ESG Weekly Update – October 6, 2022

6 October 2022

U.S.: EPA Launches New Environmental Justice and Civil Rights Office

On September 24, 2022, the Environmental Protection Agency (“EPA”), the U.S. federal agency tasked with environmental protection matters, announced the creation of a new Office of Environmental Justice and External Civil Rights (“Office”). The Office is tasked with engaging with marginalized communities with environmental justice concerns to understand their needs and to provide technical assistance to address these issues. This includes overseeing the implementation and delivery of a $3 billion climate and environmental justice grant program designed to help address pollution in marginalized communities.

The Office will also work alongside other departments to incorporate environmental justice policies into EPA’s existing processes and systems. It will commit 200 staff toward working on these environmental challenges – nearly quadrupling the number of EPA staff already dedicated to the issue – and will be led by a Senate-approved Administrator, yet to be nominated.

The creation of the Office follows the launch of other initiatives aimed at addressing environmental justice and civil rights. These include the establishment of the White House Environmental Justice Advisory Council, which advises the federal government on how it can address current and historic environmental injustice through strengthening environmental justice monitoring and enforcement, and the launch of the Justice40 Initiative, which aims to ensure that 40% of the benefits of certain federal environmental investments go to communities suffering from environmental injustice.

EPA Press Release

Global: IMF and Barbados Agree on $300 Million Loan Under Climate Trust

On September 28, 2022, the International Monetary Fund (“IMF”) and the Government of Barbados agreed to a credit arrangement scheme which will see the IMF lend Barbados approximately $300 million for the purpose of providing affordable, long-term financing to help build resilience against climate change. The program will include the provision of $110 million in a three-year extended fund facility and $183 million under the Resilience and Sustainability Trust (“RST”).

Barbados, which is vulnerable to hurricanes and flooding and particularly exposed to the effects of climate change, is the first country to be granted access to the RST.

Under the agreement, the funds will be put toward “enhancing resilience to climate change while also focusing on Barbados’ continued efforts to reduce public debt and facilitate capital expenditure to boost growth.” The RST will provide financing to support Barbados’ goal of transitioning to a fully renewable-based economy by 2030. In particular, the country will work with the World Bank and other international partners to:

  • mainstream climate change in the budget and enhance risk management, including for the financial sector;
  • introduce “green” Public Financial Management, including in procurement; and
  • incentivize private investments in climate resilient infrastructure and renewable energy initiatives.

The agreement is subject to approval by the IMF Executive Board; it is not yet clear when the RSF will become operational.

IMF Press Release

Global: Net-Zero Asset Owner Alliance Urges Policymakers to Close Climate Investment Gap in Emerging Markets

On September 28, 2022, the UN-backed Net-Zero Asset Owner Alliance (“NZAOA”), a group of institutional investors with more than $10 trillion of assets under management, called on policymakers to facilitate the scaling of blended finance schemes in order to achieve climate goals. Blended finance enables both public and philanthropic capital to be leveraged in order to improve the risk profiles of certain investment opportunities, in doing so mobilizing important sources of private funds.

In its “Call on Policymakers,” NZAOA argues that blended finance could enable the flow of private capital toward emerging markets and developing economies, and in doing so address structural deterrence to investments in these economies. Though capital is available to finance clean technology and low-carbon infrastructure – both key tenets of the Paris Agreement and the Sustainable Development Goals (“SDGs”) – not enough is being diverted to emerging markets and developing economies because of the level of risk in investment opportunities. NZAOA outlines five solutions to achieve progress toward an investment environment where capital can flow to those areas where it is most needed, namely:

  • scale and aggregate pools of concessional capital that create fiduciary investment assets;
  • modernize the governance and business models of multilateral development banks and development finance institutions (“DFIs”) to align with the SDGs and the Paris Agreement;
  • support accurate risk pricing by providing access to core credit risk data;
  • prioritize thematic parameters in official developmental assistance; and
  • make guarantees eligible for official developmental assistance.

NZAOA argues that the success of blended finance schemes relies on multilateral development banks and DFIs, who not only provide capital and have an increased appetite for risk compared to typical institutional investors, but also have experience and expertise in emerging markets and developing economies.

Call on Policymakers

EU: Questions of Practical Relevance Raised by ESAs Regarding the Definition of Key Terms Under the SFDR

On September 9, 2022, the European Supervisory Authorities (“ESAs”) submitted a list of queries relating to the EU law interpretation of certain key terms under the Sustainable Finance Disclosure Regulation (“SFDR”). The questions address some significant points of uncertainty under the SFDR, and the Commission’s answers will therefore be very important in practice.

The ESAs raise eight queries, including the question as to whether an investment qualifies as a “sustainable investment” – which is currently defined in the SFDR as an investment that contributes to a specific environmental or social objective, such as climate change mitigation – where only part of the company’s activities contribute to the specific objective. They also raise the question of whether an investment must directly contribute to an environmental or social objective in order to qualify as sustainable, by virtue of the inherent environmental or social benefits of the business, or whether activities that are carried on in a measurably sustainable way, such as manufacturing that is best in class in terms of emissions, can also qualify.

Another key question relates to the definition of the term “consider” under Article 7 SFDR. The SFDR requires disclosures around principal adverse impacts (“PAI”), including a clear and reasoned explanation of whether, and, if so, how, a financial product “considers” PAIs. The ESAs have asked the Commission to clarify whether “consider” means that a fund simply needs to report the potential PAI, or whether it requires an action to be taken to address the PAI, such as engagement with the portfolio company. The ESAs further ask whether there are minimum criteria for any such actions, noting that the table to report PAI factors includes a column for “actions taken” to be listed.

Answers are expected from the European Commission later this year.

List of queries