ESG+ Newsletter – 2nd February 2023

General counsels find rising ESG litigation risk

A recent survey published by the law firm, Norton Rose Fulbright, revealed that in-house legal counsels are preparing for a dramatic increase in ESG related litigation and class action lawsuits in 2023, findings which align with recent FTI Consulting research. According to the survey, 28% of more than 430 general counsels and in-house litigation leaders stated that their exposure in this area had increased, up from the 2% of respondents who detailed ESG-related litigation in 2022. The survey highlighted that 37% of respondents considered ESG as a risk in driving major class action lawsuits in the future, joining employment and labour disputes, cybersecurity, and data protection as key issues – although some would argue each of these have fallen under the ESG already. The sharp uptick in concern amongst companies’ legal counsels reflects the potential for climate-related legal action to be pursued by activists and investors who believe some companies are failing on their disclosures, greenwashing or have weak emission reduction targets.

With scrutiny of corporate behaviour only set to rise, it is reasonable to think that the number of lawsuits against perceived greenwashing will increase too. Ultimately, companies will increasingly be held accountable for their actions, with expectations that transparency around sustainability grows while avoiding excessive claims of progress – a tricky balancing act.

Commissioner discusses key points from California meeting on ESG

The California ’40 Acts Group, a forum that discusses matters impacting the investment management industry, met on January 27th of 2023. The group discussed ESG matters at length, from ESG investing to the definition of ESG and activism by asset managers. Mark Uyeda, a commissioner at the SEC published remarks on the discussion, highlighting that with ESG assets slated to surpass $50 trillion by 2025, investing in this space is complicated for a number of reasons, including the definition of ESG and its scope. In line with recent criticism from certain US states, the commissioner argued that ESG could cross a line into reflecting a broader political or social agenda. Instead, investor focus should remain on financial materiality and any SEC regulations should place such considerations front and centre – something many investors will already argue ESG does. The comments are yet another demonstration of the battle lines being drawn around ESG in the US, with a long way to travel to bottom out what ESG means and where the SEC is comfortable focusing. Despite the seemingly relentless discussion of potential regulations, management in the US apparently still feel “unprepared” for any SEC rule, according to Corporate Secretary, which a cynic may view as a lobbying position as much as a preparedness one.

The UK’s regulatory push heats up

The consultation period for the FCA’s Sustainable Disclosure Requirement (‘SDR’) paper closed on January 25. While investors, and their representative bodies, have called for more clarity, they have also highlighted the rules’ potential to enhance transparency for investors. The UK Sustainable Investment and Finance Association (‘UKSIF’) praised the FCA’s rules as “a positive departure from the arguably looser criteria for ESG fund categories set out in the EU’s SFDR”, where a lot of criticism (and debate) continues to be focused on the definition of the concept of sustainable investment.

The labelling approach, which looks to provide a framework of decision-useful disclosures for consumers based on different investment strategies has been welcomed; however, additional clarity on the guidance has also been sought. In particular, investors have raised concern about the risk of labels such as the “improvers”, becoming a “catch all” label, with the potential for funds to exaggerate the impacts of their engagement activities.  The focus has also been ESG at the FRC this week, which announced it would continue to review the work done by auditors to ensure they consider the climate-related risks facing the companies they audit. With all measures underway, the UK seems to be matching the EU in attempting to establish a world leading ESG regime but may need to exercise caution that the efficacy of the rules are not blunted by a lack of clarity.

A defence of the voluntary carbon market

The Voluntary Carbon Market (VCM) was this week defended by over 45 signatories, who claim Carbon Net Zero is unachievable without it. The letter, which may be seen as a response to fiery criticism of the market in the first part of 2023, was published by Sylvera and supported by a range of bodies involved in the carbon credit market, including credit brokers, project developers, industry bodies, and ratings and data providers, contests the recent growing criticism of the VCM. Concerns have been widely raised in recent weeks over the integrity and quality of some carbon credit programmes, criticism going as far as to say that organisations are using the VCM to purchase carbon credits without doing the groundwork towards their carbon reduction goals. However, the carbon market stakeholders have insisted that “the majority of corporate buyers investing in projects are also heavily investing in decarbonizing their own value chains” instead of relying on carbon credit purchases to reduce their emissions.

The letter acknowledges that companies must first avoid and reduce emissions – the central tenet of addressing climate change – using credits only to compensate for emissions they are unable to avoid and that moving forward, high-quality credits that have transparency and accountability will be paramount to the overall acceptance, use and success of the VCM. According to the authors, “we need every tool in the box, including carbon credits.”

EU responds to US Inflation Reduction Act

In response to the Inflation Reduction Act, which has caused concern regarding companies moving from the EU to the US to take advantage of subsidies, the Financial Times reports that the EU is planning to ease restrictions to allow a surge of tax credits for green investment. The draft reveals that state-aid rules may be relaxed in order to support green sectors, as well as the creation of tax benefits for green investment, with some of the €800bn in the NextGenerationEU Covid-19 recovery fund redirected towards tax credits. The proposed move from the EU doesn’t come without criticism, as it is easier for deep-pocketed countries such as Germany to hand out fiscal incentives than it is for others with smaller economic flexibility. While the proposed measures have not been finalised, the steps point to the concern in the EU around the IRA, and the ease under which credits are provided to green initiatives under its structure. Having said that, it is unclear whether the EU and its Commission should be concerned by a race with the US to incentivise “green” projects. Instead, as this opinion piece highlights, the EU should welcome such a “trade war”, spurring enhanced rules on green subsidies and ultimately driving greater action on climate change.

ICYMI

• ESG funds in Asia double their global market share. A recent report from Barclays reveals that Asia’s ESG fund market share grew from 2% to 4% at the end of 2020, as Bloomberg writes. Asia’s net inflows into ESG stock and bond funds compared with 5% for non-ESG funds in the region, showing “stronger investor appetite for sustainable investing”.  
• US lawmakers call on Kerry to convince UAE to replace COP28 president. Reuters reported that more than two dozen US representatives have urged climate envoy John Kerry to persuade the UAE to withdraw the appointment of the head of the Abu Dhabi National Oil Company as president of the COP 28 summit, claiming that his appointment will jeopardize the climate talks.
• Over 85% of companies plan to increase spending this year on emissions reduction. According to the latest Environmental Sustainable Index by Honeywell, a sizeable majority of businesses remain confident and committed to increasing investments in environmental initiatives in order to reach their sustainability goals, as ESG Today reports.

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