EU: Parliament Approves Landmark Deforestation Law
On April 19, 2023, the EU adopted a regulation restricting companies from selling certain products in the EU without an accompanying “due diligence” statement that addresses deforestation. The products covered by the regulation include cattle, cocoa, coffee, palm-oil, soya, wood, rubber, charcoal, and printed paper products. In particular, companies must confirm that any such product “does not come from deforested land” and has not “led to forest degradation, including of irreplaceable primary forests, after 31 December 2020.” Additionally, companies must verify the production of goods in accordance with the country of production’s relevant legislation, including human rights under international law and the principle of free, prior, and informed consent (as set forth in the United Nations Declaration on the Rights of Indigenous People).
The Commission will classify countries by risk and perform checks proportionally to that risk: low-risk countries will have 1% of goods checked, standard-risk countries will have 3% of goods checked, and high-risk countries will have 9% of goods checked. Products from low-risk countries will be subject to a simplified due diligence procedure. This means that products from low-risk countries will not have to take special account of risks such as the prevalence of deforestation or forest degradation in the area of production, the complexity of the supply chain, or mixing with products of unknown origin.
Once formally endorsed by the European Council, the law will be published in the Official Journal of the European Union and enter into force 20 days later.
EU: Parliament Adopts Several Key Pieces of Legislation under “Fit for 55” Package
On April 18, 2023, the European Parliament formally adopted a range of legislation under the “Fit for 55” package. This package is intended to bring EU legislation in line with the goal of reducing net greenhouse gas emissions by at least 55% by 2030.
The package of legislation includes the following:
- The Carbon Border Adjustment Mechanism Regulation, which sets out a system of carbon certificates. Importers will be required to pay for carbon certificates that correspond to the carbon price that would have been paid had the goods been produced in the EU. The goods covered by the Carbon Border Adjustment Mechanism Regulation are iron, steel, cement, aluminum, fertilizers, electricity, and hydrogen.
- Revisions to the EU Emissions Trading System (“EU ETS”), including a directive revising the EU ETS Directive 2003/87/EC and the Market Stability Reserve Decision (EU) 2015/1814. In addition, the revisions also include a regulation amending Regulation (EU) 2015/757 to include maritime transport activities in the EU ETS and related greenhouse gas emissions monitoring, reporting, and verification. These changes also increase the greenhouse gas emissions cuts that must be made in the EU ETS sectors to 62% by 2030 as compared to emissions in 2025.
- A directive amending the EU ETS for aviation, which will phase out the free allowances to the aviation sector by 2026 and promote the use of sustainable aviation fuels.
- A regulation establishing a Social Climate Fund, which aims to address any social impacts arising from a new emissions trading system that will place a yearly cap on emissions from the road transport and building sectors. Part of the revenue from this system will fund the Social Climate Fund.
Once the European Council adopts this package of legislation, the new laws will come into force 20 days after publication in the Official Journal of the European Union.
Asia: Hong Kong Stock Exchange Seeks ESG Proposals
On April 14, 2023, the Stock Exchange of Hong Kong Limited (“SEHK”) published a consultation paper soliciting proposals for the enhancement of climate-related disclosures. In particular, the paper seeks views and comments on proposed changes to the ESG reporting framework set out in the ESG Reporting Guide, to enhance climate-related disclosures made by listed issuers.
The SEHK further proposed to require all issuers to make ISSB-aligned climate-related disclosures in their ESG reports. Subject to the consultation, the new rules would be effective from January 1, 2024.
The SEHK also proposed interim provisions for certain disclosures—such as reporting on the financial effects of climate-related risks and opportunities, scope 3 emissions, and certain cross-industry metrics—during the first two reporting years.
The paper comes against the background of Hong Kong’s existing climate goals. The Hong Kong government has targeted being carbon neutral by 2050 and has launched a Climate Action Plan that outlines relevant initiatives to “reduce carbon emissions for a smooth transition to a low-carbon, climate-resilient economy.”
Responses must be submitted by July 14, 2023.
HXEX Press Release
Consultation Paper (PDF)
U.S.: NY Federal Reserve Bank Calls for More Realistic Carbon Tax Assumptions by Central Banks
In April 2023, the Federal Reserve Bank of New York (“FRBNY”) published a staff report detailing that U.S. banks have a meaningful but manageable exposure to climate transition risks. The report further sets out that these transition risks are greater where stricter policies are introduced, such as policies with higher carbon tax rates.
The FRBNY suggested in the report that central banks should study the feasibility of implementing a significant carbon tax before incorporating such taxes into forward-looking climate scenario analyses. Such analyses are now a principal component of identifying the potential economic impact of climate hazards on GDP, unemployment, and inflation. To this end, the FRBNY questioned whether “an extreme carbon tax that would dramatically raise energy prices and bankrupt high emissions industries is ever likely to arise.” It further noted that more research on investor expectations was required to incorporate such factors into climate scenario analyses and risk modelling in a meaningful way.
The report further assessed the potential implications of climate change transition risks. Noting that most research has focused on the physical risks associated with climate change, the paper explored banks’ exposures to alternative policies that would promote the transition to a low-carbon economy. It argued that many banks underestimate their exposure to climate transition risks, an analysis that includes understanding borrowers’ likely responses to policies that aim to facilitate the low-carbon economic transition. The paper concluded that banks’ exposures increase with a stringent carbon tax policy, but benefit from corporate or capital tax redistribution policies (relative to a lump sum dividend). Additionally, according to the paper, banks’ exposures increase—although not dramatically—in “stress scenarios.”
EU: The European Supervisory Authorities Publish SFDR Q&A
On April 5, 2023, the European Securities and Markets Authority (“ESMA”) published responses to public questions regarding the Sustainable Finance Disclosure Regulation (“SFDR”). The answers, referred to as “Joint Q&As,” result from a collaboration of the three European Supervisory Authorities (“ESA”): the European Banking Authority, ESMA, and European Insurance and Occupational Pensions Authority.
The Joint Q&As include eight answers clarifying various aspects of the SFDR, including the following:
- the definition of “sustainable investment” (Article 2);
- the relationship between economic investments and social/environmental objectives (Article 2);
- the relationship among financial products, active/passive investment strategies, and the goal of reducing carbon emissions (Articles 8 and 9);
- the meaning of “considering” Principle Adverse Impacts (“PAI”) in the context of financial products (Article 7);
- how to define the average number of employees in determining the PAI threshold (Article 4); and
- the frequency of periodic reporting for portfolio management services (Article 11).
The ESA also published amendments to prior Q&As.
For more on the Joint Q&As, please see our Debevoise Update here.
SFDR Q&A (April 2023) (PDF)
SFDR Q&A (Amendments) (PDF)