ESG Weekly Update – October 12, 2023

12 October 2023

U.S.: California Governor Signs Climate Disclosure Bills into Law

On October 7, 2023, California Governor Gavin Newsom signed two landmark climate-related disclosure bills into law. As of now, SB 253 is expected to become effective by January 1, 2025, and SB 261 by January 1, 2026.

SB 253 and SB 261 will require certain companies doing business in California to disclose direct and indirect emissions, including those associated with their value chains, as well as to report on climate-related financial risks to their operations. While Governor Newsom signed both bills into law, he stated that SB 253’s reporting protocol could result in inconsistent reporting across covered companies and that SB 261 provides insufficient time for the California Air Resources Board (“CARB”) to adequately carry out the bill’s requirements, as well as the overall financial impact of the bills on covered companies. To address these concerns prior to the bills becoming effective, Governor Newsom directed his administration to collaborate next year with the California legislature and instructed CARB to monitor the financial impact of implementing both bills.

These bills are discussed in depth in the Debevoise Update, “California Climate Disclosure Bills Expected to Become Law” and Governor Newsom’s signing remarks are further detailed in the Debevoise Debrief, “California Climate Disclosure Bills Signed into Law.”

Links:
Press Release
Debevoise ESG Weekly Update – September 13, 2023
Debevoise ESG Weekly Update – February 8, 2023


Europe: EU Launches First Phase of Carbon Border Tariff

On October 1, 2023, the European Union launched the Carbon Border Adjustment Program’s (“CBAM”) transitional phase, equalizing the price of carbon between domestically produced items and imports. The program, which will take full effect in 2026, seeks to ensure businesses cannot sidestep EU climate policies by offshoring production and importing products from jurisdictions less restrictive about carbon emissions. When in full force, the CBAM will require importers to buy certificates—and surrender them annually—proportionate with the greenhouse gases embedded in imported goods covered by the program, based on the EU Emissions Trading System (“ETS”).

In effect, importers will have the choice of producing goods within the EU in compliance with EU climate policies, or producing them abroad and paying the tariff. Currently, the ETS places a cap on the total amount of greenhouse gases that may be emitted. Based on this cap, EU members auction allowances on the EU carbon market for the right to emit a certain amount of carbon dioxide per year.

The CBAM tariff will be calculated by the weekly average auction price of ETS allowances. The tariff seeks to equalize the climate impact of production and ensure that any goods sold within the EU have been created in line with EU standards or have offset the environmental impacts of their production elsewhere. The program also incentivizes responsible production offshore, because if an importer can show that some or all of the carbon price has already been paid during the good’s production, a corresponding amount can be deducted from the required CBAM contribution.

The CBAM’s first phase will serve as a data-collection period only applicable for imported goods that are highly carbon-intensive, such as cement, iron and steel, aluminum, fertilizers, electricity and hydrogen. No later than the end of 2023, importers must report direct and indirect emissions from production, and have flexibility on the manner in which they report. At the start of 2025, only the EU’s reporting method will be accepted in anticipation of the program’s full rollout in 2026.

Links:
Press Release
CBAM


Europe: ESMA Finds Significant Increase in ESG Terms Used in Fund Names

On October 2, 2023, the European Securities and Market Authority (“ESMA”) published a study entitled “ESG Names and Claims in the EU Fund Industry.” The study used natural language processing to analyze a dataset with historical information on 36,000 funds with around €16 trillion in assets under management, finding that funds are increasingly using ESG-related language in their names, which correlates with investors preferring such funds. Further, the study identified evidence that the fund industry generally adapts its ESG communications based on whether the method is regulated or unregulated.

The study concluded that over the past ten years there has been a rise from 3% to 14% of assets under management in the EU where ESG-related terminology is used in the funds’ names. Further, the demand for ESG-labeled funds in the EU has exceeded that for other funds in each fiscal quarter for the past six years.

The study found that “funds prefer to include less-specific words (i.e. broad ESG words rather than more specific ‘E’ or ‘S’ words)” and that most ESG-related terms in fund names were generic, such as “ESG” or “sustainable.” It also found a distinction in the use of ESG-related terms in documents aimed at retail—as opposed to institutional—investors, with the former being more likely to use ESG-related language. The study attributes the trends that it observes to the 2015 Paris Agreement, among other EU-level policies. The ESMA considers its study to be supportive of efforts by policymakers to identify and reduce greenwashing in the investment management industry.

Links:
ESMA Study
FinTech Global


Global: India and Japan Form Bilateral Fund to Invest in India’s Environmental Preservation Sector

On October 4, 2023, India’s National Investment and Infrastructure Fund Limited (“NIIFL”) and the Japan Bank for International Cooperation (“JBIC”) announced the formation of the India-Japan Fund, a $600 million fund that will invest in environmental sustainability and low carbon emission projects in India.

The India-Japan Fund, NIIFL’s first bilateral fund, was created to support the COP26 goal of achieving carbon neutrality by 2070. To that end, the fund targets investments in India’s environmental preservation sectors, such as renewable energy, electric vehicles, waste management and water management. JBIC’s announcement stated that the India-Japan Fund will also “support Indian companies and projects that collaborate with Japanese companies with the aim of enhancing cooperative relationships between Indian and Japanese companies across all sectors.”

JBIC will contribute 51% of the capital to the India-Japan Fund, and the Government of India, which anchors the NIIFL, will contribute the remaining 49%. The India-Japan Fund is the formal action resulting from a memorandum of understanding, dated November 7, 2022 between JBIC and NIIFL, which aimed to create a platform for promoting environmental preservation, low carbon emissions and the growth of the Indian economy, as well as cultivating the relationship between the Indian and Japanese economies.

Link:
JBIC Announcement