ESG Weekly Update – June 1, 2023

1 June 2023

U.S.: Supreme Court Limits EPA’s Ability to Regulate Wetland Pollution

On May 25, 2023, the U.S. Supreme Court issued its decision in Sackett v. EPA, holding that the Clean Water Act does not allow the Environmental Protection Agency (“EPA”) to regulate pollution or other discharges into wetlands near bodies of water unless those wetlands have “a continuous surface connection” to those bodies of water. This ruling follows the EPA’s enforcement action taken against a couple in Idaho for filling in a lot with a view to build a home on it. The case turned on the scope of the EPA’s authority under the Clean Water Act and the difference between “adjoining” and “adjacent” when it comes to the scope of EPA-regulated wetlands.

All nine justices agreed that the EPA’s enforcement action was improper but disagreed on the test for defining the wetlands subject to the EPA’s regulatory scope. In the past, the court had disagreed over the scope of connection between traditionally defined “Waters of the United States,” such as streams, oceans, rivers, and lakes, and their wetlands and tributaries. Following Rapanos v United States (2016), the EPA regulated wetlands that either connected to traditional navigable waters or had a “significant nexus” to them. This effectively included both wetlands adjoining bodies of water and those adjacent to them (but not necessarily connected). The majority opinion in Sackett, written by Justice Alito, rejected that view and held that the Clean Water Act only extends to wetlands with a continuous surface connection to traditional navigable waters that makes it difficult to determine where the wetland ends and the water begins.

Sackett is the second Supreme Court case in the last year that limits the EPA’s authority to regulate pollution and curtails administrative agency power more broadly. In June 2022, the Court limited the EPA’s power to restrict power-plant emissions.


Global: Net Zero Insurance Alliance Holds Emergency Meeting Following Defections

On May 25, 2023, signatories of the Net Zero Insurance Alliance (“NZIA”) held an emergency meeting following the exit of several major members including Allianz, Scor SE and Axa SA. On May 26, 2023, Lloyd’s also withdrew from the NZIA.

These departures coincide with the recent wave of anti-ESG in the United States. On May 15, 2023, attorneys general representing 23 U.S. states published a letter noting their “concern[] with the legality” of NZIA, stating that its activities allegedly “led to serious detrimental effects on the residents of [their] states.”

On May 24, 2023, the UN Environment Programme issued a public statement citing “recent discussions within the United States” as the reason why members with “significant US business and exposure” have withdrawn from the NZIA.

At its peak, NZIA represented approximately 15% of global insurance premiums. Munich Re, a founding firm and the world’s largest reinsurer, left the alliance in March, citing “material” legal risks as the catalyst for its departure.

UNEP Statement
Lloyd’s Press Release
AG Letter

UK: Financial Reporting Council Proposes Revisions to Corporate Governance Code

On May 24, 2023, the Financial Reporting Council (“FRC”) – an independent regulator for auditors, accountants and actuaries – announced a public consultation on proposed revisions to the UK Corporate Governance Code. The planned updates to the Code would be the first in five years and are intended to “enhance [its] effectiveness in promoting good corporate governance.” The revisions include five primary areas of focus: (1) board leadership and company purpose; (2) division of board responsibilities; (3) board composition, succession and evaluation; (4) audit, risk and internal control; and (5) remuneration policies.

Specific ESG-related revisions include new reporting requirements for board audit committees. Such committees would be required to discuss significant sustainability issues in the company’s annual report and how these are addressed. In addition, the proposal requires renumeration outcomes to be aligned with the company’s performance, purpose and values; the annual report must include an explanation of how remuneration supports ESG objectives as part of the company’s long-term strategy.

The FRC is accepting comments until September 13, 2023 and intends to use this feedback to “continue restoring trust in audit and corporate governance.” The revisions are set to be effective starting January 1, 2025 to allow sufficient time for implementation.

FRC Press Release

Global: Science-Based Targets for Nature Launched

On May 24, 2023, the Science Based Targets Network (“SBTN”) launched its science-based targets for nature, building on the guidelines set by the Science Based Targets Initiative (“SBTi”). Established in 2015, the SBTi provides companies with a framework for reducing greenhouse gas emissions to keep global temperature increases within 1.5 degrees Celsius.

The science-based targets for nature follow from the Kunming-Montreal Global Biodiversity Framework, agreed at the UN Biodiversity Conference (COP15) in December 2022. As with the SBTi, companies will set their own targets, which the SBTN will validate.

The SBTN also published draft technical guidance on how to set science-based targets for nature in relation to fresh water and land. Guidance on biodiversity and ocean targets will soon also be published.

An initial group of 17 companies will pilot the science-based targets for nature. This includes AB InBev, H&M Group, Nestlé and Tesco.

The first target validation for companies outside of the pilot scheme is aimed to begin in early 2024.

Draft Guidance (Freshwater and Land)
SBTN Press Release