Global: ISSB Delays Non-Climate Sustainability Disclosures
On April 4, 2023, the International Sustainability Standards Board (“ISSB”) voted to delay non-climate sustainability disclosures by one year.
This follows an ISSB decision in February to make its standards available for regulators around the world to incorporate into their national reporting requirements starting in 2024. If regulators were to adopt the measures by next year, companies would have been required to disclose certain non-climate sustainability metrics – such as packaging waste, employee diversity, and human-rights policies in supply chains – as soon as 2025. The delay means companies now will be required to make these disclosures by 2026. The delay does not affect S1 (general requirements) – which sets out overall requirements for an entity to disclose sustainability-related financial information – and S2 (climate-related disclosures) – which sets out specific disclosure requirements about an entity’s exposure to significant climate-related risks and opportunities.
ISSB stated that the delay will allow companies to “prioritise putting in place reporting practices and structures to provide high-quality, decision-useful information about climate-related risks and opportunities in the first year of [ISSB S1 and S2] reporting.”
UK: Government Releases Green Finance Strategy and Consultation on Regulatory Framework for ESG Ratings Providers
On March 30, 2023, HM Treasury published its 2023 Green Finance Strategy, which was last updated in 2019. The latest government strategy is aimed at mitigating climate risk, supporting climate and nature adaptation, and augmenting the amount of capital directed to net zero and green objectives. The publication sets out the government’s plan to become “the world’s first Net Zero-aligned Financial Centre” through a series of information-sharing and regulatory processes. The UK published a related Nature Markets Framework in addition to, and referenced in, the Green Finance Strategy. Overall, both strategies focus on decarbonization and bolstering green energy markets generally.
In order to strengthen climate and nature considerations in the marketplace, the government simultaneously released a consultation paper on the regulatory framework applying to ESG ratings providers. In doing so, the government emphasized that market participants require access to sufficient information when making decisions that impact climate priorities and green investing overall. By regulating ratings providers, the government hopes to combat greenwashing and its impact on market decision-making. Interested parties may submit comments on the scope of the regulatory framework by June 30, 2023.
Green Finance Strategy
Nature Markets Framework
India: Securities and Exchange Board of India Approves ESG Disclosures, Rating and Investing Framework
On March 29, 2023, the board of the Securities and Exchange Board of India (“SEBI”) approved its proposed regulatory framework for disclosures by listed entities, ESG investing by mutual funds, and ESG ratings.
SEBI approved amendments to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 and SEBI (Mutual Funds) Regulations, 1996. The effect of these amendments is to introduce a Business Responsibility and Sustainability Report (“BRSR”) Core framework, which contains a set of key performance indicators (e.g. intensity of greenhouse gas emissions, water consumption, and waste generation) under which listed entities need to report and obtain reasonable assurance (i.e. verification by an assurance provider). The reasonable assurance requirement will apply to the 250 largest companies by market capitalization from fiscal year 2023-2024 and the 1,000 largest companies from fiscal year 2026-2027. Furthermore, the 250 largest listed companies will also need to make certain disclosures about their value chains, with disclosures required from fiscal year 2024-2025 and assurance required from fiscal year 2025-2026.
To address the “risk of mis-selling and greenwashing, to enhance stewardship reporting requirements and to promote ESG investing,” SEBI has approved the proposal that mutual funds must:
- Ensure ESG schemes invest at least 65% of AUM in listed entities that assure their disclosures under BRSR Core;
- Undertake third party assurance and certification related to compliance with ESG objectives;
- Implement enhanced disclosures on ESG-focused voting decisions; and
- Disclose fund manager commentary and case studies that highlight how the ESG strategy is applied to the fund and its investments.
SEBI also approved the establishment of a regulatory framework for ESG ratings providers by introducing a new chapter in the SEBI (Credit Rating Agencies) Regulations, 1999.
SEBI Board Minutes
Germany: BaFin Issues Clarifications on Collaborative Engagement Between Investors
On March 30, 2023, the German financial regulatory authority, BaFin, clarified its position on “collaborative engagement,” a practice investors have previously been reluctant to engage in due to the regulator’s passive stance on the issue. A collaborative engagement could qualify as the collaborating parties “acting in concert” and would then entail serious consequences (e.g. the requirement to file a mandatory offer to other stakeholders where the collaborating parties are deemed to be majority stakeholders due to them acting in concert). Although BaFin followed the view of Germany’s Federal Court in their clarifications, it emphasized that courts may develop different understandings of “acting in concert”.
In response to six hypothetical scenarios presented to it by the German government’s sustainable finance advisory council, BaFin submitted that acting in concert involves parties agreeing on the exercise of voting rights or otherwise cooperating with the aim of achieving a permanent and significant change in the corporate direction of the issuer. BaFin concluded that agreements on individual issues – such as investors meeting with management to discuss an ESG issue, or jointly signing a letter addressed to management on such an issue – would not qualify as acting in concert, since they do not represent scenarios pertaining to the company’s overall direction and are limited to individual isolated cases. Acting in concert was not deemed present in two further scenarios: when investors share a consensus on an ESG issue at an annual general meeting, and when investors agree to file an ESG-related shareholder proposal in order to escalate that particular issue.
The regulator only raised concerns with respect to a scenario that envisages investors publishing an open letter or press release to a company calling for change (e.g. with regard to ESG matters) and then jointly voting in favor of such a change at an annual general meeting after having discussed their intention for such a voting behavior internally. Despite BaFin acknowledging that investors make their own individual decisions, they determined that such a behavior could qualify as acting in concert when its aim is to seek a change in the direction of the company. BaFin considers the publication of the open letter or press release, in combination with the joint voting behavior, to be a context that would not qualify as an individual isolated case and would therefore presume this to be “acting in concert”.
U.S.: Republican Attorneys General Challenge Asset Managers Over ESG Considerations
On March 30, 2023, the office of the Montana Attorney General, on behalf of the Montana Attorney General and 20 other Republican attorneys general, issued a letter to 53 of the largest asset managers in the United States, including BlackRock, State Street, and JPMorgan Chase. The letter asserts that the asset managers have disregarded their fiduciary duties to their clients by joining initiatives that seek to reduce greenhouse gas emissions, such as the Net Zero Asset Managers Initiative (“NZAM”) and Climate Action 100+. The letter asserts that the asset managers, after joining such initiatives, failed to advertise all of their funds as ESG despite the emissions commitments made; failed to adequately explain the risks of funds advertised as ESG; and failed to disclose conflicts of interest between climate and financial motives.
The letter also discusses a number of shareholder proposals where the asset managers will be required to choose between ESG policy and prioritizing financial returns, namely: (1) climate change resolutions in banking; (2) underwriting activities in insurance; (3) net zero compliance in utilities and energy; and (4) abortion and political spending. For each category, the letter notes that the shareholder proposal fails to explain any financial benefit to the company or to explain how the policy promotes financial goals over what the letter states are political and partisan ESG policies.
The letter concludes by noting the attorneys general’s intention to continue to evaluate the asset managers’ activities as part of ongoing investigations into potential violations in this area.
Global: Activist Investor Urges Nike to Take Action on Human Rights
On March 30, 2023, UK-based activist investor Tulipshare filed a shareholder proposal ahead of Nike’s annual general meeting. The proposal urged Nike to produce a report for shareholders assessing how effectively the company manages its supply chain in accordance with its human rights commitments. More specifically, the group requested that Nike assess the effectiveness of company codes, guidelines, contracts, and other policies in place throughout its supply chain and determine the extent to which such policies are consistent with international recommendations like the UN Guiding Principles on Business and Human Rights, the UN Sustainable Development Goals, and the OECD Guidelines for Multinational Enterprises. Further, the proposal recommends that Nike disclose how the company tracks its performance on key issues, such as forced labor and wage theft, and consider adopting model contract clauses developed by the American Bar Association in its supplier contracts to ensure adequate human rights due diligence.
In support of the shareholder proposal, Tulipshare’s founder and CEO argued that Nike has not adequately disclosed how it addresses labor risks or engages with affected workers in its supply chain. Tulipshare cited a 2023 complaint that a group of trade unions and labor rights groups filed with the U.S. State Department alleging Nike’s treatment of garment workers during COVID-19 violated the OECD Guidance for Responsible Business Conduct.
Tulipshare Press Release