ESG Knowledge Update | November 2024
Published on 19th Nov 2024
Welcome to our Osborne Clarke ESG Knowledge Update, which offers a round-up of legal, regulatory and market news
Legal and regulatory news
European Union
The Council of the EU last month agreed and did not put forward any amendments to the European Commission's proposal to delay the implementation of the EU Deforestation Regulation to (EUDR) by 12 months. But, on 14 November, an amendment was passed in the European Parliament to introduce a new category of "no risk" countries. The full EUDR proposal will now need to go back to the Commission and the Council for further negotiation on this point. While the extension of a year has now been agreed across the board, there is a risk that if the EU cannot reach an agreement on the official proposal by the end of the year then, as a matter of law, the start date remains January 2025.
The European Commission has published frequently asked questions (FAQs) on the interpretation of provisions on the new sustainability reporting requirements introduced by the Corporate Sustainability Reporting Directive (CSRD). The FAQs includes an overview of the sustainability information to be reported, a flowchart on the process to determine whether an entity is subject to sustainability reporting requirements and from which financial year and FAQs on topics such as scope and application, exemptions and value chains.
The final guidelines on the use of ESG or sustainability-related terms in the names of funds will come into force on 21 November. The guidelines aim to regulate unambiguously the use of words or acronyms that are indicative – or merely allusive – of sustainability-oriented investment strategies within the names of investment funds.
The European Securities and Markets Authority (ESMA) has published an updated sustainable finance implementation timeline. ESMA's timeline outlines key regulatory developments in sustainable finance, such as the CSRD.
On 30 October 2024, the European Supervisory Authorities published a final report on principal adverse impact (PAI) disclosures under the SFDR. PAI disclosures aim to show the negative impact of financial institutions' investments on the environment and people, as well as on the actions taken to mitigate them by asset managers, insurers, investment firms, banks and pension funds. The ESAs have assessed both entity and product-level PAI disclosures.
The European Parliament has approved the final text of the regulation on forced labour products which will prohibit products made with forced labour going on the EU market. The Council is expected to formally adopt the text without further amendments. After this, the regulation will be published in the Official Journal of the European Union and will enter into force on the day following its publication. The regulation will apply three years after its date of entry into force.
The European Commission has adopted new measures under REACH to restrict the use of undecafluorohexanoic acid (PFHxA) and PFHxA‑related substances, which are sub-groups of PFAS. The restriction will ban the sale and use of PFHxA in consumer textiles such as rain jackets, food packaging (for example, pizza boxes), consumer mixtures such as waterproofing sprays, cosmetics and in some firefighting-foam applications. This restriction is distinct from the potential restriction on the entire PFAS group which the European Chemicals Agency is currently assessing.
On 14 October 2024, the Council of the European Union formally adopted a directive aimed at enhancing air quality standards across the EU. The directive supports the EU's net-zero objectives and prioritises the health of EU citizens by establishing air quality targets for 2030.
A consultation on a draft regulation to establish the EU Carbon Border Adjustment Mechanism (CBAM) registry has been launched. The registry will be used for filing and managing the CBAM declarations, including checks, indicative assessments and communication and review procedures. EU CBAM will apply from January 2025 for authorising CBAM declarants and January 2026 for CBAM reporting obligations. The consultation closes on 28 November 2024.
United Kingdom
On 30 October, the UK chancellor, Rachel Reeves, delivered the Autumn Budget which contained a number of announcements relevant to ESG.
- A UK CBAM will be introduced on 1 January 2027, placing a carbon price on goods that are at risk of carbon leakage imported to the UK. Sectoral scope confirmed as aluminium, cement, fertiliser, hydrogen, and iron and steel. Products from the glass and ceramics sectors will not be in scope as previously proposed.
- The government reaffirmed its commitment to a zero-waste economy and the implementation of the Collection and Packaging Reforms Programme and stated that the extended producer responsibility for packaging is expected to generate over £1 billion annually. Fees are payable under the extended producer responsibility (EPR) regime from October 2025.
- An investment of £3.4bn will be made to increase the energy efficiency and decarbonisation of household energy, as well as supporting the growing heat pump manufacturing supply chain.
- The Plastic Packaging Tax (PPT) rate will be increased for 2025-26 in line with CPI inflation. The Budget also confirmed businesses will be permitted to use a mass balance approach to evidence recycled content in chemically recycled plastic for PPT.
- The energy profits levy was increased on 1 November 2024 to 38% and will remain in place until 31 March 2030. The Budget also removed the 29% investment allowance but kept the 80% decarbonisation allowance in place. (This windfall tax on oil and gas companies was introduced in May 2022 at 25% and was due to expire at the end of 2025. In January 2023, the levy was increased to 35%. In the Spring Budget 2024, it was announced that it would be extended to March 2029.)
The draft Producer Responsibility Obligations (Packaging and Packaging Waste) Regulations 2024 have been laid before Parliament. The regulations implement the EPR scheme for packaging waste. The key change from the previous draft of the regulations is that the provision on mandatory recyclability labelling has been removed meaning this requirement will not be introduced in 2027 as originally expected.
The UK government has laid legislation to ban the sale of single-use vapes from 1 June 2025. Businesses will have until this date to sell any remaining stock ahead of the ban coming into force. The government explains that this ban will not only protect the environment by reducing waste and pushing towards a circular economy, but also reduce appeal to young people.
The Department for Energy and Security and Net Zero has published the government response to the consultation on its proposals to expand the carbon capture readiness (CCR) requirements. The proposal renames CCR as decarbonisation readiness (DR), ensuring that all new-build combustion power plants have a path to decarbonisation. The DR requirements will be moved from the planning consent process to the environmental permitting regime for applications submitted after 28 February 2026.
A House of Lords select committee has published a report evaluating the impact and effectiveness of the Modern Slavery Act (MSA) 2015 following Parliament's request for a review. The select committee has highlighted areas where the UK has fallen behind in its approach to tackling modern slavery and offers a series of recommendations for improvement.
The Transition Plan Taskforce (TPT) has published its Progress Achieved and the Path Ahead: The Final Report of the Transition Plan Taskforce, which officially concludes its work. The TPT has been working over the past few years to establish "the gold standard for transition plan disclosures" and the publication of this final report illustrates the work of the TPT, including its suite of guidance materials, and the next steps for transition plans.
The FCA has published examples of good and poor practice in relation to sustainability disclosure requirements and investment labels providing helpful pre-contractual disclosure examples.
International
The election of Donald Trump as the 47th President of the United States looks set to spell change for the ESG landscape in the US. Businesses will need to keep abreast of what is coming down the line for ESG as the new US president's inauguration approaches on 20 January 2025.
The COP29 climate conference is taking place in Azerbaijan this month (with the outcomes covered in the next edition).
The COP16 biodiversity conference ran from 21 October to 1 November in Colombia where there were announcements on a range of issues.
- The Taskforce on Nature-related Financial Disclosures (TNFD) announced that 502 companies and financial institutions committed to reporting their nature-related issues in line with the TNFD recommendations, a 57% increase since January 2024.
- The TNFD also published draft guidance on nature transition planning to assist businesses in developing and disclosing a transition plan in line with the TNFD recommendations. The TNFD is seeking feedback on the guidance until 1 February 2025.
- Further to the implementation of the Kunming-Montreal Global Biodiversity Framework, which aims to halt and reverse biodiversity loss by 2030, 44 countries have submitted revised national biodiversity strategies and action plans and 119 parties uploaded their national targets. These will be the basis for first national reports due in 2026.
- The COP discussed its monitoring framework and the procedures for the Global Review of Implementation in 2026 and 2030, but as the COP ran out of time, these discussions were not finalised and will continue in inter-sessional meetings.
- Negotiations were concluded on digital sequence information (DSI), which refers to genetic information sequenced from nature and made available online for research that aids in the creation of medicines, vaccines and other products. The deal introduces the Cali Fund, to which businesses can voluntarily contribute if they use DSI.
- It was agreed that a new body to focus on the rights and interests of indigenous people and local communities will be established.
The International Financial Reporting Standards (IFRS) has published a report on the progress on corporate climate-related disclosures. The report found that 82% of a sample of public companies disclosed information in line with at least one of the 11 Task Force on Climate-related Financial Disclosures recommendations and over 1,000 of these companies have referenced the International Sustainability Standards Board (ISSB) in their reports. The IFRS states that "this is an important backdrop to the move to regulatory adoption of the ISSB Standards."
Market news
The UK Competition and Markets Authority (CMA) has closed its investigation into green claims made by Unilever on the grounds of administrative priorities… According to CDP, a non-profit organisation that collects environmental disclosures from global companies, nature-related disclosures are on the rise, with around 1,800 companies now reporting the impact their value chains have on biodiversity. Additionally, companies worth a third of the global stock market are also now disclosing water data to CDP… A recent survey reveals gaps in companies' supply chain transparency and human and financial resources required to comply with the new Corporate Sustainability Due Diligence Directive… Shell has won its appeal against a Dutch court's order that it must cut its emissions by 45% by 2030 compared to 2019 levels.
