U.S.: Senators Launch Investigation into SEC Climate Disclosure Proposal
On February 22, 2023, three Republican senators sent a letter to Securities and Exchange Commission (“SEC”) Chairman Gary Gensler requesting records related to the SEC’s climate disclosure rule proposal. The letter was signed by Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, Bill Huizenga, (R-Mich.), chairman of the panel’s Subcommittee on Oversight and Investigations, and Tim Scott (R-S.C.), ranking member of the Senate Committee on Banking, Housing, and Urban Affairs.
The letter requests that the SEC provide answers to seven questions and supply supporting documentation by March 8, 2023. The questions include: whether the SEC has made efforts to minimize First Amendment concerns related to “compelled speech”; whether the SEC worked with other federal agencies, non-governmental organizations or the White House in developing the proposed rule; and which SEC employees were part of the rulemaking process. The letter asserts that with the proposed rule, the SEC has exceeded its mission to protect investors and instead is pursuing a “progressive social agenda through the promulgation of this extraordinarily expansive climate disclosure rule.”
Chair Gensler recently indicated that the SEC was considering changes to the rule proposal in response to comments received from the business community.
Debevoise maintains an online tracker monitoring ESG-related investigations, the current version of which can be accessed on the Debevoise ESG Resource Centre.
France: Activists Sue BNP Paribas over Energy Loans
On February 23, 2023, Friends of the Earth, Oxfam and Notre Affaire à Tous announced a lawsuit against French banking giant BNP Paribas over its funding of new fossil fuel producers. The three organizations allege that by continuing to provide both direct and indirect financing for such projects, BNP Paribas has violated its statutory duty of vigilance under French law.
According to data provided by the groups, BNP Paribas has become Europe’s largest financier of fossil fuel development in recent years, supplying an estimated $55 billion in funding to oil and gas giants between 2016 and 2021. While BNP Paribas has joined the Net Zero Banking Alliance and announced plans to significantly reduce its exposure to oil and gas by 2025, the nonprofits argue that such proposals are insufficient to counter the environmental harms caused by the bank’s existing and ongoing commitments.
The lawsuit is predicated on the 2017 French Loi de Vigilance, which requires certain multinational corporations to affirmatively cease or prevent environmentally harmful actions upon receiving a formal notice. The three groups first issued a notice to BNP Paribas last October, calling on the bank to immediately end all support for companies responsible for the development of new fossil fuel projects. In a formal response, BNP Paribas reiterated its commitment to environmental action and argued that it would be impractical to immediately or completely withdraw from the fossil fuel industry.
U.S.: Minorities Now Comprise 20% of U.S. Board Directorships
On February 22, 2023, ISS Corporate Solutions (“ISS”), a provider of governance and compensation advisory services, released data showing that racial and ethnic minorities currently hold 20% of board positions across the 3,000 largest U.S. companies (the Russell 3000). The analysis covers a four-year period between January 2019 (when the figure was 12%) and January 2023, with each minority group in the study experiencing a proportionate increase.
The study shows that despite the gains made, the makeup of boards still reflects an underrepresentation of each minority group compared to their respective share of the total U.S. population. For those of Hispanic and Latin American origin, who comprise 18.9% of the U.S. population, the board representation figure is 3.6%. Though Caucasian board representation has fallen (down 9% to 79.9% overall), they are still overrepresented compared to their share of the population (59.3%). The biggest gain from 2019 was for Black and African-American directors, who almost doubled their share of board directorships from 4.4% to 8.3%. Though only 1% of companies under ISS’s analysis have black CEOs, this represents a 56% increase from 2019.
Those directors whose race or ethnicity was not disclosed were excluded from the analysis. However, the number of directors who did not disclose fell by 58% from 2019, such that they accounted for less than 3% of all positions covered in the analysis. A NASDAQ rule (approved by the SEC in 2021) now requires NASDAQ-listed companies to publicly and annually disclose board-level diversity statistics using standardized methods.
ISS Press Release
UK: CMA Consults on New Antitrust Guidance on Environmental Sustainability Agreements
On February 28, 2023, the UK Competition and Markets Authority (“CMA”) published its Draft Guidance on Environmental Sustainability Agreements (the “Draft Guidance”) for consultation, setting out when and how businesses looking to cooperate or pursue collective action for environmental reasons can do so without risk of falling foul of UK antitrust laws.
The Draft Guidance applies to (i) agreements aimed at “preventing, reducing or mitigating the adverse impact that economic activities have on environmental sustainability” (such as those promoting the sustainable use of raw materials, reducing pollution or improving air or water quality), and (ii) agreements that “contribute towards the UK’s binding climate change targets under domestic or international law” (such as those aimed at phasing out production processes involving the emission of carbon dioxide, or concerning the provision of financing or insurance to fossil fuel producers). It provides guidance on when initiatives are unlikely to be anticompetitive, as well as the circumstances in which they may be restrictive but on balance are capable of exemption, such as agreements only to buy from sustainable sources.
The CMA is therefore making good on its public commitment to promote environmental sustainability and has proposed an innovative approach to assessing the benefits of these agreements by considering the possibility of future and non-monetary benefits. The Draft Guidance also demonstrates a departure from the traditional “fair share” assessment, in particular for climate change agreements where it provides for “a more permissive approach” by including “the totality of the benefits to all UK consumers” as a relevant factor. The Draft Guidance reiterates the CMA’s “open-door policy” to discussing environmental sustainability agreements with parties and provides protection from fines for those who discuss their proposed initiatives in advance.
The consultation is open for responses until April 11, 2023.
Draft guidance document
Global: ISSB Sustainability and Climate Disclosure Standards to Go into Effect January 1, 2024
At its February 16, 2023 meeting, the International Sustainability Standards Board (“ISSB”) finalized the content of its initial IFRS Sustainability Disclosure Standards (“Standards”), which are expected to be issued by the end of Q2 2023. With the content agreed, the ISSB will now enter the drafting, review and approval process before issuing the Standards. The ISSB unanimously agreed on an effective date of January 1, 2024.
The ISSB was created in November 2021 by the International Financial Reporting Standards (“IFRS”) Foundation to develop a comprehensive global baseline of sustainability-related disclosure standards. The ISSB proposed disclosure standards in two exposure drafts published in March 2022 – IFRS S1 General Sustainability-Related Disclosures (“Draft S1”) and IFRS S2 Climate-Related Disclosures (“Draft S2”) – and has considered feedback from the more than 1,400 comment letters received on the exposure drafts.
Draft S1 proposed requirements for an entity to disclose sustainability-related financial information about its sustainability-related risks and opportunities. Draft S2 proposed requirements for an entity to disclose climate-related financial information about its climate-related risks and opportunities. Draft S2 builds upon recommendations of the Task Force on Climate-Related Financial Disclosures, which also served as a model for the SEC’s proposed climate disclosure rule. Draft S2 included a requirement for companies to disclose Scope 3 greenhouse gas emissions but the ISSB agreed at its latest meeting to a temporary exemption from this requirement until after the first reporting year. While adoption of the Standards will be determined according to jurisdiction, their finalization could be particularly significant for companies that use IFRS to prepare financial statements.
ISSB Press Release
Exposure Draft S1 and comment letters
Exposure Draft S2 and comment letters
U.S.: Loan Syndication and Trading Association Announces Updated Sustainable Lending Principles
On February 22, 2023, the Loan Syndication and Trading Association (“LSTA”) announced the publication of updated Loan Principles in three different areas, namely the Green Loan Principles, Social Loan Principles, and Sustainability-Linked Loan Principles. These new materials can be accessed through the LSTA’s Sustainable Lending Library.
The Green Loan Principles are voluntary guidelines that aim to promote the development of the green bond market. The Social Loan Principles are intended to facilitate and support the role of credit markets in financing the mitigation of social issues and challenges, and the achievement of positive social outcomes. The Social Loan Principles also provide a high-level, non-exhaustive list of eligible social projects, such as affordable housing or access to essential services like education. The Sustainability-Linked Loan Principles provide guidance on what a sustainability-linked loan is and how to identify sustainability performance indicators. All three principles set out standards around the use of loan proceeds, the process for project evaluation and selection, the management of loan proceeds and reporting recommendations.
On February 17, 2023, the LSTA also published new guidance for sustainability-linked loans, including drafting guidance and Sustainability Structuring Agent Engagement Letter inserts.
Transactions completed before March 9, 2023 will be exempt from adherence to the updated principles and should be reviewed according to the previous version in force at the time of origination, extension or refinancing.
Sustainable Lending Library
Drafting Guidance for Sustainability-Linked Loans
Sustainability Structuring Agent Engagement Letter inserts