ESG+ Newsletter – 14 March 2024

SEC climate rule subject of litigation, as expected 

As covered by this newsletter, the US Securities Exchange Commission (SEC) launched its climate rule last week. When launched, it was predicted that the climate rule would be subject to litigation from both sides, with some arguing the rule overstepped the remit of the SEC and others arguing that it did not go far enough. Some of those predicted lawsuits have come to fruition. Shortly after the finalisation of the rule, ten Republican states announced a lawsuit aimed at blocking the new climate-related disclosure rules. Criticism has not just been voiced at the state level, but also at the federal level with the chair of the House Financial Services Committee describing the rule as “gross regulatory overreach”. While those questioning whether climate-related disclosures fall within the remit of the SEC have been vocal, there are others questioning whether the climate rule has been so watered down that its impact will be limited. The final rule does not require companies to disclose scope 3 emissions, and only requires scope 1 and 2 emissions to be disclosed where these are deemed ‘material’ to the company’s “business, operations or financial condition”. While the SEC may have used this wording to reduce the risk of the rule being described as overburdensome, placing the onus on companies to decide whether emissions are material leaves the rule open to interpretation and creates a lack of clarity for investors. According to Environmental Finance, this could increase the risk of legal challenge of company disclosures by investors or the SEC themselves. As litigation and debate around the SEC climate rule continue, our FTI colleagues seek to provide clarity on what the rule means for companies by separating signal from noise. 

Evolving scrutiny around ESG disclosures to drive litigation   

As the SEC continues to prepare itself for lawsuits from both sides of the ESG aisle following the publication of its long-awaited mandatory climate reporting framework for companies, a recent Reuters article has doubled down on these concerns, detailed that litigation arising from alleged greenwashing will likely emerge as a prominent theme in 2024. The concerns for potential increase in ESG litigation could be focused across three areas: company disclosures; companies’ supply chains; and companies DEI policies. While litigation relating to companies’ efficacy of their environmental disclosures has been ongoing for the last number of years, there has been a clear uptick in legal proceedings arising out of sustainability claims made by companies supply chains and operations such as emission and recycling product claims, and human rights violations in supply chains. Litigation relating to DEI policies – which covers a broad range of topics from labour relations to social justice issues – is a relatively recent phenomenon (particularly in the US), with companies facing increasing legal scrutiny regarding the promotion of their DEI efforts, from both employee and investors. 

‘Corporate technocracy’: leaving ESG governance to technical experts   

In a Bloomberg Law article, Aisha Saad argues that a new model of ESG governance is needed to avoid the negative impacts of changing political landscapes on companies’ sustainability agendas. The core of her argument is to give more power to technical experts in making ESG decisions as they would be less subject to political pressure. Her solution involves developing topical expertise and routine procedures in an attempt to overcome the problems that arise from simply trusting managers or shareholders to do the right thing. This model may however prove difficult to implement in practice. ESG governance requires businesses to make complex trade-offs between sustainability and economic objectives, and all these trade-offs would be difficult to codify. A more natural approach may be to bring the right mix of ESG and business expertise in the different bodies responsible for overseeing and implementing the company’s sustainability strategy

EU takes latest step to address emissions in buildings

Tackling emissions from the real estate sector is the latest focus of the EU’s green agenda and this week, the European Parliament has approved a new law that aims to reduce emissions in buildings across the EU. As set out by RTE.ie, Carbon dioxide from EU buildings currently accounts for over a third (36%) of the bloc’s emissions. In response, the Energy Performance of Buildings Directive aims to fully decarbonise EU buildings by the middle of this century. MEPs approved the proposal by a large majority, with 370 votes in favour and 199 votes against, looking to formalise the implementation on integration of solar panels and the phasing out of fossil-fuel use as a means of reducing real estate emissions. Notably, the EU itself recognises the scale of the challenge in the sector, estimating that a quarter of a trillion euro will need to be by 2030.

UK confirms pro-regulation approach to ESG ratings 

As reported by Pensions & Investments, the financial services industry is “broadly supportive” of last week’s confirmation that the UK government will regulate providers of environmental, social and governance ratings. The news, announced as part of the Spring Budget, followed a three-month consultation period between March and June 2023, and clarified that the Financial Conduct Authority will be the primary regulatory party.  

The article, in representing the views of FS sector, cited asset owner advocacy group Pension and Lifetime Savings Association, asset management firm Ninety One, and a senior fixed income specialist at GIB Asset Management. Summarised published feedback by the three parties noted the fast growing role ESG ratings are playing when it comes to investment decisions, and therefore the potential positive role of strengthened regulation. Ninety One, however, also commented on the need to address asset level information, which is still inconsistent in both detail and breadth. With 2024 set to be a milestone year of the UK’s sustainable investing landscape, in significant part due to the upcoming Sustainable Disclosure Regulation framework for asset managers, the timing of the announcement is most definitely apt. As referenced in the piece, PwC has estimated that $33.9 trillion of assets under management will consider ESG factors within three years, and the UK’s economic decision-makers have been clear that they would like to be a global leader in the sector. 

ICYMI 

• World benchmarking alliance working on ocean-specific nature benchmark. Responsible Investor reveals that the World Benchmarking Alliance is currently working on an ocean-specific nature benchmark, in which companies will likely be assessed on risk mitigation or policies focusing on the main drivers of ocean biodiversity loss.
• UK to update nature markets strategy. The UK government is set to release an updated version of its nature markets framework this week to improve consistency of nature projects. The paper will discuss how the government is supporting farmers and other land and coastal managers in accessing nature markets as another income stream alongside farming and other land uses.
• Big businesses accused of undermining net-zero commitments with excessive air travel. An analysis of the climate strategies of more than 300 big businesses conducted by the NGO Transport & Environment has revealed that four in five have no target to cut travel emissions, with offenders including the Coca-Cola Company, Netflix, Apple and Microsoft.