ESG Weekly Update – December 21, 2022

21 December 2022

EU: European Parliament and Council Reach Political Agreement on Carbon Border Mechanism

On December 13, 2022, the European Parliament and Council reached an agreement in principle on the Carbon Border Adjustment Mechanism (“CBAM”), which will impose CO2 emissions tariffs on imports of certain carbon-intensive goods, namely iron and steel, cement, fertilizers, aluminum and electricity. Foreign and domestic companies importing these goods into the EU will be required to buy certificates to cover their emissions.

During the phasing in of CBAM, importers of in-scope goods will have to report direct greenhouse gas emissions from their imports but will not be required to make any payments or surrender any CBAM certificates. The agreement foresees that indirect emissions will be covered by CBAM after the transitional period on the basis of a methodology that is yet to be defined.

Once the permanent system enters into force, importers will need to annually declare the quantity of goods imported into the EU in the preceding year and their GHG emissions. They will then be required to surrender the corresponding number of CBAM certificates. The price of the certificates will be calculated based on the weekly average auction price of EU Emissions
Trading System (“ETS”) allowances expressed in €/ton of CO2 emitted.

During the transitional phase, the product scope of the CBAM will be reviewed to assess whether it should be extended to include other goods produced in sectors covered by the EU ETS. These include, for instance, glass, ceramics, pulp, paper, cardboard, acids, and bulk organic chemicals.

The agreement is expected to be adopted in the next few weeks, and the transitional phase of the CBAM is expected to enter into force on October 1, 2023.

Press Release

U.S.: SEC to Answer to Congress under Republican House Control

On December 12, 2022, during an online panel, Representative Bill Huizenga said that legislators planned to scrutinize the Securities and Exchange Commission’s (“SEC”) proposed rules for greater disclosure of ESG-related factors when Republicans take over the House of Representatives in 2023. Specifically, legislators have voiced concern that the proposed rules are redefining what is considered material – i.e. what information is essential to a reasonable investor’s decision-making – to go beyond the definition set by the Supreme Court. Legislators appear to view the SEC’s rule-making as outside its agency limits.

SEC Chair Gary Gensler has not appeared before the House Financial Services Committee since October 2021, but he testified before the Senate Banking Committee in September. Beyond calling for Gensler’s testimony, Huizenga also introduced a bill – the Mandatory Materiality Requirement Act of 2022 – to amend securities laws to require that the SEC determine that any new disclosure requirements on public companies be material to investors. The proposed legislation has a sister bill in the Senate.

Since its ESG disclosure rule proposal this Spring, the SEC has received 14,000 comment letters.

Debevoise is launching an ESG Investigations Tracker, which will be available on the Debevoise ESG Resource Center page. It will be regularly updated to reflect ongoing developments in this space.

Law360 article

U.S.: U.S.-African Leaders Summit Focuses on U.S. Investment in African Climate Resilience and Clean Energy

Starting on December 13, 2022, the U.S.-African Leaders Summit emphasized climate concerns throughout the three-day program. Representatives from 49 African countries gathered with U.S. President Joe Biden in Washington, D.C., where they discussed environmental concerns unique and particularly pressing to the African continent. Concerns included extreme food insecurity due to drought, asymmetry between development and population growth and a lack of access to clean energy infrastructure.

The summit represented a chance for increased collaboration between the United States and African countries, particularly when it comes to U.S. investment in a clean energy transition for the African continent. Although Africa generally contributes very little to global carbon emissions, a renewable energy infrastructure will be integral in accelerating sustainable economic development across the continent.

President Biden has made U.S. investment in Africa a core part of his President’s Emergency Plan for Adaptation and Resilience (“PREPARE”) announced in November 2022 at COP27. In light of last week’s summit, the Biden-Harris administration has highlighted the ways in which at least $1.1 billion has been dispensed to conservation, climate resilience, and clean energy transition in Africa. Recent such projects include the U.S.-Africa Clean Tech Energy Network, the Health Electrification and Telecommunications Alliance, and Accelerating Women’s Empowerment in Energy.

Press Release/Fact Sheet

Global: 11 Investment Firms Launch “Nature Action 100” to Address Business’s Impact on Biodiversity

On December 11, 2022, 11 investment firms launched a campaign – Nature Action 100 – to encourage companies to preserve ecosystems and biodiversity. The announcement was made at COP15, where delegates are negotiating the Post-2020 Global Biodiversity Framework (“GBF”). The draft GBF proposes requiring companies to assess and report harm to nature caused by their business and investments including impacts within their supply chains.

The campaign, modeled after Climate Action 100+, aims to complement the GBF in its attempt to address business’s role in biodiversity loss. Nature Action 100 will identify 100 companies with the highest impact on nature and engage with those companies to assess and identify their impacts on nature and ecosystems, mitigate those impacts and monitor their progress. The list of 100 companies will be published in 2023.

Some of the investment firms involved in the campaign include AXA Investment Managers, BNP Paribas Asset Management, Church Commissioners for England, Domini Impact Investments, Federated Hermes Limited, Karner Blue Capital, Robeco, Storebrand Asset Management, Christian Brothers Investment Services and Vancity Investment Management.

Nature Action 100 Press Release

Global: HSBC to Stop Funding New Oil and Gas Projects

On December 14, 2022, HSBC announced that it will no longer fund new oil and gas fields and related infrastructure but will continue to provide financing and advisory services to existing projects at levels sufficient to meet global demand during the transition to clean energy.

In October 2020, HSBC set climate targets to achieve a net-zero portfolio by 2050. By 2030, the bank said it aims to reduce its absolute financed emissions for the oil and gas sector by 34% from 2019 levels and to provide $750 billion to $1 trillion in sustainable financing and investment. Last year, the bank also introduced a Thermal Coal Phase-Out Policy in line with these commitments.

According to the updated energy policy, HSBC will not provide new finance or advisory services to clients for new oil and gas fields approved after December 31, 2021 or for infrastructure connected primarily to those new oil and gas fields. Additionally, the bank will stop new financing for oil and gas exploration, appraisal, development, and production related to oil assets with the highest emissions intensities and local environmental risks, such as ultra-deep-water offshore oil and gas, shale oil, extra heavy oil, and projects in environmentally and socially critical areas. HSBC will require enhanced due diligence and pre-approval for new finance or advisory services related to shale gas activities.

Citing the International Energy Agency’s Net Zero by 2050 report, HSBC’s energy policy states that global energy demand requires maintaining 2020 financing and investment levels in existing oil and gas fields until 2030 and declining thereafter. The policy allows for financing of existing oil and gas projects in line with those metrics and requires the bank to engage with clients on an annual basis about their transition plans to decarbonize. HSBC will also continue to provide financing at the corporate level for energy companies with transition plans that the bank determines are consistent with its climate targets and commitments.

HSBC Energy Policy (December 2022)

Global: International Sustainability Standards Board Is Developing Biodiversity Standards

On December 13, 2022, the International Sustainability Standards Board (“ISSB”) – an arm of the International Financial Reporting Standards Foundation (“IFRS”) – agreed on a uniform description of sustainability and clarified that a company’s ability to deliver value for its investors is inextricably linked to the natural resources, including biodiversity and ecosystems, it draws on.

Sustainability will be described in the ISSB’s General Sustainability-related Disclosures Standard (S1) as “the ability for a company to sustainably maintain resources and relationships with and manage its dependencies and impacts within its whole business ecosystem over the short, medium, and long term.” Sustainability will be further described as a “condition for a company to access over time the resources and relationships needed (such as financial, human, and natural), ensuring their proper preservation, development and regeneration, to achieve its goals.”

After receiving strong feedback on the connection between climate and nature, including biodiversity, deforestation and water, the ISSB is researching incremental enhancements that would complement the Climate-related Disclosures Standard (S2), including those relating to natural ecosystems and the human capital aspects of the climate resilience transition. To deliver this, the ISSB will consider the work of the Taskforce for Nature-related Financial Disclosure and other existing nature-related standards and disclosures where they relate to the information needs of investors. The ISSB did not provide specific metrics for measuring biodiversity and announced it would publish updated standards in 2023.

In addition, at COP15, Emmanuel Faber, Chair of ISSB, announced the appointment of two Special Advisers on natural ecosystems, Karin Kemper and Geordie Hungerford. Karin Kemper was, until recently, Global Director for Environment, Natural Resources and Blue Economy at the World Bank. Geordie Hungerford is CEO of the First Nations Financial Management Board in Canada and is Gwich'in (whose traditional territories are in the Northwest Territories and the Yukon). Mr. Hungerford will provide strategic counsel on issues important to Indigenous Peoples, which include biodiversity.

IFRS Press Release