ESG Weekly Update – September 29, 2022

29 September 2022

EU: European Commission Proposes Regulation Banning Products Made with Forced Labor

On September 14, 2022, the European Commission unveiled a proposal to ban products made with forced labor from being imported to, or exported from, the EU. The proposal covers all products available on the EU market, without a specific industry focus. The proposed regulation applies to goods made for domestic EU consumption, exports and imports.

The Commission estimates that 27.6 million people are in forced labor globally. Following an investigation, national authorities will have the power to withdraw products that are found to be made with forced labor from the EU market. EU customs authorities will identify and stop such products at EU borders.

The Commission has described the implementation of the prohibition as being conducted through a “robust, risk-based enforcement approach”. This will include utilizing a range of information sources to help identify products and geographic areas where forced labor takes place through contributions from civil society, specialized databases and company due diligence. Where national authorities have suspicions about goods being made with forced labor, they will be able to request information from companies and carry out inspections, including in places outside the EU. If the national authorities find forced labor, they will order the withdrawal of products already placed on the market as well as prohibit their future placement on the market and their export out of the EU. Companies producing these goods will be required to dispose of them.

The proposed regulation will next be discussed and agreed on by the European Parliament and the Council of the European Union. The regulation will begin to apply 24 months after its entry into force.

European Commission Press Release
Proposed Regulation

U.S.: Senate Ratifies Kigali Amendment

On September 21, 2022, the U.S. Senate voted to join the 2016 Kigali Amendment, agreeing to reduce the production and use of hydrofluorocarbons (“HFCs”). Under the Kigali Amendment, industrialized nations must reduce production and consumption of HFCs to 15% of 2012 levels by 2036. The vote passed 69 to 27.

HFCs are industrial chemicals commonly found in refrigerators and air conditioners, with approximately 1,000 times the heat-trapping effect of carbon dioxide. The Kigali Amendment to the Montreal Protocol on Substances that Deplete the Ozone Layer first came into force on January 1, 2019. Under the Protocol, nations that do not ratify the Kigali Amendment will have restricted access to expanding international markets starting in 2033. The United States’ ratification of the Kigali Amendment will bring the total number of signatory parties to 138.

Scientists estimate that successful implementation of the Kigali Amendment would prevent up to 0.5 degrees Celsius of global warming by the end of the century.

In practice, it is not expected that the vote will change HFC emissions in the U.S. significantly, as the Biden administration has already enacted policies to reduce the production and importation of HFCs by 85% over the next 15 years.

Senate voting record
Kigali Amendment

Global: HSBC to Halt Thermal Coal Funding

On September 22, 2022, HSBC Asset Management announced that it will phase out coal-fired power and thermal coal mining from its listed holdings in the EU and OECD markets by 2030 and globally by 2040. HSBC is doing so as part of a commitment under the Net Zero Asset Managers initiative.

HSBC said it will actively engage with companies’ management, and in time will divest from companies and vote against company chairs with transition plans it views as inadequate, in order to help accelerate the end of thermal coal production and use across the world. Specifically, HSBC has said that:

  • HSBC will not vote to re-elect chairs of listed issuers with more than 10% revenue exposure to thermal coal that do not provide Task Force on Climate-Related Financial Disclosures or equivalent reporting. It will also vote against chairs whose transition plans remain inadequate following engagement.
  • Actively managed portfolios will not participate in IPOs or primary fixed income financing by issuers engaged in thermal coal expansions. For issuers with more than 10% revenue exposure to thermal coal, participation in IPOs or primary fixed income financing will be subject to enhanced due diligence of transition plans to ensure alignment with HSBC’s net zero commitments.
  • By the end of 2030, HSBC will not hold listed securities of issuers with more than 2.5% revenue exposure to thermal coal in the EU and OECD markets, and globally by 2040, across its actively managed portfolios. The policy will apply to all portfolios where HSBC has investment discretion and funds where it has significant control.
  • HSBC will not make direct investments in new or existing thermal coal projects.
  • HSBC will not launch new exchange traded funds (“ETF”) or index funds with more than 2.5% exposure to thermal coal issuers, unless the ETF or index fund’s strategy has specific Paris-aligned 1.5°C objectives or clear divestment pathways.

The announcement comes after HSBC unveiled late last year its plans to phase out thermal coal financing in stages by 2025, 2030 and 2040.

HSBC press release

Global: Changes Made to Race to Zero Guidance

On September 16, 2022, the UN Race to Zero initiative – a corporate alliance that supports the creation of a zero-carbon economy – responded to concerns that the interpretation guide to its membership criteria was revised to remove language that required members not to participate in new coal projects from next year. The guidance, produced by an expert peer review group, is intended to assist UN Race to Zero members in implementing the criteria.

Under the revised guidance, instead of each member being required to “restrict the development, financing and facilitation of new fossil fuel assets … across all scenarios, [including] no new coal projects,” they must “phase out” these activities in relation to new “unabated fossil fuel assets, including coal, in line with appropriate global, science-based scenarios.” The addition of the qualifier “unabated” means that UN Race to Zero members will be permitted to increase investments in fossil fuel projects so long as they capture and store their carbon emissions.

It has been reported that the change in the guidance resulted from concerns that a collective agreement by members of the initiative to forego new coal projects could violate competition laws. Additional changes to the guidance call for members to pursue the zero-carbon economy target “independently.”

It is unclear whether the revised guidance, which generally is more stringent than the prior version issued last year, will impact participation in the Race to Zero initiative. The Race to Zero initiative affirmed in their response that members are still required to align their corporate strategy with science-based scenarios to limit global warming to 1.5 °C.

Interpretation Guide