ESG+ Newsletter – 21 March 2024

Due diligence directive gets green light from EU 

For a while it looked extremely unlikely; however, the Corporate Sustainability Due Diligence Directive (CSDDD) was passed by the European Parliament’s Committee on Legal Affairs and the Committee of Permanent Representatives over the last week, clearing the way for the Directive to be formally adopted by the European Council. The adoption follows weeks of disagreements between certain member states, with Germany, Italy and France all voicing objections to aspects of the draft CSDDD text. As reported by ESG Today, the text was “watered down” to break the stalemate, reducing the scope, civil liability regime, tightening the definitions within the Directive and raising the thresholds of those covered. 

The CSDDD seeks to mimic OECD guidelines by placing a responsibility on companies to monitor their value chains for ‘adverse impacts’ on human rights and the environment, act to mitigate these impacts, and, where unsuccessful, end the business relationship. The CSDDD also mandates that in-scope companies implement a transition plan to net zero in line with the Paris agreement. The Directive will apply to EU-based companies with over 1,000 employees and €450m in turnover, or third-country companies with €450m in EU turnover. Fines for non-compliance are severe at a minimum of 5% of net worldwide turnover, a similar rate to the impactful GDPR. While the scope of the Directive has been blunted somewhat, it still represents a significant shift in regulatory expectations for many companies operating within the EU. As a cornerstone of the EU Green Deal, it places a significant onus on companies to monitor and manage the impacts of their supply chains, an area of sustainability that many companies feel present the highest compliance burdens.

Legal challenges mount against SEC climate rules 

As pointed out in last week’s newsletter, there is likely to be a level of challenge to the Securities and Exchange Commission’s (SEC) recent rule on climate-related disclosure, with the Wall Street Journal reporting on a U.S. appeals court temporarily halting the new rules. The action initially prohibits the SEC from enforcing the rule while the court considers the arguments around it. As with any regulation, its effectiveness might be impugned by a level of uncertainty; however, in response last week, the SEC argued that a temporary stay of the rule was unnecessary, with the deadline for complying set for March 2026, at the earliest. The Commission is also on record stating that it would “vigorously defend” the rules in court.

In finalising the rule, the SEC removed the requirement for companies to disclose Scope 3 emissions, which was seen by some as pre-empting the legal challenges it is now facing. Regardless of such challenges, and as set out in our own review of the rules, the competitive, regulatory and stakeholder pressures for greater disclosure of climate-related risks across sectors mean that companies should continue to prepare to disclose their emissions, which can also act as effective internal risk management tools in the coming years, despite the potential for long-lasting legal deliberations on disclosure requirements.

Asset managers fall within scope of EU ESG regulation

The European Commission’s upcoming regulation for ESG ratings will include the proprietary scores employed by asset management firms, Responsible Investor has reported, following confirmation by regulatory officials. The clarification comes amid confusion in the sector, with investors to-date unsure on the scope as the current legal text states exemption for ratings issued for “non-commercial purpose” or are “free of charge“. RI’s source noted that, despite investor modelled ratings not being sold as a specific product, similar transparency is required to that of specialised providers. As recently covered by the ESG+ team, the financial services sector has so far been broadly supportive of the increased scrutiny placed on ratings providers to provide improved methodology and source detail; however, whether confirmation of their inclusion in the scope of the regulations dampens that enthusiasm, remains to be seen. While there will almost certainly be concerns around the protection of intellectual innovation, opposition may not be voiced publicly. However, as the use of scoring systems and proprietary models are commonplace in assessing investments, there is likely to be a growing compliance and reporting burden across investment chains; not just limited to specialist ESG rating providers.

French proposal targets the EU’s used clothing exports

France’s environment ministry informed Reuters this week of its proposal for an EU-wide prohibition on the export of second-hand clothes, a measure backed by Sweden and Denmark. Aiming to be discussed at the Environment Council meeting on March 25th, this initiative holds significant implications. UN trade data reveals that in 2022, the EU exported a staggering 1.4 million metric tons of used textiles, more than double the amount from 2000. Concurrently, according to the European Commission, Europe generates 5.2 million tons of clothing and footwear waste annually.

This suggests that over one-third of that waste could be exported, ultimately contributing to pollution in African countries where unsold items often end up in landfills. Moreover, even resold clothing can have adverse effects, undermining local industries and traditional clothing. While the proposed ban is important, its success hinges on, and requires, industry and consumers to shift towards enhanced re-use and recycling of textiles and reducing current overconsumption.

Challenges to India’s clean energy efforts as demand soars

As India’s energy demand surged, the country took a hybrid approach in 2023, with total energy subsidies hitting a 9-year high of INR 3.2 lakh crore as per ESG News Asia. While advocating for global renewable energy growth, India’s subsidies favoured fossil fuels over clean energy, reaffirming the potential for economic and consumer trade-offs to decarbonisation. Fossil fuel subsidies rose by 63%, surpassing clean energy subsidies fivefold. Aiming for a $5 trillion economy by 2027, India’s subsidy growth underpins its continued dependence on fossil fuels. These aims around significant short-term economic growth are impeding clean energy goals, delaying sustainable economic growth and global climate leadership. The report suggests targeting subsidies and reinvesting fossil fuel tax revenues for a just energy transition aligned with India’s net-zero commitments, with state-owned enterprises’ an obvious starting point for aligning India’s aims of economic growth with its climate goals and a more sustainable future.  

ICYMI 

• GRESB Launches New Suite of Sustainability Data Solutions for Real Estate Managers and Investors. The launch of REAL Solutions is powered by GRESB’s annual real estate assessment, comprising a new planned suite of tools aimed at providing real asset managers and investors with actionable insights into the sustainability, resilience and efficiency of assets.  
• GHG Protocol told to step in on facilitated emissions reporting. Stakeholders have asked the GHG Protocol to weigh in and decide whether facilitated emissions should count towards a bank’s carbon footprint. The topic has recently drawn increased attention from regulators following the release of the PCAF’s voluntary standard. 
• Germany on Track to Reach 2030 Climate Targets, Government Says. The Federal Government believes that Germany’s climate targets for 2030 are achievable, based on new data from the German Environment Agency (UBA). According to the Climate Protection Act, this is the year by which greenhouse gas emissions in Germany are to be reduced by 65% as compared to 1990 levels, and in its latest report, the UBA projects a reduction of just under 64%.