Horizon - ESG Regulatory News and Trends

Welcome to Horizon, DLA Piper’s regular bulletin reporting on late-breaking legislative and policy developments in ESG. Our aim is to scan the litigation, enforcement, and regulatory horizon to help inform business decisions.

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In this issue

Click each topic to jump to that section.

Disclosures
Voluntary reporting frameworks
Supply chain
Greenwashing
Climate change: Regulatory
Climate change: Litigation
Business and human rights
ESG investment
ESG calendar – key reporting deadlines, coming events

DISCLOSURES

SEC responds in Climate Disclosure Rule litigation. The SEC has filed its brief with the Court of Appeals for the Eighth Circuit defending the Climate Disclosure Rules, asserting that the regulation “falls within the Commission’s statutory authority and is consistent with the Commission’s decades of practice exercising its delegated rulemaking authority.” At heart, the agency said, the rules are in keeping with the agency’s mission to protect investors. The plaintiffs’ reply briefs are due September 3. The future of the Climate Disclosure Rules remains uncertain, and it is possible the Court of Appeals for the Eighth Circuit may vacate the rules in whole or in part. Nevertheless, public companies are encouraged to continue understanding the Climate Rules in light of ongoing SEC scrutiny of climate-related disclosures. For more information about this challenge to the Climate Disclosure Rules, see our alert.

California: Clash over climate disclosure rules. Early this summer, California Governor Gavin Newsom called on the state legislature to delay implementation of the state’s two climate disclosure bills until 2028 – a postponement of two years. On August 16, State Senator Scott Weiner, author of the bills, responded with SB 219, which proposes to give the California Air Resource Board (CARB) until July 1, 2025 (rather than January 1, 2025) to finish its rulemaking and adopt regulations for reporting entities’ annual disclosures of Scope 1-3 emissions. SB 219 would also, among other changes, allow SB 253 reports to be consolidated at the parent company level. Importantly, however, the bill does not change the ultimate compliance deadlines for companies. Observers are noting that the new bill is a quiet admission that rulemaking for the disclosure bills is not on track to meet the original timeline. At this writing, SB 219 has been ordered to a third reading.

European Commission issues new FAQs on CSRD. The European Commission has published a new set of FAQs created to support businesses as they implement the sustainability reporting requirements of the EU’s Corporate Sustainability Reporting Directive (CSRD). The FAQs, released on August 7, are intended to provide greater clarity and certainty to companies and help reduce their administrative burden. See the FAQs here, and see our explanation of the CSRD here.

Australia: mandatory climate-related financial disclosure standards. On August 22, the Australian Senate approved Australia’s mandatory climate-related financial disclosure rules, which are expected to become effective starting January 1, 2025. The new reporting standards are being finalized by the Australian Accounting Standards Board this month and will be implemented in phases through 2027.

VOLUNTARY REPORTING FRAMEWORKS

IASB proposes “examples” to improve climate reporting. The International Accounting Standards Board (IASB) has published a consultation document proposing "new illustrative examples" intended to help companies improve their application of existing accounting standards in reporting climate-related risks. The examples, said IASB chair Andreas Barckow, were created specifically to clarify how companies should accurately report uncertainties. Comment letters on the proposed examples may be submitted through November 28, 2024. The IASB is the accounting standard-setting body of the International Financial Reporting Standards (IFRS) Foundation.

New initiatives aim to enhance interoperability of voluntary frameworks. These four new initiatives have recently launched:

• A joint interoperability mapping tool launched by the Global Reporting Initiative (GRI) and the Taskforce on Nature-related Financial Disclosures (TNFD) outlines the alignment between TNFD disclosure recommendations and GRI standards to provide businesses with practical support in reporting their nature-related ESG impacts.
• The UN Development Programme, in partnership with several prominent standard setters, is establishing Sustainability Disclosure and Management Hubs (SDMHs) in 14 developing and emerging economies. The hubs, which will launch later this year across Latin America, the Caribbean, Africa, and Asia, will focus on enhancing sustainability disclosure, aligning with national development priorities, providing stock exchange guidance, and developing regulations.
• GRI has unveiled a linkage service that will align its standards with EU CSRD reporting requirements. The linkage service will help companies that are already using GRI standards to understand the interoperability between the CSRD requirements and the GRI standards. Find out more here.
• A new publication from the IFRS Foundation and the European Financial Reporting Advisory Group is designed to provide companies with practical support to enable compliance with two key standards: the International Sustainability Standards Board’s IFRS Sustainability Disclosure Standards and the European Sustainability Reporting Standards. See the Interoperability Guidance here.

SUPPLY CHAIN

Understanding how the CSDDD impacts your business. The EU’s Corporate Sustainability Due Diligence Directive (CSDDD) is now in effect and will become applicable to companies in stages starting July 26, 2027. It requires European and non-European companies operating in the EU to conduct due diligence of all their global value chains to identify and address adverse human rights and environmental risks that may arise in their operations, inside and outside the EU. To help you understand its impact, our alert answers 10 frequently asked questions.  You may also enjoy our look at what US companies need to know about the CSDDD.

New GAO report calls for increased scrutiny of contractors’ anti-trafficking compliance. A report from the US Government Accountability Office (GAO) has found that, in the majority of federal contracts reviewed, four key federal agencies have not been complying with federal anti-trafficking requirements. Analyzing efforts of the Departments of Homeland Security, Defense, State, and the US Agency for International Development, the GAO found that although contractors are required to maintain an anti-trafficking plan and annually certify their compliance, government contracting officials typically were not requesting or reviewing the plans, nor obtaining the certifications. The GAO recommended that the four agencies implement a systematic approach to managing trafficking risks in federal procurements, reviewing contractors’ anti-trafficking plans, and obtaining the required certifications. The federal government’s National Action Plan on Responsible Business Conduct states that the government “expects” contractors to proactively conduct human rights due diligence “throughout their value chains.” Contact Tom Daley to learn more.

Here come Extended Producer Responsibility laws. Regulators in five US states (California, Colorado, Maine, Minnesota, and Oregon) are moving to implement Extended Producer Responsibility (EPR) laws for packaging and other products as rulemaking and compliance deadlines approach. EPR laws are gaining momentum across the US and globally, bringing significant compliance requirements and challenges for producers. Our alert examines what producers should know as they prepare to operate under these comprehensive new regimes.

GREENWASHING

Greenwashing directives emerging in the EU. Two EU Directives will reshape the way companies market their ESG activities, and, more largely, their products in the European Union. The first, adopted earlier this year, is the Directive on Empowering Consumers for the Green Transition. This directive aims to encourage sustainable consumer practices by requiring companies to provide more thorough information about product lifespan and reparability; it also prohibits generic environmental claims unless the company can demonstrate relevant environmental performance. EU member states have until March 27, 2026 to transpose this directive into their national laws, with enforcement expected to start later that year.

The second is the complementary Green Claims Directive, which at present is in the midst of the legislative negotiating process. This Directive will compel companies to substantiate their voluntary environmental and social claims with robust evidence, and it will clarify and harmonize environmental labeling requirements. It will likely not be adopted before the beginning of 2025, and thus would not go into effect before 2026.

UK Anti-Greenwashing Rule: a tightrope for financial firms. The UK’s Anti-Greenwashing Rule is now in effect, requiring Financial Conduct Authority-authorized financial firms to ensure that any reference they make to the sustainability characteristics of their financial products and services is “fair, clear and not misleading.” Sustainability claims must be complete and not omit or hide important information. The rules, we note in our alert, will likely be a tightrope, posing considerable legal risk.

Canada’s Competition Bureau seeks feedback on new greenwashing law. Canada’s Competition Bureau has launched a public consultation on the greenwashing amendments to the Competition Act in Bill C-59, Canada’s Fall Economic Statement Implementation Act, 2023. Bill C-59, which became law in June, places new substantiation obligations on businesses: any conduct that promotes, directly or indirectly, a product or other business interest by any means, may be “reviewable”. if it is not adequately substantiated. Businesses have the onus of establishing compliance and those businesses found to have made unsubstantiated or deceptive claims may face significant penalties. The Competition Bureau is inviting feedback by September 27 on the new greenwashing provisions, including which types of testing and internationally recognized methodologies are adequate to substantiate environmental claims. Effective in one year, on June 20, 2025, private parties will gain the ability to seek leave from the Competition Tribunal to enforce reviewable conduct provisions, including the new greenwashing provisions. The Tribunal may grant leave if satisfied that it is in the “public interest” to do so; the applicant will not have to show that they suffered loss or damage

CLIMATE CHANGE AND THE ENVIRONMENT: REGULATORY

US shifts position on global plastics treaty; plus a federal procurement action plan. The US has pivoted in its stance on the global management of plastic production and pollution, with significant potential impacts for industry. The shift comes amid ongoing negotiations toward a legally binding UN treaty aiming to address the growing issue of plastic pollution – our alert looks at this critical shift. Furthermore, the Biden Administration has released an action plan to phase out single-use plastics from all federal operations by 2035, starting with a goal to address federal procurement of single-use plastics for food service operations, events, and packaging by 2027. The plan outlines particular opportunities to reduce plastic pollution and details the existing progress of federal agencies and departments in tackling plastic pollution.

Antitrust concerns again raised in partisan threats to sustainability initiatives. Dueling reports in June from the Republican and Democratic staffs of the House Judiciary Committee have laid bare the deep partisan divide on sustainability initiatives like Climate Action 100+ and the United Nations-convened Net Zero alliances, which Republicans have deemed “climate cartels” that allegedly violate US antitrust laws. At the end of July, Republican lawmakers issued letters to over 130 financial institutions asking for information as part of the Committee’s “oversight of the adequacy and enforcement of U.S. antitrust laws” and advising the recipients to preserve documents that relate to “collusive activity” around the initiatives. The letters represent the latest attacks by Republican lawmakers and regulators – among them multiple Republican state attorneys general – that have proven destabilizing to these initiatives around the world. The partisan attacks in the US come at the same time that competition enforcers in the rest of the world continue to create guidance for businesses engaging in sustainability collaborations aiming to encourage such collaborations by reducing uncertainty about potential antitrust violations. To learn more about this developing story, please contact Carsten Reichel or Vic Domen.

Tightening emissions standards for landfills. The EPA is reviewing its 2016 standards for landfill emissions and says it intends to issue a draft rule in 2025 covering both new and existing municipal solid waste sites. The review was quietly rolled into announcements during the July White House summit on heat-trapping super pollutants – the GHGs, like methane, that trap atmospheric heat far more effectively than carbon dioxide. Slashing such emissions, EPA says, is “the fastest way to tackle climate change” and bring down atmospheric CO2 levels. Waste Today magazine notes that many landfill operators have already begun investing in new technologies that address emissions by capturing biogas to generate electricity or produce renewable natural gas through anaerobic digestion.

Legislating sustainable fashion in the US. The proposed Americas Trade and Investment Act, a bill with bipartisan support that is now before Congress, is the latest legislation seeking to address growing consumer demand for responsible and sustainable practices by apparel companies. The EU, with its Strategy for Sustainable and Circular Textiles, is already farther down this path – in December, for instance, announcing new financial incentives to encourage sustainable practices by clothing manufacturers. Meanwhile, California is considering the Responsible Textile Recovery Act, which would require manufacturers of apparel or textiles to join a producer responsibility organization, and New York is considering the Fashion Sustainability and Social Accountability Act, which would make fashion manufacturers and retail sellers accountable for their social and environmental impacts. See our alert about the Americas Trade and Investment Act.

California starting work early to extend cap-and-trade program. Aiming to give regulated businesses the confidence and predictability to pursue their long-term plans, California will begin working next year to extend its cap-and-trade program. The program is currently slated to expire in 2029, but the state senate intends to begin working on program reauthorization in 2025, according to California state Senate President Pro Tempore Senator Mike McGuire. Earlier this year, the State of California announced that the cap-and-trade program has funded $28 billion in climate investments since it launched a decade ago, supporting more than half a million local projects that fight climate change and cut pollution.

77 world leaders urge UN to restore “fossil fuel” wording to Pact for the Future. Expressing their “grave concern,” a coalition of world leaders and Nobel laureates is urging the UN to restore commitment to a “fast and fair” transition away from fossil fuels in the draft UN Pact for the Future. In an open letter released August 14, the 77 signatories note that burning fossil fuels is the primary cause of the climate crisis. The failure to specifically mention fossil fuels in the Pact, they state, undermines global climate action. Among the signatories of the open letter are Mary Robinson, former President of Ireland; Muhammad Yunus, Chief Adviser of Bangladesh; Stefan Löfven, former Prime Minister of Sweden; the Dalai Lama; and numerous Nobelists. See the open letter here.

CLIMATE CHANGE: LITIGATION

Kansas and Ohio ask Supreme Court to stay Power Plant Emission Rule. On August 21, the attorneys general of Kansas and Ohio asked the US Supreme Court to stay the EPA’s Power Plant Emission Rule through its emergency docket. Under the rule, certain coal-fired and new natural gas-fired power plants would be expected to control 90 percent of their carbon dioxide emissions, among other new rules to reduce power plant pollution. At present, the Supreme Court is currently considering eight emergency docket requests from industry groups and Republican state attorneys general to bar the rule’s implementation while legal challenges proceed. The emergency docket, nicknamed the “shadow docket,” allows the Court to issue decisions swiftly, without extensive briefing or public oral arguments.

Louisiana court permanently blocks EPA from enforcing tougher pollution rules in poor and minority communities. On August 22, the United States District Court for the Western District of Louisiana issued a permanent injunction against the US Department of Justice and the EPA blocking them from using the “disparate impact” requirements in Title VI of the Civil Rights Act – which hold that a regulation may disproportionately harm one group of people more than others – to determine how Louisiana regulates industrial facilities. The injunction limits the federal government’s scope of action against specific governmental decisions to intentional discrimination. Also on August 22, DOJ and EPA stated that they “remain committed to enforcing civil rights law, consistent with the court’s order.” The decision only affects EPA enforcement actions based on disparate impacts in Louisiana. However, it may set an example to the other 22 states that petitioned EPA in April this year attacking the agency’s environmental justice policies and citing the statements on racial discrimination set out in the Supreme Court’s 2023 decision Students for Fair Admissions, Inc. v. President and Fellows of Harvard College.

Arguments coming in litigation over California climate disclosure laws. Arguments for summary judgment in Chamber of Commerce v California Air Resources Board will take place September 9, 2024. In this case, before the US District Court for the Central District of California, the Chamber and a number of business groups are challenging the two California climate disclosure laws, SB 253, the Climate Corporate Data Accountability Act and SB 261 requiring the disclosure of climate-related financial risks.

Japan’s first youth-led climate change lawsuit. In first-of-its-kind litigation in the country, a group of 16 Japanese youths, ages 15 to 29, are suing 10 major thermal power companies which, they say, account for 40 percent of Japan’s energy-related carbon dioxide emissions. The case is the first climate change lawsuit in Japan whose plaintiffs are exclusively young people. The plaintiffs say they were inspired to bring the suit by a “sense of danger” – that everyday life has become more precarious as the climate has grown hotter. Their goal, they say, is to reduce the greenhouse gas emissions that are hindering international climate goals. The lawsuit was filed August 6 in Nagoya District Court.

BUSINESS AND HUMAN RIGHTS

Equal Rights Amendment is legally valid, says ABA resolution. At its annual meeting this month, the American Bar Association’s House of Delegates adopted a resolution stating that the Equal Rights Amendment (ERA) has been fully ratified, is legally valid, and should be implemented as the 28th amendment to the US Constitution. First proposed to the states as an amendment in 1973, the ERA would guarantee equal legal rights for all American citizens regardless of sex, ending legal distinctions between men and women in such areas as employment, property ownership, and marriage. As of 2020, three-fourths of US states have ratified it. Calls for implementing the ERA are on the rise – just this month, the League of Women Voters of the United States wrote to the Biden Administration urging that the ERA be immediately published in the US Constitution; and in early August, the Young Feminist Party, a national coalition of grassroots activists, hosted a conference in Washington, DC to strategize in support of implementing the ERA. 

DHS adds more PRC-based companies to the UFLPA Entity List. On August 23, the US Department of Homeland Security (DHS) updated the Uyghur Forced Labor Prevention Act (UFLPA) Entity List, adding five new companies allegedly linked to forced labor practices in China’s Xinjiang Uyghur Autonomous Region (XUAR). These companies have been identified as working with the XUAR government to recruit, transport, transfer, harbor, or receive forced labor from Uyghurs, Kazakhs, Kyrgyz, and other persecuted groups and sourcing materials from the XUAR, especially through government labor schemes such as the “poverty alleviation” or “pairing-assistance” programs, which are notorious for their association with forced labor practices.

ESG INVESTMENT

First ESG administrative law challenge in the Loper-Bright era. In the wake of the recent Loper-Bright decision, which overturned the decades-old Chevron deference doctrine, the US Fifth Circuit Court of Appeals has remanded Utah v. Su to a Texas district court for rehearing. The case is a bid by 29 Republican state attorneys general to block the Department of Labor’s ESG rule, which allows retirement plan fiduciaries to consider ESG factors when selecting and voting in connection with investments. The appeals court said that when the district court initially upheld the rule, it was relying on the now-overturned Chevron deference doctrine. Utah v. Su thus becomes the first ESG case to go before a court in the Loper-Bright era.

Federal court rules Missouri’s “anti-ESG law” violates First Amendment. On August 14, a federal judge in Missouri struck down a state law regulating ESG investments through “notice and consent.” An industry group, the Securities Industry and Financial Markets Association (SIFMA), challenged the law, which required clients of financial firms to provide written consent before the firm could invest the client’s money in funds that considered ESG factors. The court found that the law constituted “compelled speech” and was “unconstitutionally vague” in violation of the First Amendment to the US Constitution, and that the law was preempted by federal laws. It is expected that Missouri will appeal the ruling to the Eighth Circuit Court of Appeals.

SBTi: carbon offsetting is largely ineffective, says SBTi. The standard-setting Science Based Targets initiative (SBTi) has concluded "various types of carbon credits are ineffective in delivering their intended mitigation outcomes," and that more research is needed on the different use cases for carbon credits. SBTi’s finding, announced on July 30, arises from its review of 111 third-party studies on performance of carbon credits released that same day. SBTI's review examined carbon credits as a group, and did not review evidence distinguishing effective credits from ineffective ones. In April, SBTI’s board of trustees released a statement saying that the organization would consider recognizing environmental attribute certificates, including carbon credits, for abatement purposes in reporting value chain emissions (that is, Scope 3). The review is being widely seen as an interim step as the organization works toward a final position on the issue.

UK to introduce mandatory rules for ESG raters. The UK’s Ministry of Finance has announced that Finance Minister Rachel Reeves “has asked the Treasury to respond quickly to an industry consultation on a new regulatory regime for ESG rating providers and bring forward legislation next year.” Investors use ESG ratings to garner a quick understanding of a company’s ESG performance. In the UK, raters of company ESG performance need only comply with a voluntary code of conduct, and their proprietary methodologies have been criticized as inconsistent. Introducing mandatory regulations, the UK Sustainable Investment and Finance Association said, would make the rating process more transparent and coherent. The coming rules will align with recommendations from the International Organisation for Securities Commissions.

MUFG announces Sustainability Finance Framework. Tokyo-based Mitsubishi UFJ Financial Group (MUFG) has released its new Sustainable Finance Framework, setting out eligible categories of environmental and social projects funded through the bank. The projects will be financed through green, social, and sustainability bonds and loans. The framework sets out two categories of projects eligible for funding: green buildings which are certified with ratings like LEED Platinum or Gold, and renewable energy, plus six social categories, among them affordable housing and access to essential healthcare.

ESG CALENDAR – KEY REPORTING DEADLINES, COMING EVENTS

Deadlines

• US: California Transparency in Supply Chains Act – annually based on the company’s internal annual publication deadline
• Canada: Bill S-211, Fighting Against Forced Labor and Child Labor in Supply Chains Act – annually on May 31
• EU: Taxonomy Regulation
• NFRD obliged companies – financial years starting on or from January 1, 2024 (with reports due in 2025/2026)
• Large undertakings and parents of large groups – financial years starting on or from January 1, 2025 (with reports due in 2026)
• EU: Corporate Sustainability Reporting Directive (CSRD)
• Large EU Public Interest entities (NFRD obliged) – January 1, 2024 (with reports due in 2025) and then annually
• Large EU undertakings and parents of large EU groups – January 1, 2025 (with reports due in 2026) and then annually
• Non-EU parent companies – January 1, 2028 (with reports due in 2029) and then annually
• EU: Deforestation Regulation – the regulations will substantively apply from December 30, 2024 onwards.
• EU: Corporate Sustainability Due Diligence Directive (CSDDD)
• 2027 for companies with 5,000+ employees and €1.5 billion
• 2028 for companies with 3,000+ employees and €900 million net turnover and
• 2029 for all other companies that fall within the scope of the CSDDD.
• UK: Modern Slavery Act, Transparency in Supply Chains Act – annually. Companies should publish their statement as soon as possible after their financial year end, which is expected to be, at most, within six months of the organization’s financial year end. Companies may wish to publish these statements at the same time as they publish other annual accounts.
• Germany: Act on Corporate Due Diligence Obligations in Supply Chains
• Phase 1 – June 1, 2025
• Phase 2 – annually on January 1
• Switzerland: Due Diligence and Transparency in Relation to Minerals and Metals from Conflict-Affected Areas and Child Labor – annually on June 30
• Norway: Transparency Act – annually on June 30
• Australia: Modern Slavery Act
• If the business reporting date is based on calendar year (ie, January 1 to December 31), then the reporting deadline is annually on June 30
• If the business reporting date is based on Australian financial year (ie, July 1 to June 30), then the reporting deadline is annually on December 31
• If the business reporting date is based on Foreign Financial Year – including United Kingdom and Japan (ie, April 1 to March 31) – then the reporting deadline is annually on September 30

Coming events

• Houston Energy & Climate Week will be held September 9-13, 2024 in Houston.
• Climate Week NYC takes place September 22-29, 2024 in New York City.
• World Conference on Climate Change & Sustainability takes place October 21-23 in Barcelona.
• The 2024 United Nations Biodiversity Conference of the Parties (COP16) to the UN Convention on Biological Diversity (CBD) will be held October 21 - November 1, 2024 in Cali, Colombia.
• The 2024 United Nations Climate Change Conference (COP 29) will be held November 11 – 22, 2024 in Baku, Azerbaijan.
• The 13th United Nations Forum on Business and Human Rights will be held November 25 – 27, 2024, both hybrid and in-person in Geneva, Switzerland.