ESG Weekly Update – June 6, 2024

6 June 2024

Other Notable Developments

Business and Human Rights: In a report expected to be submitted to the UN Human Rights Council in late June, the UN Working Group on Business and Human Rights made a number of recommendations to the Japanese government and corporates, including recommending the establishment of a national human rights institution and addressing the gender wage gap.

Corporate Accountability: Global unions launched a campaign to support a binding UN treaty to hold corporations accountable for human rights abuses.

EU: Council Adopts Corporate Sustainability Due Diligence Directive

On May 24, 2024, the Council of the European Union formally approved the Corporate Sustainability Due Diligence Directive (“CSDDD”). The legislation sets mandatory obligations for large companies to identify and address human rights and environmental issues across their value chains. The CSDDD further requires companies to adopt climate-change mitigation plans to align with the Paris Agreement and also mandates EU member states to establish supervisory authorities to investigate and impose penalties on noncompliant companies.

The CSDDD was initially proposed by the European Commission in February 2022. The final adoption of the CSDDD was delayed following concerns from member states about the financial and legal impacts of the directive, including the costs of the due diligence process and potential civil liability for failure to conduct the required due diligence. This opposition resulted in revisions in the legislation that significantly scaled back the number of companies covered by the law, raising the thresholds to companies with at least 1,000 employees, up from 500, and to companies with revenue greater than €450 million, up from €150 million. Lower thresholds that had been in place for high-risk sectors were also removed, with the possibility to be reconsidered later. 

The revised CSDDD also includes a gradual phase-in process. It will initially cover companies with over 5,000 employees and revenue greater than €1.5 billion in 2027, followed by companies with more than 3,000 employees and €900 million revenue in 2028. The CSDDD will apply to all other companies in scope of the law by 2029.  

The CSDDD will enter into force 20 days after its publication in the Official Journal of the European Union. Member states will have two years to adopt the directive in national law. 

For more on the CSDDD, see our previous Weekly Update here.

Council Press Release

EU: Council Approves Net-Zero Industry Act

On May 27, 2024, the Council of the European Union approved the Net-Zero Industry Act, establishing a framework aimed at developing the EU’s manufacturing capacity for clean technologies linked to its climate goals. The Net-Zero Industry Act was initially proposed by the European Commission in early 2023, and the European Parliament approved the law in April of this year. 

The Net-Zero Industry Act framework will support the bloc’s transition to net zero, given Europe currently imports much of the clean technology required to meet its own climate goals. Policymakers suggest that the Act will increase the competitiveness of the European Union’s industrial base, growing the European climate workforce in doing so. Approval of the Net-Zero Industry Act follows the U.S. Inflation Reduction Act in August 2022, which aimed to address issues with investments in renewable energy and industrial decarbonization. 

Specifically, the Net-Zero Industry Act seeks to encourage investment in green technologies by: (i) simplifying the permit-granting process for strategic projects; (ii) facilitating market access for strategic technology products (in particular in public procurement or the auctioning of renewable energies); (iii) enhancing the skills of the European workforce in these sectors; and (iv) creating a platform to coordinate EU action in this area. Furthermore, the Act creates “regulatory sandboxes” in order to create “favorable regulatory frameworks” for developing, testing and validating innovative technologies.

The Net-Zero Industry Act also sets a benchmark for the manufacturing capacity of strategic net-zero technologies to reach at least 40% of the EU’s annual deployment needs by 2030. 

The Net-Zero Industry Act will enter into force the day after its publication in the Official Journal. 

Council Press Release
Commission Press Release

U.S.: White House Releases Voluntary Carbon Markets Joint Policy Statement and Principles

On May 28, 2024, the Biden-Harris Administration released a policy statement on Responsible Participation in Voluntary Carbon Markets (“VCMs”), which outlines the U.S. government’s approach in advancing high-integrity carbon markets. The statement notes that popular crediting methodologies often do not produce the decarbonization outcomes they claim and that additional action is needed to ensure that VCMs live up to their potential to facilitate decarbonization. 

The policy recommends the following voluntary principles for U.S. market participants in carbon credit markets: (i) carbon credits and credit-generating activities should meet credible atmospheric integrity standards; (ii) credit-generating activities should avoid environmental and social harm and should, where applicable, support co-benefits and transparent and inclusive benefits-sharing; (iii) corporate buyers that use credits should prioritize measurable emissions reductions within their own value chains; (iv) credit users should publicly disclose the nature of purchased and retired credits; (v) public claims by credit users should accurately reflect the climate impact of retired credits and should only rely on credits that meet high-integrity standards; (vi) market participants should contribute to efforts that improve market integrity; and (vii) policymakers and market participants should facilitate efficient market participation and seek to lower transaction costs.

Press Release
Voluntary Carbon Markets Joint Policy Statement and Principles

U.S.: Anti-ESG Lawsuit against American Airlines’ Defined Contribution Plan Receives Class Certification

On May 22, 2024, the U.S. District Court for the Northern District of Texas certified 100,000 plan beneficiaries in a lawsuit against American Airlines that asserts the company’s defined contribution plan violates ERISA by choosing fund managers that “pursue ESG policy agendas through proxy voting and shareholder activism.”

The case is the first suit against a defined contribution plan and one of the first suits in the private sector to assert that a retirement plan breached its fiduciary duties by selecting ESG investments to the detriment of its beneficiaries. A win could open the door to increased litigation by lowering the bar on which similar suits could proceed.

The original complaint filed by pilot Bryan P. Spence on June 2, 2023 named Fidelity Investments and Edelman Financial Engines as additional defendants and claimed plan managers violated ERISA on two other grounds—by promoting ESG investments in self-directed brokerage accounts and by including ESG funds in contribution plans. The amended complaint filed in August of last year removes Fidelity and Edelman as defendants and the two additional ERISA claims, focusing solely on the alleged breach of fiduciary duty by American Airlines in selecting ESG-driven funds.

Original Complaint (June 2, 2023)
Amended Class Action Complaint (August 25, 2023)
Order on Motion for Class Certification (May 22, 2024)

Global: IFRS Reports on Uptake of ISSB Standards

On May 28, 2024, the International Financial Reporting Standards Organization (“IFRS”), reported on the global uptake of its model sustainability disclosure standards. Most notably, the IFRS announced that over 20 countries have announced steps to either adopt the International Sustainability Standards Board (“ISSB”) standards into national law or to fully align their sustainability disclosure standards with those of the ISSB. These countries represent around 55% of global GDP and account for over half of global greenhouse gas emissions. The latest country to announce synergy with the ISSB standards is China, which published a draft of the “Chinese Sustainability Disclosure Standards for Business Enterprises” based on ISSB standards on May 27, 2024. 

There are currently two ISSB standards: IFRS S1, which covers general requirements for disclosure of sustainability-related financial information, and IFRS S2, which covers climate-related disclosures specifically. IFRS S1 and IFRS S2 together aim to raise sustainability reporting to the same level as conventional financial reporting, by requiring businesses to consider the financial relevance of sustainability-related risks and opportunities in their annual reports.

This report coincides with the release of an “Inaugural Jurisdictional Guide for the adoption or other use of ISSB standards” by the IFRS, designed to assist countries in devising and planning strategies to adopt the ISSB standards into their domestic corporate reporting requirements. 

For more on the ISSB standards, see our Debevoise In Depth, here.

Press Release
Inaugural Jurisdictional Guide for the adoption or other use of ISSB standards
IFRS Sustainability Standards

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.