ESG Weekly Update – March 2, 2022

2 March 2022

Global: Wave of New Sanctions Implemented in Response to Russian Actions in Ukraine, Presenting Governance Challenges

Since February 21, a growing number of countries have imposed and coordinated sanctions against Russia in light of its recognition of two breakaway Ukrainian regions and the Russian military activities in Ukraine. The sanctions are being regularly updated, becoming tighter and encompassing more persons and sectors. More specifically, the new restrictions generally include:

  • blocking sanctions (that is, asset freezes) against major Russian financial institutions, Russian state-owned companies, their subsidiaries and politically exposed Russian persons;
  • correspondent banking restrictions on blocked persons, Sberbank (the major financial institution) as well as deposit restrictions on Russians;
  • capital market restrictions regarding transactions in debt and equity instruments issued by targeted Russian companies;
  • further restrictions on dealings involving Russian sovereign debt;
  • prohibitions targeting the Central Bank of Russia and certain Russian banks’ access to the SWIFT financial messaging system;
  • export controls, e.g., trade bans on dual-use goods, technology, industry goods, aircraft, spare parts, aircraft insurance, etc.; and
  • closing airspace to Russian planes and entry bans.

Further sanctions from additional countries are expected, with some having already announced a new wave of export and investment restrictions, asset freezes and limits on Russian deposits, among other measures. Russia has responded with countermeasures, including closing its airspace to 36 countries. In addition, Russian authorities have prepared an order seeking to temporarily limit foreign investors’ ability to sever ties with their Russian assets and investments.

The new sanctions present considerable governance challenges for firms with businesses that touch Russia, with many financial institutions in particular being required to sever ties or halt operations. Some firms are beginning to divest their Russia holdings or cease operations, including on ESG grounds, in recognition of the human rights impacts of Russia’s activities in Ukraine. As a result of the rapidly changing situation, firms are advised to review their compliance policies in light of the new sanctions, undertake screening regarding their current and potential counterparties, and urgently cease relationships or wind down transactions within the time period prescribed by the sanctions regulations. They should also remain vigilant about changes in the law, which are likely to come frequently and with little or no advance notice.

OFAC Press-releases
EU Sanctions
UK Sanctions

EU: European Commission Adopts Position on Proposed Corporate Sustainability Due Diligence Directive

Last week, the European Commission adopted its position on the proposed corporate sustainability due diligence directive. The proposed directive requires companies to identify and, where necessary, prevent, end or mitigate their activities’ adverse impacts on human rights and the environment. Companies could be held liable for harms committed by their subsidiaries, contractors and suppliers, either domestically or abroad, and individuals negatively impacted will have the opportunity to seek damages for harms that could have been avoided had appropriate due diligence measures been implemented.

Specifically, the directive will require in-scope companies to conduct due diligence relating to human rights and environmental impacts identified in the directive’s annex and:

  • integrate due diligence into their policies;
  • identify actual or potential adverse human rights and environmental impacts;
  • prevent or mitigate potential impacts;
  • bring to an end or minimize actual impacts;
  • establish and maintain a complaints procedure;
  • monitor the effectiveness of the due diligence policy and measures;
  • publicly communicate on due diligence; and
  • for Group 1 companies only (defined below), develop plans to ensure that business strategies are compatible with limiting global warming to 1.5 °C in line with the Paris Climate Agreement.

If adopted, the directive will first apply to EU limited liability companies with 500 or more employees and that generate at least EUR 150 million in net turnover worldwide (“Group 1” companies). Other EU limited liability companies that operate in high-impact sectors (such as textiles, agriculture and mineral extraction) and have more than 250 employees and a net turnover of at least EUR 40 million worldwide (“Group 2” companies) will be required to comply with the rules two years after they begin applying to Group 1 companies. The rules will also apply to non-EU companies active in the European Union that meet the turnover thresholds for Groups 1 and 2, where that turnover is generated in the European Union. The Commission expects approximately 9,400 companies to fall within Group 1, 3,400 companies to fall within Group 2 and 4,000 companies to fall within the non-EU Group 1 and Group 2 categories.

The Commission has been criticized for the narrowness of the proposed directive’s scope, including from the European Coalition for Corporate Justice (ECCJ), which notes that the proposed directive will apply to less than 0.2% of EU companies. The ECCJ also notes that the proposed directive fails to address legal hurdles to bringing transnational court cases—such as high costs, short time limits, limited access to evidence, restricted legal standing and a disproportionate burden of proof—making it difficult to hold potential violators to account.

The proposal will be presented to the European Parliament and the Council for approval. Once adopted, Member States will have two years to transpose the directive into national law and communicate the relevant texts to the Commission.

Directive proposal
Annex to the Directive
Q&A on the proposal
ECCJ press release

U.S.: New York Introduces Fashion Sustainability and Social Accountability Act

New York state legislators have introduced a bill that would require fashion retail sellers and manufacturers to disclose environmental and social due diligence policies with the stated aim of addressing the lack of regulation governing the fashion industry, including the “fast fashion” segment. Under the bill, fashion retailers doing business in the state and with global revenue of at least $100 million would be required to disclose various environmental and social impacts, diligence policies and outcomes.

Disclosures would include, at a minimum, the following:

1. supply chain mapping and disclosure, including information on suppliers at all stages of production, from raw material to final production;

2. due diligence disclosures, including social and environmental sustainability reports and identification of risk areas in the supply chains; and

3. impact disclosures.

The introductory language of the bill contemplates that citizens will have the ability to bring civil actions to enforce the law. The bill would also establish a community benefit fund, which could be used by the New York Department of Environmental Conservation to implement environmental benefit and environmental justice projects.

Senate Bill S7428 was introduced in October 2021 and was referred to the Consumer Protection Committee on January 5, 2022. The Assembly version of the bill is similarly before the Consumer Affairs and Protection Committee.

Senate Bill S7428 
Assembly Bill A8352

UK: Government Issues Climate Reporting Guidance

In advance of UK companies reporting on TCFD-aligned climate-related financial disclosures starting next year, the United Kingdoms Department for Business, Energy and Industrial Strategy (BEIS) has published guidance clarifying its expectations.

The guidance highlights the importance of disclosing “material climate-related financial information” to support investment decision-making. In particular, companies are required to disclose how they are “identifying, assessing, and managing climate-related risks and opportunities,” and how they have incorporated these into their overall risk management strategies. Companies will also be required to disclose analysis of their business models, how those models will be affected by various climate-related issues and their strategies for dealing with these issues, and to identify climate-related targets.

The disclosures will apply to UK companies at the group level but also include any subsidiaries whose activities are included within the consolidated group. International organizations with UK operations may also be required to comply.

The BEIS is currently accepting feedback on the guidance.

UK government issues climate disclosure guidance
Also see UK to enshrine mandatory climate disclosures for largest companies in law

Global: UNEA Conference Anticipates Multilateral Plastic Waste Treaty Discussions

This week, the UN Environment Assembly (UNEA) will meet in Nairobi to discuss a binding treaty to combat plastic pollution. Ecological damage from plastic waste is a growing multilateral concern; earlier this month, the World Wildlife Foundation reported that, on the current trajectory, ocean plastic pollution could quadruple by 2050, while the OECD’s Global Plastics Outlook concluded that “there is an urgent need to expand national policies and improve international co-operation to mitigate environmental impacts all along the value chain.”

To address the plastics pollution problem, draft resolutions will be considered at the UNEA’s 5.2 Assembly, including one proposed by Rwanda and Peru, which seeks to address the entire life cycle of plastics, from chemical production to disposal. The Rwanda-Peru resolution has so far been endorsed by at least 70 countries, including the United States and 27 EU Member States. In addition to governmental support, a group of 90+ corporates and financial institutions have signed on to a proposal aligned with the resolution, urging Member States to develop a legally binding instrument enabling a common standard of action for all countries “to abide by, and to drive the transition to a circular economy for plastics globally and at scale.”

The American Chemistry Council (ACC), which includes a number of major chemical and plastics manufacturers, is lobbying for the treaty to address plastic waste without consideration of plastic production. The ACC supports an alternative resolution proposed by Japan and supported by Cambodia, Palau and Sri Lanka. The Japan resolution prioritizes waste management interventions and limits its scope to marine litter.

Rwanda-Peru Resolution
Japan Resolution
Environmental Investigation Agency Comparisons between the resolutions
ACC Statement
WWF – Impacts of Plastic Pollution Report
OECD Global Plastics Outlook