U.S.: SEC Expected to Release Final ESG Rules Later This Year
On January 4, 2023, the Office of Management and Budget released a federal regulatory agenda update indicating that the U.S. Securities and Exchange Commission (the “SEC”) anticipates issuing its final ESG rules later this year. The three ESG-related rules consist of:
- rule amendments to enhance disclosures regarding issuers’ climate-related risks and opportunities, expected in April 2023 (we reported on this in more detail here);
- requirements for investment companies and investment advisers to provide additional information regarding their ESG investment practices, expected in October 2023 (more on this here); and
- rule amendments relating to investment company names, requiring funds to invest at least 80% of their assets in accordance with the focus indicated by the fund’s name, also expected in October (more on this here and here).
The indicated timeframes are not binding.
SEC Rule – Issuers
SEC Rule – Investment Practices
SEC Rule – Investment Company Names
Europe: German Law on Supply Chain Due Diligence Enters into Force
On January 1, 2023, the German Act on Corporate Due Diligence Obligations in Supply Chains (the “Act”), or Lieferkettensorgfaltspflichtengesetz, entered into force. The Act applies to companies with a head office, statutory seat, principal place of business, administrative headquarters or branch office in Germany. Currently, the Act applies to companies with at least 3,000 employees in Germany but will extend in 2024 to companies with at least 1,000 employees. In calculating the number of Germany-based employees, all affiliated companies must be considered.
Under the Act, companies must conduct due diligence on human rights- and environment-related risks within their supply chain. This includes all stages of producing a company’s products or services carried out in Germany or abroad, from the extraction of raw materials to delivery to the end customer. The obligations cover the company’s own business, consisting of the activities required to achieve the company’s business objective, as well as its direct and indirect suppliers.
The Act also covers human rights risks where there is a “sufficient probability” of an imminent violation of prohibitions against child labor, forced labor, all forms of slavery, disregard of occupational safety, disregard of the freedom of association, unequal treatment in employment, inadequate living wage, harmful pollution and excessive use of force when protecting a company’s project. Environmental risks refer to prohibitions on the use of mercury and certain chemicals, improper waste disposal and import/export of hazardous waste.
The due diligence obligations mandated by the Act include:
- establishing a risk-management system to identify, prevent and minimize risks within the supply chain;
- establishing preventive measures, including a strategy for business processes, procurement, training and risk-based control measures;
- taking remedial actions in relation to violations that have occurred or are imminent;
- establishing an internal complaints procedure enabling persons to report violations; and
- continuously documenting the fulfilment of due diligence obligations and reporting annually on actions taken.
The European Union has adopted separately a proposal for a Directive on Corporate Sustainability Due Diligence (see our previous report here), which would expand on obligations covered by the Act. In December 2022, the European Council adopted its negotiating position on the proposed directive, which marks the start of negotiations with the European Parliament. If negotiations are successful, a final text is expected before the end of the legislative mandate in 2024.
Debevoise Update – Germany: Mandatory Human Rights Due Diligence
Federal Law Gazette (in German)
Text (in English, unofficial translation)
Asia: Singapore Implements New ESG Disclosure Requirements
On January 1, 2023, the Monetary Authority of Singapore’s (“MAS”) ESG disclosure rules took effect. The new rules are based on the recommendations of the Task Force for Climate-related Financial Disclosures and explicitly target retail ESG funds in an effort to limit greenwashing.
ESG fund prospectuses filed in Singapore on or after January 1 must disclose the fund’s investment focus, sustainable investment strategy, reference benchmark (if applicable) and risks associated with the fund’s ESG focus, including a description of any ESG metrics used or due diligence carried out by the fund. Funds are also required to disclose their progress on stated ESG goals to investors on both an ongoing and yearly basis. In addition, any scheme that uses “green” or other ESG-related terms in its name must demonstrate that its investments are “substantially ESG focused.” This can be done by allocating at least two thirds of the fund’s net asset value in accordance with its stated ESG strategy or by providing a written explanation to MAS.
Relatedly, the Singapore Exchange (the “SGX”) will require finance, agriculture and energy issuers to report climate disclosures starting this year. This marks a change from the position taken until now, where the SGX required issuers to report on a “comply or explain” basis. In the coming years, SGX plans to make such disclosures mandatory for issuers in other key industries such as materials and buildings or transportation.
MAS Circular: CFC 02/2022
SGX Reporting Requirements
SGX Compliance Guide
Asia: Draft Thai Taxonomy Excludes Gas from Green Category
On December 26, 2022, the Bank of Thailand and the Thai Securities Exchange Commission issued Thailand’s draft sustainable finance taxonomy. The draft is currently envisaged to apply to the transport sector, Thailand’s highest greenhouse gas emitter, with the intention to extend it to other industries in the future. These Thai regulators aim to produce a taxonomy “closely aligned” to the developing ASEAN regional taxonomy.
The draft taxonomy uses a traffic-light system of green, yellow (transition activities) and red (polluting activities), and it adopts the same standards as the EU taxonomy in relation to lifecycle emissions limit, with the notable exception of natural gas. Both the EU taxonomy and the Thai draft taxonomy have adopted a “substantial contribution” emissions threshold for generating power limited at 100g CO2e/kWh. However, the Thai draft taxonomy does not list natural gas as “green,” in contrast to the EU, where the European Parliament in July 2022, in a heavily criticized move, voted to define natural gas as “green” (we reported on this here).
The Thai draft taxonomy is open for comment until January 26, 2023.
Press Release (in Thai)
Draft Taxonomy (in Thai)
U.S.: Federal Trade Commission Seeks Public Comment on “Green Guides”
On December 14, 2022, the U.S. Federal Trade Commission (the “FTC”) announced a request for public comment on possible updates to its Green Guides for the Use of Environmental Claims (“Green Guides”). Since the last revision in 2012, the FTC noted an increase in environmental consciousness among consumers, prompting the FTC to consider updating the Green Guides to align better with consumers’ perceptions of corporate environmental benefit claims. According to the FTC, the updates would help marketers avoid making unfair or deceptive environmental marketing claims under Section 5 of the Federal Trade Commission Act.
The FTC is seeking general comments on the continued efficacy and economic impact of the guides, with a focus on number of specific issues, including whether the guides should provide additional information on claims related to carbon offsets and climate change as well as the legal definitions and thresholds for marketing terms like “recyclable,” “recycled content,” “compostable,” “degradable,” “ozone-friendly,” “organic” and “sustainable.”
The Green Guides were first developed in 1992 to help businesses avoid making legally deceptive environmental marketing claims, otherwise known as “greenwashing.” The guides are not mandatory but have become increasingly relevant in recent years due to rising consumer awareness of ESG issues and corporate ESG programs.
Public comments may be submitted to the FTC on or before February 21, 2023.
Asia: India Approves US$ 2 Billion Incentive Plan for Green Hydrogen Industry
On January 4, 2023, India approved a roughly US$ 2 billion green hydrogen incentive program designed to advance the country toward meeting its goal of net-zero carbon emissions by 2070. India is currently one of the world’s largest emitters of greenhouse gases but hopes this plan will make the country a global hub for green hydrogen.
Green hydrogen is considered a promising alternative to fossil fuel-based energy and has characteristics that allow it to reach certain sectors where other forms of green energy are less promising. Green hydrogen is created through electrolysis, a process that creates hydrogen by splitting water through the use of a device that itself is powered by others forms of renewable energy.
India’s incentive plan seeks to achieve green hydrogen production of up to 5 million metric tons (“MMT”) annually by 2030, which would result in the elimination of 50 MMT of carbon emissions and reduce fossil fuel imports. To help promote the use of green hydrogen, the government plans to implement mandatory targets of green hydrogen consumption for fertilizer units, petroleum refineries and city gas-distribution networks.
Similar green hydrogen incentives have been approved in the United States and the European Union.