ESG Weekly Update – February 22, 2023

22 February 2023

Europe: European Commission Proposes Green Hydrogen Standards

On February 13, 2023, the European Commission released two Delegated Acts, its proposed rules under the Renewable Energy Directive to define what constitutes renewable, or “green,” hydrogen. These rules also support the Commission’s May 2022 REPowerEU Plan, which seeks to diversify energy supplies and reduce dependence on fossil fuels.

The first Delegated Act requires that hydrogen and other hydrogen-based fuels be generated by electrolyzers powered by new renewable energy in order to qualify as renewable fuels of non-biological origin. This requirement seeks to ensure that hydrogen production doesn’t negatively impact power generation and that there will be an overall increase in available renewable energy.

The second Delegated Act introduces a methodology to calculate the life-cycle greenhouse gas emissions of these renewable fuels of non-biological origin, which includes upstream emissions, processing and transportation. It also clarifies how to calculate emissions for green hydrogen produced in a fossil-fuel production facility.

The European Parliament and the Council now have two months to accept or reject the proposals in full, with no opportunity for amendment.

Press Release

Asia: Indian Central Bank to Issue Green Finance and Climate Risk Disclosure Guidelines

On February 8, 2023, the Reserve Bank of India (“RBI”) announced the release of a green finance and disclosure framework based on global standards. The framework will address three critical areas: (i) acceptance of green deposits; (ii) climate-related financial risk disclosures; and (iii) climate scenario analysis and stress testing. The guidelines will apply in a phased manner to “regulated entities,” the scope of which is still unclear but will likely include banks.

The announcement is a result of feedback received on RBI’s prior Discussion Paper on Climate Risk and Sustainable Finance, published in July 2022, as well as a survey of leading banks in India seeking to assess their risk-management and climate disclosure practices. The results of the survey noted that board-level engagement on climate risk and related disclosures is “inadequate” and that the majority of surveyed banks are yet to align their climate-related financial risk disclosures to any internationally accepted standard.

RBI’s latest initiative is part of a strong push to promote sustainable finance in India. In January, India launched its first sovereign green bond auction of US$ 1.9 billion.

Press Release
Discussion Paper

U.S.: Republican Attorneys General Urge Lawmakers to Reject Biden Reversal of Trump-Era Rule

On February 14, 2023, 27 Republican state attorneys general published a letter calling on Congress to overturn a Department of Labor (“DOL”) rule permitting ERISA fiduciaries to consider ESG factors in making investment decisions. The DOL rule went into effect on January 30 and reversed previous ESG-targeting restrictions implemented under the Trump administration.

In the letter, the attorneys general allege that the rule threatens financial stability and violates federal law by exceeding DOL’s statutory authority and that the rule contradicts the plain language of the ERISA statute. The attorneys general also argue that investment managers are required by law to focus solely on “financial” rather than “nonpecuniary” benefits. They reference “multiple studies” that show that ESG investing reduces returns and further criticize the broader practice taken by asset managers to pressure public companies to comply with “woke environmental and social agendas.”

The Biden administration has defended its policy by asserting that the rule merely clarifies how factors bearing an “ESG” label may be considered alongside any other investment risk.

The letter accompanies a lawsuit filed by largely the same group of state officials in the Texas federal district court (see more on this here). Earlier this month, House and Senate Republicans introduced a bill that, if passed, would overturn the rule (we reported on this here).

Letter and Lawsuit

U.S.: Inflation Reduction Act Reintroduces US$10 Billion Tax Credit for Clean-Energy Makers

On February 13, 2023, the Treasury Department, Department of Energy and Internal Revenue Service released guidance outlining implementation of the Inflation Reduction Act’s (“IRA”) clean and advanced energy tax credit program. The administration announced that it plans to reintroduce a tax credit for advanced energy projects, including those that expand domestic manufacturing, reduce industrial greenhouse gas emissions or help create a domestic supply chain for critical minerals.

Projects may apply for an investment tax credit of up to 30% starting from May 31. The program includes a funding round of US$4 billion, with US$1.6 billion earmarked for projects in areas where coal mines and coal-fired power plants have shut down. The Treasury Department also announced a bonus tax credit of up to 20% for wind and solar projects located in low-income communities. If fully realized, that bonus incentive could cover 50% of a given project’s cost.

The program is a relaunch of the short-lived Qualifying Advanced Energy Project Credit (“QAEPC”) that was part of the American Recovery and Reinvestment Act of 2009. The QAEPC program exhausted its initial US$ 2.3 billion allocation and was not refunded.

Press Release

Global: SBTi Adds Land-Based Metrics to Target-Setting Framework

The Science Based Target Initiative (“SBTi”), an initiative set up to promote science-based practices to reduce emissions, issued a draft methodology to help companies “adopt a roadmap for integrated action on nature and climate.”

The methodology is SBTi’s first to address the impact of climate change on nature, focusing on protection and restoration of ecosystems. The new methodology sets three targets for land:

  • no conversion of natural ecosystems, requiring companies to refrain from changing a natural ecosystem into another land use;
  • land footprint reduction, which aims to reduce the amount of agricultural land a company requires for the products in its value chain over time; and
  • landscape engagement, a target measuring corporate actions that support landscape initiatives.

The land targets focus only on assessing the direct operations of companies and upstream activities. SBTi noted that downstream reporting will be considered in future guidance.

Compared to the SBTi Forest, Land and Agriculture (“FLAG”) guidance published in 2022, the new methodology has a more targeted focus on nature and biodiversity. FLAG focused on deforestation and practices that reduce emissions. Both FLAG and the new land targets are intended to spur voluntary corporate actions in line with company commitments to science-based targets for nature. Neither methodology is intended as a regulatory framework.

The draft guidelines are open for comments until March 7, 2023.

SBTi Announcement