and are able to exercise market discipline. This includes mandatory disclosure templates designed to facilitate comparability between financial institutions, and, among other things, require the disclosure of financial institutions’ green asset ratios (GAR) and banking book taxonomy alignment ratios (BTAR).

A firm’s GAR is its green assets as a share of total assets. Qualifying financial institutions subject to the CRD have been required to disclose their taxonomy-eligible assets since January 1, 2022. As a result of the new ITS, from January 2024, such institutions will be required to disclose their taxonomy-aligned assets - those activities that (i) contribute to one or more of the taxonomy’s objectives, (ii) do no significant harm to any other objective, and (iii) pass separate minimum safeguards. A firm’s BTAR is similar to the GAR but it features additional information on exposures to companies that fall outside of the scope of the EU’s Non-Financial Reporting Directive.

Links:
EBA – Transparency and Pillar 3
EBA – Publication of ESG Standards


Global: Net-Zero Asset Owners Alliance Releases New Protocol, Setting More Ambitious Emissions Targets

The UN-convened Net-Zero Asset Owners Alliance (the “Alliance”) has released a new edition of its target setting protocol. The Alliance now consists of 69 members, mainly large institutional investors such as pension funds and insurers, who commit to transitioning their portfolios to net zero greenhouse gas emissions. The new protocol expands on the previous iteration in three main areas:

1. Scope: The new protocol introduces infrastructure investments, both debt and equity, as an asset class and sets out a target-setting scheme based on the Partnership for Carbon Accounting Financials’ carbon accounting framework. It also takes what it refers to as “first steps” toward including sovereign debt as an asset class, but does not yet set targets for these emissions.

2. Ambition: The new protocol sets an overall emissions reduction target of between 49% and 65% by 2030 compared to the base year 2020, and an interim recommended target of between 22% and 32% by 2025.

3. Approach: The new protocol establishes more detailed metrics and directions of approach for the asset classes already in scope of the protocol. It also contains a list of key climate-related considerations that members of the Alliance can request from asset managers and companies. This includes asking asset managers to publish their approach to integrating climate risk and opportunities, both transition and physical, and explain how any limitations are addressed.

Links:
Press Release
Target Setting Protocol (Second Edition)


Africa: Helios Investment Partners Announces First ESG-Linked Facility in Africa

Helios Investment Partners, among the largest emerging markets-focused PE firms with B Corp certification, has secured Africa’s first ESG-linked capital call facility for their Fund IV. Rand Merchant Bank and Standard Chartered Bank acted as arrangers and sustainability coordinators. The interest rate of the Helios IV facility is pegged to ESG performance targets set by the sustainability coordinators, with the individual ESG ratings of the fund’s portfolio companies to be determined by an independent ratings agency./p>

Paul Cunningham, Chief Financial Officer of Helios, stated that “[the] facility allows [Helios] to target and track continuous improvement in ESG ratings for our portfolio companies in a tangible way,” with the view that companies with strong ESG standards and performance are able to generate strong financial returns as well.

ESG-linked credit facilities have grown in number significantly over the last two years, as private equity firms have come to view them as a key means of aligning financial goals with socially conscious objectives.

Links:
Helios Announcement
RMB Announcement


Global: Leading Private Equity Houses Join ESG Data Convergence Project

The ESG Data Convergence Project is an initiative toward standardizing ESG metrics in order to facilitate comparative reporting across the private market industry. The project intends to establish a long-term mechanism for collecting and reporting ESG data, which provides investors with greater transparency and comparable portfolio information. The data collected over the course of 2021 covers six categories: greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement.

Launched in September 2021, the project is supported by a group of over 100 general partners and limited partners worldwide, representing roughly $8.7 trillion in assets under management (AMU) and 1,400 portfolio companies. The first report, expected to come out this spring, will be published as an anonymized benchmark aggregated by Boston Consulting Group (BCG). The group intends to meet annually to review and assess the previous year’s data.

Links:
ESG Data Convergence Project


US: Blackstone Launches Sustainable Resources Platform

On January 21, Blackstone announced the launch of Blackstone Credit’s Sustainable Resources Platform, targeting “renewable energy companies and those supporting the energy transition.” With respect to the Platform’s investment strategy, Blackstone has indicated its focus will be to “invest across the credit spectrum in investment grade credit, non-investment grade credit, preferred and convertible securities,” focusing on sectors ranging from residential solar and home efficiency to renewable electricity generation and storage as well as products and services that support the transition to clean energy.

The Platform includes more than 30 Blackstone employees. It is led by Robert Horn, the Global Head of Blackstone Credit’s Sustainable Resources Group, and is advised by Jean Rodgers, Blackstone’s new Global Head of ESG and the founder of the Sustainability Accounting Standards Board (SASB) and Rita Mangalick, Blackstone Credit’s Head of ESG.

Links:
Blackstone Announcement