Global: ISSB Releases Climate and Sustainability Disclosures Standards
On June 26, 2023, the International Sustainability Standards Board (the “ISSB”) released its long-awaited standards:
- General Requirements for Disclosure of Sustainability-Related Financial Information (IFRS S1), which requires companies to publish information on “all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s cash flows, its access to finance or cost of capital over the short, medium or long term”; and
- Climate-Related Disclosures (IFRS S2), which requires companies to report on climate-related risks (including both transition and physical risks) and opportunities.
The ISSB standards incorporate the Task Force on Climate-Related Financial Disclosures recommendations, following the same four-part structure covering governance, strategy, risk management, and metrics and targets. In order to simplify reporting obligations, the ISSB standards also incorporate elements from other widely used frameworks, including the SASB Standards, CDSB Framework, Integrated Reporting Framework and World Economic Forum metrics, and are interoperable with the GRI standards.
A number of governments and regulators have indicated their intention to formally endorse and adopt the standards, including the United Kingdom, Canada, Japan and Nigeria.
The ISSB disclosures are expected to accompany companies’ financial statements starting from January 1, 2024.
Germany: Volkswagen, BMW and Mercedes Benz Hit by Xinjiang Forced Labor Complaint
On June 27, 2023, the European Center for Constitutional and Human Rights (the “ECCHR”) filed a complaint before the German Federal Office of Economics and Export Control against Volkswagen, BMW and Mercedes Benz, alleging links with forced labor in China’s Xinjiang region.
The complaint was filed under the German Act on Corporate Due Diligence Obligations in Supply Chains that came into effect on January 1, requiring large German companies to establish global supply chain due diligence procedures to prevent human rights and environmental abuses (more on this here and here). The ECCHR argues that the carmakers have not presented supporting documentation to show that they are carrying out adequate supply chain due diligence. The complaint points out that Volkswagen has a factory in Ürümqi, Xinjiang’s capital, and that Mercedes-Benz and BMW use indirect and direct suppliers based in the region who are at risk of using forced labor.
Other companies operating in Xinjiang face further pressure as groups continue to bring legal cases. For instance, the European Uyghur Institute based in Paris alleged that Uniqlo, Inditex, and Skechers are willfully ignoring human rights abuses and benefitting from forced labor in the region.
While regulatory scrutiny in Europe increases, China’s recent anti-espionage law further complicates compliance as it restricts consultancy and auditing firms’ access to information and ability to carry out effective due diligence.
ECCHR Press Release
Business and Human Rights Article
U.S.: Congress Publishes Interim Findings on Forced Labor Investigation of Chinese Shopping Sites
On June 22, 2023, the House Select Committee on the Chinese Communist Party released a report identifying possible violations of the Uyghur Forced Labor Prevention Act (the “UFLPA”) by Temu and Shein, two Chinese fast fashion online shopping platforms. The report is part of an ongoing investigation into fast fashion that began in March.
The report noted that Temu and Shein rely on the de minimis exception, which allows them to import into the United States products with a retail value below $800 without paying customs duties and with fewer reporting requirements. The Committee identified four key findings:
- Temu and Shein packages represent more than 30% of the de minimis shipments coming into the United States, consisting of roughly 600,000 packages imported daily;
- Temu and Shein’s business models rely on the de minimis exception to avoid complying with many requirements of the UFLPA;
- Temu does not carry out audits or reporting on compliance systems to ensure compliance with the UFLPA; and
- Temu does not expressly prohibit sales of products originating in Xinjiang.
The report further noted that, in 2022, U.S. Customs and Border Protection cleared over 685 million de minimis shipments “with insufficient data to properly determine risk” because of the overwhelming amount of shipments.
Select Committee's bipartisan interim report on the investigation of Shein and Temu
Global: Claims Code of Practice Issued for Voluntary Carbon Credits
On June 28, 2023, the Voluntary Carbon Markets Integrity Initiative (the “VCMI”) launched the Claims Code of Practice, which seeks to bring integrity and uniformity to the voluntary carbon markets. The code is aimed at companies seeking to make credible carbon claims, consumers or businesses buying climate-conscious goods and services, investors seeking to evaluate the credibility of a company’s claims and government actors seeking to incentivize the use of carbon credits.
Companies who want to show that their use of voluntary carbon credits is compliant with the code must make a “VCMI Claim” following a four-step process:
- First, a company must comply with the VCMI foundational criteria including committing publicly to reach net zero emissions by 2050 and demonstrating their support for the Paris Climate Agreement goals.
- Second, a company may make three types of VCMI Claims, depending on the percentage of remaining emissions in their latest reporting year: (i) VCMI Silver Claims, if the company purchased and retired carbon credits corresponding to 20%−60% of the remaining emissions; (ii) VCMI Gold Claims, if the carbon credits correspond to 60%−100% of the remaining emissions; or (iii) VCMI Platinum Claim, the most aspirational level, where the carbon credits correspond to 100% or more of the remaining emissions.
- Third, a company must meet a certain threshold of carbon credit use and quality.
- Fourth and finally, a company must obtain third-party assurance on the information used to substantiate its VCMI Claim.
VCMI’s code comes at a time of increasing concern about the integrity of carbon markets. On June 20, 2023, the U.S. Commodity Futures Trading Commission (the “CFTC”) issued an alert explaining how to identify and report fraud and other manipulation in the carbon markets, such as manipulation of trading or tokenized markets, “ghost” offsets, double counting and fraudulent statements.
VCMI Claims Code of Practice
CFTC Press Release
U.S.: House Republicans Issue Anti-ESG Priorities
On June 23, 2023, the ESG Working Group of the House Committee on Financial Services issued its Preliminary Report on ESG Climate-Related Financial Services Concerns. The report represents the Working Group’s first concrete steps in its campaign to protect retail investors from the alleged “far-left ideology” of “progressive activists.”
The report identifies a number of priorities for the remainder of the 118th Congress, including in relation to the shareholder-voting process, large asset manager practices, SEC oversight and the applicability of EU regulations to U.S. companies. The Working Group announced that its objectives are to examine the impact of the “progressive agenda” on investors and to identify policies and practices to protect them. The report further highlights the concern that the Biden administration has used financial regulation as a tool to advance its ESG priorities, thus circumventing the legislative process.
Finally, the report outlines how the House Committee on Financial Services plans to use its oversight and investigation powers to expose and counteract pro-ESG regulatory actions.