Europe: EU Announces Net Zero Industry Act
On January 17, 2023, the President of the European Commission, Ursula von der Leyen, announced plans to introduce a Net Zero Industry Act as part of the new Green Deal Industrial Plan. Von der Leyen acknowledged in her speech at the World Economic Forum that the introduction of the Green Deal Industrial Plan is partly in response to the U.S. Inflation Reduction Act, stating that “it is no secret that certain elements of the design of the Inflation Reduction Act raised a number of concerns in terms of some of the targeted incentives for companies.”
The purpose of the Net Zero Industry Act is to create a regulatory environment that allows the European net zero industry to scale up fast and to create “conducive conditions” for sectors that play an important role in reaching net zero.
The Net Zero Industry Act will identify clear goals for the European clean technology sector by 2030. The Act aims to focus investment on strategic projects along the entire supply chain, and will specifically look into making the process to obtain permits for new clean technology production sites simpler and faster.
Under the Green Deal Industrial Plan, the Commission has also proposed to temporarily relax state-aid rules in order to incentivize investments in the clean technology sector. This will include introducing a new simple tax-break model for the sector.
Funding will be made available through the creation of a European Sovereignty Fund, which was first announced in September 2022. More details about the Fund is expected this summer during the mid-term budget review.
The draft text of the Act has not yet been published.
Europe: European Parliament Committee Votes in Favor of Stricter Reporting Requirements for EU Banks but Omits Fossil Fuel Regulations
On January 24, 2023, the Economic and Monetary Affairs Committee (“ECON Committee”) of the European Parliament voted in favor of changing banking regulations to require increased disclosures relating to ESG risks. The changes to the regulations implement Basel III, developed by the Basel Committee of Banking Supervision, which focuses on strengthening the regulation, supervision and risk management of banks in order to improve their resilience to economic shocks.
The ECON Committee focused its amendments on environmental risks, pointing to the EU’s 2025 carbon neutrality pledge as driving enhanced reporting requirements for banks. Lawmakers agreed that stronger reporting and disclosure requirements were necessary. However, environmental groups were disappointed that the ECON Committee excluded a proposal that would tighten fossil fuel requirements for bank capital.
The amendments also require that banks’ remuneration policies complement their short and long-term objectives with regard to managing ESG risks. In terms of governance reforms, the ECON Committee also focused on achieving diversity and gender parity within management bodies.
Europe: Europe’s Largest Pension Fund, ABP, Wary of Banks’ ESG Shortcomings
ABP, Europe’s largest pension fund, has notified banks and other agents in the financial sector that they must show tangible action and progress towards portfolio decarbonization in order to maintain current levels of investment.
Dominique Dijkhuis, head of investments at ABP, highlighted ABP’s views regarding the misalignment between the financial sector’s ESG targets and its actual performance, saying that institutions that state they are committed to a climate course but actively grant loans to new fossil products are not aligned.
Dijkhuis’s comments come in the wake of the publication of ABP’s 2022 annual review, which set out its target to achieve an absolute CO2 reduction of 50% by 2030 compared with 2019 levels, for its entire investment portfolio and throughout its value chain. Further, the fund aims to invest EUR 30 billion in the climate transition by 2030, and will no longer invest in companies selling products “inextricably linked to climate damage.” The EUR 500 billion fund is in the process of setting certain climate- and other ESG-related KPIs that financial sector participants must meet in order to avoid divestment over the next few years.
At the same time, three of New York City’s five public pension funds have filed shareholder proposals to urge banks such as Goldman Sachs, JPMorgan Chase, RBC and Bank of America to set absolute 2030 emission reduction targets in order to align with a science-based net-zero pathway. The same banks are also the subject of a proposal filed by U.S. non-profit As You Sow, requesting disclosure of transition plans for achieving near-term net-zero emission reduction goals.
ABP annual review
U.S.: Mighty Earth Files Complaint with U.S. Securities and Exchange Commission Against JBS ‘Green Bonds’
On January 17, 2023, Mighty Earth, a global advocacy organization, filed a whistleblower complaint against Brazilian multinational meat producer JBS to the U.S. Securities and Exchange Commission (the “SEC”). The complaint concerns Sustainability-Linked Bonds (“SLBs”), valued at $3.2 billion, issued by JBS in 2021, that are tied to its stated goal to cut emissions and reach “Net Zero by 2040.”
Mighty Earth alleges that JBS, the world’s largest meat processor, omitted material information from its bond offering and investor presentations. Specifically, the company’s total emissions have apparently increased in recent years and the bond offerings omitted Scope 3 supply chain emissions entirely, which constitute 97% of JBS’s climate footprint, according to Mighty Earth. Additionally, Mighty Earth alleges that JBS failed to include information about the number of animals it slaughters each year, which it claims is the primary source of greenhouse gas emissions in its supply chain.
Mighty Earth stated in its press release that it hopes that the SEC’s Climate and ESG Task Force will investigate the allegations as securities fraud.
Second Party Opinion
U.S.: Texas Attorney General Publishes Rejection of Citigroup’s Standing Letter
On January 18, 2023, the Public Finance Division of the Texas Attorney General’s office sent a public letter to Citigroup rejecting the company’s standing letter, a document that had permitted Citigroup to underwrite debt on the public bond market in Texas. The Texas Attorney General’s office determined that Citigroup “has a policy that discriminates against a firearm entity or firearm trade association” and could not provide a traditional business reason specific to the (potential) customer to operate such a policy. The policy in question imposed restrictions on new retail business clients that sell guns, requiring that these clients only sell firearms to customers who had passed background checks.
According to the letter, Texas will not approve any public security where Citigroup underwrites the security, or in which Citigroup is a party to a covered contract relating to the public security.
The Texas Attorney General letter follows the adoption of Senate Bill 19, which prohibits government contracts with companies engaging in anti-gun practices. Senate Bill 19 came into effect in September 2021. Citigroup temporarily stopped its business in the Texas municipal bond market at this time; two months thereafter, the company reengaged its business in the market, believing that its practices complied with the new law.
In response to the Texas AG’s letter, a Citigroup spokesperson stated that the company “will remain engaged with the Texas AG office to review our options.”
Senate Bill 19