UK / EU / International ESG Regulation monthly round-up – July 2024

UK Developments

As you will all know the General Election on 4 July 2024 resulted in a change of government in the UK.  Instead of the usual summer lull, we have seen a lot of activity and engagement from government departments. To mark the opening of the new parliament on 17 July 2024, the King’s Speech set out a number of priorities for the new Labour government – see below for more detail. Whilst the FCA continues its work on implementing TCFD into the regulatory regime, the Court of Appeal passed down a decision which could increase the risk of firms becoming criminally liable for activities in their supply chains.

King’s Speech 2024

1. What does it mean for energy, sustainability and cleantech?

The King delivered his speech on the opening of Parliament on 17 July 2024. The speech sets out the priorities of the new Labour government for the coming year. Generally, the speech referred to resetting “the relationship with European partners and work to improve the United Kingdom’s trade and investment relationship with the European Union”.

Amongst other things, it identified:

1. 1. a £7.3 billion National Wealth Fund (more below);
   2. a £8.3 billion fund to establish Great British Energy which will develop, own and operate assets, investing in partnership with the private sector aiming to accelerate technologies of the future, reaping benefits at home in cheap clean power and securing Britain at the front of the global race for technology which has major global export potential. It will facilitate, encourage and participate in the production, distribution, storage and supply of clean energy, the reduction of greenhouse gas emissions from energy produced from fossil fuels as well as measures for furthering the transition to clean energy and improving energy efficiency; and
   3. the Sustainable Aviation Fuel (Revenue Support Mechanism) Bill which aims to support the nascent sustainable aviation fuel (SAF) industry but providing a revenue certainty mechanism for SAF producers looking to invest in the UK.

See more on the content of the King’s Speech and how it affects financial services here.

2. More on the National Wealth Fund

Although on 9 July 2024, the Chancellor and Business Secretary instructed officials to align the UK Infrastructure Bank (UKIB) and the British Business Bank under a new (and much anticipated) National Wealth Fund (NWF), the NWF was also highlighted as central to the UK Government’s mission to deliver growth and a greener economy in the King’s Speech on 17 July 2024. The fund will be chaired by the Green Finance Institute and the taskforce will include Mark Carney, Aviva, Legal & General and NatWest as well as other intuitional investors. 

The £7.3 billion fund (in addition to UKIB’s existing funding) is intended to:

1. 1. focus on priority sectors and catalyse private investment at scale (intending to raise at least three times as much as the fund in order to attract tens of billions of pounds of private capital);
   2. unlock funding for the UK’s green and growth industries to speed up the economy and help meet net zero in areas such as automotives, ports, steel and hydrogen.

Further information is expected ahead of the government’s international investment summit later in the year.

Other ESG court and regulatory activity in the UK

1. Court of Appeal decision – potential liability for criminal activities in supply chains

The recent decision of the Court of Appeal in World Uyghur Congress v National Crime Agency [2024] EWCA Civ 715 could increase the risk of firms becoming criminally liable for activities in their supply chains. The judgment confirms the risk of money laundering liability where there is evidence of human rights violations in supply chains.

In light of this decision, corporates may wish to consider whether they have completed sufficient due diligence to ensure that their supply chains do not involve forced labour or other criminal offences – as they now face an increased risk of being criminally liable for money laundering offences as a result of this decision. Full details of the case can be found here.

2. FRC announces significant update to the UK Stewardship Code

The Financial Reporting Council (FRC) has announced revisions to the UK Stewardship Code (the Code) to better support UK capital markets, reduce reporting burdens and drive better stewardship outcomes.

The FRC has made five immediate changes to the Code to reduce the reporting burden on existing signatories applying for the next application window. The FRC will write to signatories individually to inform them how these changes will impact them.

Later this year, the FRC will hold focused stakeholder meetings and will launch a formal public consultation focusing on the revision of the five themes they have identified here.

EU and International Developments

There was a huge amount of activity in the EU in July, including a number of reports from ESMA and EFRAG in relation to CSRD and SFDR. We have highlighted some of the important publications below.

Corporate Sustainability Reporting Directive (CSRD)

1. EFRAG reports released in July

   1. 26 July – EFRAG announced the addition of 23 new explanations to be added to its compilation of explanations to assist stakeholders in applying the ESRS.  It now includes a total of 93 explanations released between January and July 2024.

   2. 25 July – EFRAG issued its study giving insights into the emerging practices of companies implementing CSRD and ESRS. The emerging practices of 28 large EU-headquartered undertakings were analysed against four focus areas particularly relevant to the implementation of ESRS: materiality assessment, value chain, gap analysis on datapoints and ESG reporting organisational approach.
2. ESMA guidelines on enforcement of sustainability information (GLESI) - final report

On 5 July 2024, ESMA published its final report on “Guidelines on Enforcement of Sustainability Information” (GLESI) and sets out the guidelines ESMA was mandated to produce to promote convergent and consistent supervision and enforcement by national competent authorities of sustainability information.

The GLESI have been drafted to be consistent with the guidelines on enforcement of financial information (GLEFI) to reflect that the CSRD sets an objective of making the status of sustainability information comparable to financial information.  Therefore the enforcement of financial information and sustainability information should be aligned.  However the drafting approach used in GLEFI has been adapted to reflect the specificities of sustainability information compared with financial information, especially in respect of terminology.

We highlight the following clarifications following the consultation:

• ESMA has made it clear in the purpose section of the GLESI that whilst the scope of the CSRD includes non-listed entities, the GLESI are intended for use by national competent authorities of listed undertakings.
• Amongst other things, the GLESI set out the objectives of the guidance, as well as the importance of appropriate human and financial resources to ensure the effectiveness of the enforcement of sustainability information (including skilled and experienced staff).  It also sets out guidance for selection of sustainability information to be reviewed, types of review and quality assurance mechanisms for the reviews.  It also sets out the menu of enforcement action available to national competent authorities (in Guideline 12).  The guidelines also set out a mechanism for European coordination and the establishment of a Sustainability Reporting Working Group.
• The GLESI apply to the “sustainability information framework” (as defined in the guidance) which encompasses Articles 19a, 29a and 29d of the Accounting Directive, the ESRS (and, ESMA clarifies, datapoints necessary to meet specific obligations under other legislation, such as SFDR) and Article 8 of the Taxonomy Regulation and Taxonomy Disclosures Delegated Act.
• ESMA acknowledges the importance of taking a proportionate approach  to the enforcement of sustainability information to reflect the developing stage of the reporting framework and emerging practice developing with respect to the ESRS.

3. Dutch regulator publishes guide to double materiality analysis for CSRD

On 4 July 2024, the Dutch regulator (AFM) published “Ten waypoints for CSRD – Double Materiality”. The AFM has analysed the application of double materiality analyses in 2023 annual reporting and has produced 10 waypoints to support companies in preparing their double materiality analysis ahead of supervision on the application of CSRD in 2024 annual reporting. This is based on the ESRS and good practices they have observed in 2023 reporting.

4. EU Commission adopts ESRS

On 31 July 2024, the European Commission adopted the European Sustainability Reporting Standards (ESRS) for use by all companies subject to the CSRD.

9. Interoperability and correspondence mapping tools published for GRI reporters to prepare CSRD reports

On 11 July 2024, the Global Reporting Initiative (GRI) published the “GRI and Sustainability Reporting in the EU Q&A”.  They report that following four years of cooperation with EFRAG, there is a high degree of interoperability between the ESRS and the GRI Standards.

Interoperability and mapping tools have been published to assist GRI reporters in preparing a first ESRS report, see the joint interoperability index and data point mapping which show how the two sets of standards relate.

Corporate Sustainability Due Diligence Directive (CSDDD)

1. Corporate Sustainability Due Diligence Directive (CSDDD) published in the Official Journal of the EU

On 5 July 2024, the EU Corporate Sustainability Due Diligence Directive (Directive (EU) 2024/1760) was published in the Official Journal. The CSDDD introduced mandatory obligations for large companies that significantly operate in the EU to undertake a human rights and environmental due diligence within their own company and across their supply chains. Companies only need to complete the due diligence if they meet the thresholds set out in the directive. The directive will be enforced by a supervisory authority which will have powers to carry out investigations where substantive concerns have arisen and may require companies to provide further information. The CSDDD will come into force on 25 July 2024, however EU Member States must transpose the CSDDD into national law by 26 July 2026.

This Commission website sets out details of the provisions of the CSDDD and also related documents.  See here, here, and here for more information.

2. CSDDD – European Commission adopts first FAQs

On 25 July 2024, the European Commission published a first set of FAQs on CSDDD covering topics such as the objective of the directive, its scope (both those affected and which human rights and environmental aspects are covered) and enforcement.

Sustainable Finance Disclosure Regulation (SFDR)

1. SFDR – update to Consolidated Q&As

On 25 July 2024, the Joint Committee of the European Supervisory Authorities (the ESAs) published an update to the consolidated questions and answers on the SFDR. The additions can be found by searching for “25 July 2024” and topics include:

1. 1. Section I, Q4 – requirement for registered AIFM to set up website to include information required by Article 10 of SFDR;
   2. Section I, Q5 – sustainability risks which are deemed not to be relevant under Art 6(1) of SFDR cannot override sustainability risk obligations in other EU legislation.  This means that an AIFM must comply with any other EU law obligations to take into account sustainability risks;
   3. Section IV, Q26-29 – new Q&As which give guidance on calculation and analysis of principal adverse impact indicators;
   4. Section V, Q20-28 – new Q&As which provide further explanation and illustrative examples regarding Taxonomy calculations, including confirmation that SPVs or holding companies whose purpose is to hold real assets (like cars or real estate) would be considered investee companies for calculation purposes.
2. EMSA Opinion on the functioning of the Sustainable Finance Regulatory Framework

On 24 July 2024, ESMA published an opinion giving long-term recommendations for EU sustainable finance regulatory framework (SFRF) following a rapid growth of the framework over the last few years.  This forms the last component of the ESMA’s reply to the Commission’s request for input related to greenwashing.

In relation to SFDR, the Q&As recommend:

1. 1. a minimum level of sustainability information for all products to create a level playing field and increase transparency across the market (this would be KPIs covering environmental and social characteristics);
   2. making the EU Taxonomy the sole reference point to determine sustainability and embedded into all relevant sustainable legislation (phasing out the SFDR approach).  Its scope should be widened to include transition activities and a social taxonomy should be developed;
   3. a product categorisation system should be introduced catering to sustainability and transition with clear eligibility criteria and binding transparency obligations.

Nature

1. Nature Restoration Law published in the Official Journal

On 29 July 2024, the Nature Restoration Law has been published in the Official Journal and will come into effect on 18 August 2024. See our June monthly round-up for more details on the effect of the Nature Restoration Law.

2. GRI and TNFD publish interoperability mapping on nature and biodiversity

On 30 July 2024, the Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD) published a joint interoperability mapping  resource giving a detailed overview of alignment between the TNFD framework and metrics and the GRI Standards this follows cooperation between GRI and TNFD.

Our Sustainable Finance & Investment practice brings together a multidisciplinary global team to support our clients in this mission-critical area.

This note is intended to be a general guide to the latest ESG developments. It does not constitute legal advice.

Authored by Rita Hunter, Julia Cripps, Dominic Hill, Emily Julier, and Jessica Dhodakia.

^{Hogan Lovells (Luxembourg) LLP is registered with the Luxembourg bar.}