In this month’s ESG Market Alert, we cover:
- FRC omits references to ESG in revised UK Corporate Governance Code
- U.S. Securities and Exchange Commission (SEC) adopts Climate-Related Disclosure Rules
- Mainland China releases new ESG disclosure guidelines for the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Beijing Stock Exchange (BSE)
- European Parliament adopts new “greenwashing” directive
- European Commission’s recommendation for 2040 emissions target
- England launches Biodiversity Net Gain (BNG) regime
- Market Practice Update: UK manufacturers intensify ESG commitments amid market shifts
FRC omits references to ESG in revised UK Corporate Governance Code
On 22 January 2024, the FRC published the latest Corporate Governance Code (Code), following a 16-week consultation process involving market participants. The Code will come into effect on 1 January 2025, with additional governance reporting obligations coming into force on 1 January 2026.
Several revisions proposed at the start of the consultation period relating to ESG were excluded from the latest edition of the Code, specifically:
- The remit of audit committees will not be extended to include narrative reporting, sustainability reporting or ESG metrics.
- Remuneration policies will not be directly linked with company performance, purpose, values and ESG objectives.
- Diversity and inclusion provisions in the Code will not detail a prescriptive list of specific diversity characteristics.
In fact the latest edition of the Code contains no explicit references to ESG, omitting all 14 references to ESG proposed in the original draft of the Code issued for consultation. The finalised Code instead reflects the FRC’s general intention to reduce the ‘reporting burden’ on companies and enhance the competitiveness of the UK listing regime, without compromising UK corporate governance standards. Furthermore, the absence of ESG from the Code as a result of the consultation process is an indicator of some resistance from investors and corporate leaders against ESG-related obligations and business practices.
U.S. Securities and Exchange Commission (SEC) adopts Climate-Related Disclosure Rules
On 6 March 2024, the SEC adopted the Climate-Related Disclosure Rules (CRDRs). The CRDRs will require certain larger publicly traded companies to disclose, among other things, any climate-related risks, their climate action, greenhouse gas (GHG) emissions, and the financial impacts of severe weather events (i.e. any climate associated costs and losses) in their annual filings.
While the CRDRs have been scaled back from the original proposed rules first published in 2022 (Original Rules), they still represent a firm commitment by the United States to address climate risks.
Key changes from the Original Rules include the following:
- Scope 1 and Scope 2 reporting (i.e. reporting on GHG emissions of the company and of the energy providers used by the company) will be mandatory for larger publicly traded companies. This represents a change from the Original Rules whereby all public companies would have been required to report. Those larger companies will also only be required to report if the corporations consider the emissions “material”, or of significant importance to their investors. In practice, this will leave reporting up to companies’ discretion.
- Scope 3 reporting (i.e. reporting on GHG emissions down the supply chain and resulting from the consumption of a company’s products) has been dropped from the Original Rules.
The CRDRs will become effective 60 days after publication in the Federal Register, and compliance will be phased in, beginning in 2026.
Mainland China releases new ESG disclosure guidelines for the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE), and Beijing Stock Exchange (BSE)
On 8 February 2024, three major stock exchanges in China, the SSE, SZSE, and BSE, announced a standardised ESG disclosure framework for listed companies (the Guidelines).
For the SSE and SZSE, disclosures will be mandatory for constituent companies of the Shanghai Stock Exchange 180 Index, STAR 50 Index as well as the Shenzhen Stock Exchange 100 Index and ChiNext Index, as well as dual listed companies. The first sustainability reports prepared in line with the new Guidelines will be due in respect of the period ending 31 December 2025 (to be published by 30 April 2026). Meanwhile, companies listed on the BSE (companies with a minimum market capitalisation of RMB20 million (approximately £2.1 million)) can issue voluntary disclosures.
The reporting requirements include:
- Environmental: corporate strategies and implementation of measures in climate change, anti-pollution, protection of biodiversity and the circular economy;
- Social: actions taken in supporting China’s national development such as rural revitalization and innovation-driven development and disclosures relating to suppliers, customers and workers in respect of ethical sourcing and human rights; and
- Corporate Governance: efforts made in respect of anti-corruption, anti-commercial bribery, and anti-unfair competition.
In Hong Kong, all listed companies have been obliged to publish ESG reports since 2020. Mandatory climate disclosures are due to come into force next year on 1 January 2025.
European Parliament adopts new “greenwashing” directive
On 28 February 2024, the Directive (EU) 2024/825 (the "Greenwashing Directive") was formally signed by the president of the European Parliament and the president of the Council. The Greenwashing Directive aims to make product labelling more trustworthy and empower consumers to make more informed choices.
The Greenwashing Directive aims to ban greenwashing and make product labelling more trustworthy by:
- banning environmental claims of a general nature;
- prohibiting the display of a sustainability label which is not based on a certification scheme or not established by public authorities; and
- extending the list of blacklisted practices to include, for example, claims that a product has a neutral, reduced or positive environmental impact due to emissions offsetting schemes.
The Greenwashing Directive was published in the Official Journal on 6 March 2024 and will come into force on 26 March 2024. Member States will then have 24 months to implement the new rules into their national law.
For more information on how legislatures are addressing greenwashing globally, please see our Energy Transition Hub.
European Commission’s recommendation for 2040 emissions target
On 6 February, following the publication of a detailed impact assessment on possible pathways to climate neutrality by 2050, the European Commission issued a recommendation for a 90% net greenhouse gas emissions reduction by 2040 compared to 1990 levels (2040 Target). A legislative proposal will be made by the next Commission, following the European elections in June this year. Once the 2040 Target is adopted it will form the basis for the EU’s new Nationally Determined Contribution under the Paris Agreement, which needs to be communicated to the UNFCCC in 2025.
Key recommendations include:
- fully implementing existing legislation to reduce emissions by at least 55% by 2030;
- setting up a task force to develop a global approach to carbon pricing and carbon markets;
- full decarbonisation of the energy sector shortly after 2040;
- decarbonisation of the transport sector through a combination of technological solutions and carbon pricing;
- development of sustainable agricultural practices and business models;
- strengthening competitiveness of clean teach sectors; and
- deployment of carbon capture and storage technologies.
The 2040 Target will send investors important signals on how to invest and plan effectively for the longer term, minimising risks of stranded assets, and will help European industry stakeholders, citizens and governments to plan accordingly.
For more information on the 2040 Target, and how to plan accordingly, please see our Energy Transition Hub.
England launches Biodiversity Net Gain (BNG) regime
England has implemented a biodiversity net gain regime, requiring new development projects to not only address their impact on on-site biodiversity, but also deliver biodiversity enhancements. From 12 February 2024, new major building projects (such as those over 10 homes or the provision of more than 1,000 square metres of floorspace) must achieve a 10% net gain in biodiversity, to be maintained for a period of at least 30 years (the same will apply to smaller sites from 2 April 2024).
The BNG regime will be dealt with through the planning system, which will require a measurable BNG plan to be approved for each development project. Regulations will allow for the BNG to be delivered on-site, off-site or through statutory biodiversity credits (which can be sold by landowners to developers to offset any impact on the natural environment a project causes) although developers must comply with the biodiversity gain hierarchy. The launch of the BNG regime therefore represents both significant financial and timing implications for developers and also new financial opportunities for landowners.
For more information on the BNG initiative, please contact Hannah Quarterman.
Market Practice Update: UK manufacturers intensify ESG commitments amid market shifts
A recent report commissioned by Lloyds Bank and Make UK revealed a surge in UK manufacturers developing internal ESG targets and strategies to meet evolving ESG demands from regulators and customers alike, reflecting a shift in market sentiment towards responsible sourcing and sustainable practices.
According to the survey, there was a 48% increase in the number of manufacturers establishing ESG targets for their businesses, with approximately 62% doing so since 2021. As ESG considerations are rapidly ascending the boardroom agenda, companies are incorporating ESG criteria into their procurement strategies, with 74% of the manufacturing sector subjecting their suppliers to ESG conditions and 77% of those surveyed being subject to ESG conditions set by their customers.
ESG Counsel
The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximise positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.
Authored by John Connell, Nicola Evans, John Livesey, Alastair Young, Christelle Coslin, Hannah Quarterman, Tiffany Lam, India Maddison, Aun Hussain, Brian Chiu, Ben Littlewood, Aled Luckman, and Khadeejah Patel
