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 EU has taken a step forward in agreeing a new Right to Repair Directive which, as its name implies, will prioritise repairing broken products over replacing them, and will affect all businesses involved the manufacture or supply of goods to or within EU member states. This month both the European Parliament and Council of the EU adopted their positions on the European Commission's proposal. Negotiations between the three institutions to agree the final draft will now begin in December 2023 and, with a likely 24-month transition period, the new rules might be in force from H2 2026.

In a tacit acknowledgement of the complexity of the EU's sustainable finance framework, the European Securities and Markets Authority, the EU's financial markets regulator and supervisor, has published three explanatory notes covering key aspects of the framework. The notes explain the concept of sustainability, the "do no significant harm" principle and the use of estimates or "equivalent information" as the sources of data to prepare ESG reporting metrics.

Meanwhile, the EU continues to add to its sustainable finance rule book. This month, the EU has taken the final step to extend the EU Taxonomy – its classification system as to which economic activities are deemed to be "environmentally sustainable" – by publishing them in its Official Journal. The extension, first announced earlier in the year, will apply from January 2024. The taxonomy now addresses non-climate environmental objectives (such as sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems) as well as including additional activities (such as manufacturing components for low-carbon transport) to meet climate environmental objectives.

UK

The Financial Conduct Authority (FCA) has published its long-awaited Sustainability Disclosure Requirements. The rules aim to bring trust and transparency to the UK market for sustainable investment products and represents a major ESG shift for the UK financial services sector. Most significantly, the rules bring in a new general anti-greenwashing rule for all FCA-authorised firms. This will come into force on 31 May 2024 (the FCA is currently consulting on guidance about how this rule will operate). The other new rules, aimed at UK asset managers, include an investment labelling regime, which firms will be able to use from 31 July 2024, as well as new naming and marketing rules and disclosure obligations, which will come into force from 2 December 2024 onwards. Just before publishing the new rules, the FCA published a review highlighting existing good and poor practice amongst UK fund managers.

Last month we told you about the final form "disclosure framework" published by the Transition Plan Taskforce (TPT) – a cross-sector body tasked by HM Treasury with developing a gold standard for best practice climate transition plans. This month, the TPT has published a consultation on seven sector-specific "deep dives". The sectors covered are asset managers, asset owners, banks, electric utilities and power generators, food and beverage, metals and mining, and oil and gas.

The Financial Reporting Council (FRC) has announced it will not be taking forward a number of ESG-related amendments to the UK Corporate Governance Code, which applies to companies listed on the Main Market of the London Stock Exchange. Amongst the proposals that have been dropped are those relating to the role of audit committees on ESG and modifications to existing Code provisions around diversity. The FRC explained its decision in the context of the current wider ongoing debate about business reporting requirements and burdens across the economy. The FRC intends to publish an updated Code in January 2024.

The UK has set out its overall and material-specific recycling targets for packaging producers in England and Wales for 2024. This is a stop-gap measure in anticipation of the UK's plans to make producers responsible for the full cost of dealing with packaging waste under a system known as extended producer responsibility. The new EPR regime is currently due to apply from October 2025, though the scheme was originally intended to begin in 2023 and has been pushed back a number of times.

International

The UN Climate Change Conference 2023, COP28, is underway in Dubai. Here is a run through of the major decisions to be made at this year's conference:

  • We should see a decision text to conclude the first "global stocktake" – an assessment of the progress made by nations towards the goals of the Paris Agreement (spoiler: everyone must try harder). The decision text will set out the globally agreed political response to the stocktake which is intended to inform each countries national climate action plans, next due in 2025. Expect the decision text to please no one as a result of having to please everyone.
  • Food systems and agriculture are likely to receive greater focus at this COP. The COP28 presidency is calling on countries to include food system decarbonisation in their national action plans and is collaborating with the United States to promote technological solutions under their Agriculture Innovation Mission for Climate.
  • Adaptation – adjusting to the effects of climate change – is a major issue for COP28. Governments are due to adopt a framework on the global goal on adaptation which should hopefully bring clarity to how the goal can be achieved and how progress towards it can be measured. We should also see a report on the pledges made by developed countries to increase adaptation finance. Finally, one of the major achievements of the last COP was to set up a loss and damage fund; this COP will need to agree how to put that fund into effect.

However, it seems unlikely that COP28 will see any further commitments to phase out fossil fuels over and above the commitments made at COP26 to accelerate "efforts towards the phasedown of unabated coal power and phase-out of inefficient fossil fuel subsidies".

Market news

The International Bar Association has published a report on the role of arbitration in the resolution of ESG disputes…. Future Coal, a pro-coal lobbying group, has signed up some big players…. B Lab, the certifier behind B corporations, has announced changes it is making to strengthen the standards B corps have to meet…. The Impact Disclosure Taskforce, a new network of financial sector stakeholders, has launched with the purpose of drafting voluntary guidance to facilitate impact reporting in line with the UN Sustainable Development Goals…. A large global study by BlackRock reports that companies with the most gender-balanced workforces outperform their worst peers by 1.6% every year (or 29% over the 9 year period of the study)…. The CFA Institute, Global Sustainable Investment Alliance, and Principles for Responsible Investment jointly published a set of definitions for the following key responsible investment terms: screening, ESG integration, thematic investing, stewardship, and impact investing.