U.S.: SEC Signals Further Delays to Its Proposed Climate Disclosure Rule
The Securities and Exchange Commission (the “SEC”) has announced a “Final Action” date of April 2024 for its finalized rule on “The Enhancement and Standardization of Climate-Related Disclosures for Investors” (the “Rule”).
The SEC originally proposed the Rule in March 2022 and held two public consultations on it later that year. However, the release of the finalized Rule has been repeatedly delayed throughout 2023. The proposed Rule, when finalized, would require all SEC registrants, including public companies, to disclose greenhouse gas (“GHG”) emissions and other climate-related information in their SEC filings (more on this here).
EU: Regulators Propose New Social, Climate Target Disclosure Rules for Financial Products
On December 4, 2023, the European Supervisory Authorities (the “ESAs”), Europe’s three primary financial regulatory agencies, announced the publication of their Final Report amending the draft Regulatory Technical Standards (“RTS”) under the Sustainable Finance Disclosure Regulation (the “SFDR”), part of the EU’s Action Plan for financing sustainable growth. The publication follows a request by the European Commission in April 2022 for the ESAs to review the RTS and to propose updates to key disclosure rules for financial products under the SFDR.
Among the key changes proposed in the Final Report is an extension and adjustment of the list of Principal Adverse Impacts (“PAIs”), which detail the adverse impacts of investment decisions on sustainability factors. Under the proposed rules, mandatory PAI indicators would include exposure to tobacco production, inadequate wages (including indicators of a gender-based pay gap) and indicators related to violations of the OECD Guidelines for Multinational Enterprises.
The Final Report also proposes changes to disclosure rules regarding GHG emissions reduction targets, applicable to financial products that have emissions reductions as their investment objective. Under the proposed rules, financial product managers would be required to describe the specific target the product is committing to achieve to investors pre-investment, as well as alignment of the target with the goal of limiting global warming to 1.5 degrees Celsius. Periodic reporting post-investment would also be required.
The European Commission has three months to decide whether to endorse the draft RTS. The Commission’s decision is independent of an ongoing review of the SFDR by the Commission, announced in September 2023.
U.S.: CFTC Issues Proposed Guidance Regarding Voluntary Carbon Credit Derivative Contracts
On December 4, 2023, the Commodity Futures Trading Commission (the “CFTC”) released details of proposed guidance regarding the listing for trading of voluntary carbon credit (“VCC”) derivative contracts. Among other things, the guidance cites factors that CFTC-regulated exchanges (or other contract markets) should consider in order to ensure compliance with contract design and listing process rules under the Commodity Exchange Act and CFTC regulations.
The guidance outlines a number of considerations regarding the design of the contract’s rules and terms and conditions. In particular, the CFTC considers that the contracts should satisfy the following characteristics:
- transparency, noting that the contracts should include information on the crediting program and the specific projects or activities underlying the credits;
- additionality, ensuring that the emission reductions or removals would not have occurred without the added monetary incentive generated by the sale of carbon credits;
- permanence and risk of reversal, recommending that contracts include a reasonable assurance that, in the event that the carbon is released back into the atmosphere, the credit will be replaced by another one which meets the contract specifications; and
- robust quantification, recommending using a standardized methodology to quantify greenhouse gas emission reduction levels.
The publication of the proposed guidance marks the culmination of an in-depth investigation by the CFTC into carbon markets and the impact of climate change on financial markets more widely. The CFTC acknowledged that VCC derivatives are a new phenomenon, and its objective with this guidance is to standardize these products and provide greater transparency and liquidity. The language encourages scrutiny of contract terms and conditions – through specification and monitoring – to align the guidance with the Core Principle requirements under the CEA.
The draft guidance is open for comments until February 16, 2024.
Asia: Monetary Authority of Singapore Launches Taxonomy for Sustainable Finance
On December 3, 2023, the Monetary Authority of Singapore (the “MAS”) launched the Singapore-Asia Taxonomy for Sustainable Finance. While not mandatory, the initiative aims to provide guidance to financial institutions on determining how their financed activities and products contribute to climate change mitigation efforts.
The taxonomy sets out a classification system to define sustainable economic activities across eight focus sectors, namely energy, real estate, agriculture and forestry/land use, transport, industry, information and communication technology, waste/circular economy, and carbon capture. It sets up a “traffic lights” system that enables users to differentiate between green, transition and ineligible activities. Activities that operate at near zero or are on the pathway to net zero by 2050 are considered “green”. “Transition” activities are those that do not meet green thresholds but are on the path to net zero or significant emission reductions within defined time frames.
The MAS announced that it will review the taxonomy periodically.
MAS Press Release
UK: ASA Cracks Down on Greenwashing in Airline Ads
On December 6, 2023, the UK Advertising Standards Authority (the “ASA”) banned Lufthansa, Air France-KLM and Etihad Airways advertisements for containing “misleading” statements about the airlines’ sustainability efforts. Lufthansa claimed to help people “fly more sustainably,” Air France-KLM asserted that it was “committed to protecting the environment” and helped people “travel better and sustainably,” and Etihad Airways alluded to their “Environmental Advocacy”.
In the ASA’s rulings, the regulator concluded that all three advertisements violated the Committee of Advertising Practice Code for being “misleading.” The Etihad Airways and Air France-KLM advertisements made “absolute environmental claims” that were not “supported by a high level of substantiation,” while Lufthansa made a “comparative claim” that “omitted significant information”. The ASA added that, currently, there are no commercially viable technologies that would support absolute green claims about air travel.
Earlier this year, the ASA banned other Etihad Airways advertisements that claimed it was “environmental airline of the year 2022,” and in 2020, the ASA banned a Ryanair advertisement claiming that it was “Europe’s Lowest Emissions Airline” and a “low CO2 emissions airline”.
Air France-KLM Decision
Etihad Airways Decision
EU: European Commission Adopts Agriculture Sustainability Guidelines
On December 7, 2023, the European Commission adopted guidelines on applying the sustainability exclusion from competition rules for agricultural products.
Generally, Article 101 of the Treaty on the Functioning of the European Union prohibits any agreements that effectively restrict competition in the marketplace. However, certain agreements that are “indispensable” to attaining sustainability standards are not restricted under Article 210a of Regulation 1308/2013 (also known as the Agricultural Products Regulation).
The new guidelines specify which agreements benefit from the exclusion: at least one party must be an agricultural producer, and the other party may be another agricultural producer or another company in the agri-food chain. The permissible sustainability objectives include “(i) environmental protection; (ii) reduction of pesticide use and antimicrobial resistance; and (iii) animal health and welfare.”
Agreements between the aforementioned parties regarding sustainability standards that effectively restrict competition, such as by raising prices or lowering quantities, are permissible if they achieve sustainability standards above the mandatory minimums imposed by law. However, authorities may intervene if the ultimate result is “unreasonable” or if a product with significant consumer demand is eliminated from the market.