EU: European Commission Expected to Adopt Corporate Sustainability Reporting Directive
The European Commission is expected to formally adopt the Corporate Sustainability Reporting Directive (the “CSRD”) at its plenary session in November, after first proposing it as a new benchmark for sustainability reporting in April 2021.
The CSRD amends several existing EU frameworks including the EU Non-Financial Reporting Directive (the “NFRD”), the EU Audit Directive and Regulation, and the EU Transparency Directive. It adds new reporting obligations in an effort to achieve corporate alignment in companies’ reporting strategies. Further, the scope of the CSRD will be much wider than that of the NFRD, applying to EU companies meeting at least two of the following criteria:
- an average yearly number of employees above 250;
- net turnover in excess of €40 million; and
- a balance sheet total above €20 million.
The CSRD also covers companies with securities listed on EU-regulated markets, as well as EU subsidiaries of non-EU companies (assuming certain financial thresholds are met). It is anticipated that the new framework will apply to approximately 49,000 companies, compared to almost 12,000 under the NFRD.
Beyond extending the quantity of sustainability-related information that companies are required to include in their annual reports, the CSRD introduces a mandatory audit and assurance regime, increasing the level of scrutiny of the data disclosed. The CSRD is part of a wave of new EU legislative developments in the ESG sphere, helping to transform the general framework from a largely voluntary one to a mandatory one. Depending on the size of the company subject to the new requirements and the start of their financial year, the reporting obligations will progressively enter into force between 2024 and 2028.
For more information, please see our recently published Debevoise In Depth article.
Australia: Australian Commission Issues First Greenwashing Action
On October 27, 2022, the Australian Securities & Investments Commission (“ASIC”) reported that it had taken its first action against greenwashing—an activity ASIC defines as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.” The action targeted energy company Tlou Energy Limited, imposing a fine of $53,280 for failure to comply with four ASIC-issued infringement notices related to concerns about alleged false or misleading sustainability-related statements made to the Australian Securities Exchange (“ASX”) in October 2021. The press release announcing the action stated that the infringement notices were issued in relation to statements and images contained in two ASX announcements made by Tlou, which claimed that:
- electricity produced by Tlou would be carbon neutral;
- Tlou had environmental approval and the capability to generate certain quantities of electricity from solar power;
- Tlou’s gas-to-power project would be “low emission”; and
- Tlou was equally concerned with producing “clean energy” through the use of renewable sources as it was with developing its gas-to-power project.
Tlou Energy released a statement on the same day denying wrongdoing, stating that it had not contravened any provision of the Corporations Act 2001 or the Australian Securities and Investments Commission Act 2001, but agreed to pay the infringement notice to conclude the matter.
ASIC has stated that greenwashing and sustainable finance would be “a key priority” for the regulator. In line with this goal, ASIC “published Information Sheet 271 (INFO 271), which details how to avoid greenwashing when offering or promoting sustainability-related products or otherwise making sustainability-related claims.” ASIC also noted that it “is currently investigating a number of listed entities, super funds, and managed funds in relation to their green credentials claims. Companies are on notice that ASIC is actively monitoring the market for potential greenwashing and will take enforcement action, including court action, for serious breaches.”
ASIC – Statement
TLOU Energy - Statement
ASIC – INFO 271
U: European Central Bank Sets Deadlines for Banks to Deal with Climate Risks
On November 2, 2022, the European Central Bank (the “ECB”) published the results of its 2022 thematic review on climate-related and environmental risks, which shows that banks are still “far from adequately” managing climate and environmental risks.
The review examined 186 banks across the European Union, representing total combined assets of €25 trillion. The review found that though over 85% of banks now have in place at least basic practices in most areas, not a single bank covered all the areas of risks they are or are likely to be materially exposed to. A specific concern highlighted by the ECB is the ability of banks to effectively implement their climate-related and environmental risk policies and practices; 55% of the banks have risk policies and practices in place that are not at all or only partially effectively implemented. The ECB found that banks continue to “significantly underestimate the breadth and magnitude of [climate-related and environmental] risks.” Blind spots in the identification of such risks in key sectors, geographies and risk drivers were identified in 96% of banks and, of these, 60% were considered to be major gaps.
As a result of these findings, the ECB has put in place bank-specific remediation timetables that require full alignment with the following expectations:
- by the end of March 2023 at the latest, to have in place a sound and comprehensive materiality assessment including robust scanning of the business environment;
- by the end of 2023 at the latest, to manage climate-related and environmental risks with an institution-wide approach covering business strategy, governance and risk management; and
- by the end of 2024 at the latest, to be fully aligned with all supervisory expectations, including having in place a sound integration of climate-related and environmental risks in stress-testing frameworks and the Internal Capital Adequacy Assessment Process.
The ECB also published a compendium of good practices in order to help banks meet these expectations.
ECB 2022 Thematic Review
ECB Good Practices
Global: Ahead of COP27, Financial Groups Stress Importance of Effecting COP26 Commitments to Avoid Missing Paris Agreement Targets
On November 2, 2022, the Investor Agenda group published its 2022 Global Investor Statement to Governments on the Climate Crisis, coordinated by the Asia Investor Group on Climate Change, the Carbon Disclosure Project, Ceres, the Institutional Investors Group on Climate Change, the Principles for Responsible Investing, and the United Nations Environment Programme Finance Initiative. The statement addressed commitments made at COP26, reminding governments of the urgency of effecting these commitments and calling upon governments to implement specific policies to enable “large scale zero-emissions, climate-resilient investments.” The signatories to the statement call for five policy actions:
- Ensuring that the 2030 targets align with the Paris Agreement;
- Implementing domestic policies to ensure 2030 greenhouse gas emissions are aligned with the Paris Agreement;
- Contributing to the reduction in non-carbon dioxide greenhouse emissions;
- Building on the agreed outcomes of COP26; and
- Strengthening climate disclosures across the financial system.
On November 3, 2022, the European Bank for Reconstruction and Development (“EBRD”) signaled that expectations should be managed ahead of COP27. Harry Boyd-Carpenter, the managing director of climate strategy and delivery at EBRD, warned against a “ratcheting up” of targets, saying that he does not expect this year’s conference to have “the same intensity” as COP26 last year. Boyd-Carpenter warned that the issue of increasing pledges year on year undermines organizations’ abilities to deliver on pledges.
On November 1, 2022, Columbia Threadneedle Investment stated its view that the world is not on track to meet the Paris climate goals, predicting that although there “may be some increase in ambition” regarding closing the 1.5˚C emissions gap, pledges will “fall far short” on closing the gap. The statement also warned that while the “loss and damage” agenda to agree on a finance mechanism is likely to be approved, progress will “remain stalled” if no concrete actions are decided upon.
The Investor Agenda
Columbia Threadneedle Investments
U.S.: Blackrock to Extend Voting Choice Program to Individual Investors
On November 3, 2022, BlackRock announced an expansion of its Voting Choice initiative, which will allow individual investors to participate in shareholder proxy voting decisions. Last year, the firm started this program by giving institutional investors and some individual investors the ability to vote at annual shareholders’ meetings. Since then, BlackRock has gradually expanded Voting Choice such that about half of its $3.8 trillion index assets under management are now eligible.
To date, clients representing approximately $452 billion in Voting Choice eligible assets have enrolled in Voting Choice. This represents 25% of BlackRock’s eligible assets under management. Eligible clients can choose from four Voting Choice options, namely to exercise control over their voting, to choose which topics or companies they want to vote on, to vote in accordance with off-the-shelf policies from third-party advisors, or to let BlackRock exercise their voting authority.
BlackRock CEO Larry Fink noted that giving individual investors more agency will “enhance corporate governance by injecting important new voices into shareholder democracy.”
Vanguard and Charles Schwab have recently announced that they are exploring similar programs.
BlackRock – Empowering investors through Voting Choice
Blomberg – Vanguard Announcement
Charles Schwab Press Release