ESG Weekly Update – April 13, 2022

13 April 2022

EU: EU Commission Publishes Final Version of the SFDR’s Regulatory Technical Standards

The EU Commission has published its final draft of the EU Sustainable Finance Disclosure Regulation’s (SFDR) Regulatory Technical Standards (RTS), including details of the long-awaited Level 2 disclosure requirements.

The SFDR requires financial market participants to disclose how they integrate ESG factors at entity and product level. The RTS specify the content, methodology and presentation of the information to be disclosed. The aim is to improve transparency and comparability, reduce greenwashing and support the financial sector’s transition to a sustainable economy.

The SFDR’s Level 1 disclosures have been in place since March of last year. These Level 1 disclosures are entity-level disclosures, notably implementing Article 3 of the regulation, which requires fund managers to (i) assess the potential for ESG factors to negatively impact the returns of funds under management; and (ii) disclose the outcome of that assessment to investors both in the funds’ prospectus documents and on the firm’s website. The Level 1 disclosures also implemented Article 4 of the regulation, requiring in-scope firms to publish an adverse impacts statement on their website. Firms with 500 employees or more have been required to publish a statement describing the due diligence policies that are applied by the firm to identify the adverse impacts of investment decisions on sustainability factors; firms with fewer than 500 employees have the option either to publish a statement or clearly state that adverse impacts are not taken into account as long as they detail why they do not and, where relevant, whether they intend to do so in the future.

The newly published Level 2 disclosures are product-level disclosures. These notably include the disclosure templates for Article 8 funds (those that promote environmental and/or social characteristics) and Article 9 funds (those that have a sustainable objective).

  • The templates for the pre-contractual disclosures for Article 8 and Article 9 products include information on:

the investment strategy and asset allocation of the fund;
whether principal adverse impacts on sustainability are taken into account; and
how well aligned the fund has been to any designated reference benchmark.

  • The templates for annual reports for Article 8 and Article 9 products include information on:

the extent to which the sustainable objective of the Article 9 fund has been met;
the extent to which the environmental and/or social characteristic promoted by the Article 8 fund has been met; and
the actions that have been taken to attain the sustainable investment objective during the reference period, in the case of an Article 9 SFDR fund, or to meet the environmental and or social characteristics during the reference period, in the case of an Article 8 fund.

The final RTS enter into force on January 1, 2023, subject to the ongoing review of the European Parliament and Council.

More details on the SFDR can be found in our Debevoise Update, linked to here.

Regulation on sustainability-related disclosure in the financial services sector

South Africa: South African Treasury Publishes New Green Taxonomy

On April 1, South Africa launched its framework for a Green Finance Taxonomy, a national classification tool designed to guide investors, lenders and other financial sector participants in establishing green credentials. The framework was created by a working group of the National Treasury’s Sustainable Finance Initiative.

The framework is aligned with the EU Taxonomy, identifying the same six environmental objectives: climate change mitigation, adaption, water, pollution, biodiversity and the circular economy, and it also takes into account best practices and approaches, including those issued by the International Sustainability Standards Board. In doing so, the South African government has stated its intention to harmonize its framework in a way that allows mutual recognition of green standards across markets while at the same time including social safeguards and technical screening criteria that incorporate South African laws and requirements.

In furtherance of its harmonization objective, the South African government is working closely with the European Commission to identify similarities and points of divergence between the two taxonomies, with the findings set to be published in the coming months. The government plans to launch a formal regulatory instrument related to the green taxonomy by the end of 2023.

South African Green Finance Taxonomy – First Edition
Taxonomy Briefing Paper

U.S.: ESG-related Shareholder Resolutions Proliferate for 2022 Proxy Season

The 2022 proxy season so far has seen in excess of 550 ESG-related shareholder proposals, a 13% increase over the 2021 proxy season, which itself saw a significant increase in ESG proposals over previous years.

This comes in the wake of a November 2021 policy change by the U.S. Securities and Exchange Commission (SEC) that made it more difficult for companies to obtain SEC approval to exclude from consideration shareholder proposals. Of the companies that have requested such approval so far this year, the SEC has denied 30.4% of such requests; in 2021, it denied them in 22% of cases.

By way of example, the SEC recently denied a request by Meta to exclude an advisory shareholder vote on the appropriateness of its metaverse project and the commissioning of a report on the psychological and human rights harms to potential users. The SEC also recently denied McDonald’s request to exclude a proposal urging the company to conduct a third-party audit of the civil rights impacts of company policies. Proposals urging companies to develop more ambitious climate change plans are also increasing in number this proxy season.

SEC Staff Legal Bulletin No. 14L (CF)
SEC – Meta Decision
SEC – McDonald’s