This memorandum highlights key recent developments in environmental, social and governance matters of relevance to public and private companies globally. For more information on this evolving business and legal landscape, we encourage you to reach out to your regular Sullivan & Cromwell contact or the lawyers listed on our ESG practice website.
The Delaware Court of Chancery has held in Simeone v. The Walt Disney Company that a stockholder’s disagreement with a corporation’s decision to speak on public policy did not constitute a “proper purpose” for making a books and records demand under Delaware law. This decision stems from public statements made by Disney’s former CEO about the company’s opposition to Florida House Bill 1557 and its support of the LGBTQ+ community.
U.S. House Republicans held multiples hearings throughout July on ESG in capital markets regulations and proxy voting, while other Republican lawmakers sought information on whether asset management firms’ efforts to reduce emissions from assets under management in conjunction with other asset managers may violate U.S. antitrust law.
An industry-led working group has published a consultation on a draft, voluntary code for conduct for ESG ratings and data product providers that is intended to have broad application and can be adopted by providers based in any jurisdiction. The industry working group has the support of market participants, the International Capital Market Association and regulators. Meanwhile, the UK Treasury is considering whether ESG ratings providers should be brought within the scope of UK financial services regulation, and the European Commission has proposed a regulation to improve the transparency and reliability of ESG ratings activities.
1. Legislative and Regulatory Updates
2. Litigation and Enforcement Developments
3. Sustainable Finance Updates
4. Energy Transition Updates
House Republicans held a series of hearings focused on ESG. Members of the U.S. House of Representatives Committee on Financial Services (the “Committee”) held a series of hearings in July to consider proposed bills that seek to limit consideration of environmental and social policy as part of capital markets regulation and the shareholder proxy voting process. The hearings build on the Committee’s previously announced ESG working group. Certain aspects of the proposed legislation target ESG considerations in the proxy process, while other proposals aim to expand the ability of companies to exclude shareholder proposals. In addition, Oversight and Investigations Subcommittee Chairman Bill Huizenga, following introduction of a bill regarding proxy voting by investor advisors, sent letters to multiple asset managers seeking information on their decision-making processes with respect to proxy voting.
EU securities regulators focus on possible greenwashing in the investment management sector. In early July, the European Securities and Markets Authority (“ESMA”) launched a common supervisory action with EU member states’ national authorities to assess asset managers’ compliance with the Sustainable Finance Disclosure Regulation, the Taxonomy Regulation and relevant implementing measures. The initiative aims to assess whether market participants adhere to sustainability-related disclosure rules and standards, to gather information on greenwashing risks in the investment management sector and to identify appropriate supervisory and regulatory intervention to address the issue. ESMA noted that fostering greater convergence across the EU in the supervision of risks stemming from incorrect and misleading disclosures is a priority. The action, which will last until Q3 2024, follows ESMA’s publication of its interim report on greenwashing, as detailed in our previous ESG newsletter.
European Commission pushes ahead with new Green Deal legislation. The European Commission in July continued work to implement the European Green Deal by proposing new legislation to support the sustainable management of textile waste across the EU and the sustainable use of key natural resources. The proposed rules on textile waste would make producers responsible for the full lifecycle of textile products, including covering the costs of management of textile waste, incentivizing waste reduction and increasing circularity of products. The proposed rules on natural resources include measures focused on improving soil health, modifying the regulations on certain genetically modified plants and setting targets for reducing food waste. The proposals will be considered next by the European Parliament and Council.
UK regulator highlights areas of improvement in climate-related disclosures. The UK Financial Reporting Council (“FRC”) has published a thematic review analyzing TCFD disclosures from 20 UK-listed companies’ annual reports and accounts. The review found that many companies reviewed had room for further improvement in their climate disclosures, including with respect to the definition and reporting of company-specific metrics and targets beyond headline ‘net zero’ statements and the linkage between climate-related targets included in TCFD reporting and ESG-related targets included in remuneration reporting. The FRC noted that it expects companies to consider the opportunities for improvement highlighted in its review and incorporate them into future annual reporting where relevant. The review also highlighted best practices for how companies can avoid greenwashing or providing misleading disclosures related to metrics and targets.
Australia details proposed climate reporting requirements. Australia’s federal government has released its second Consultation Paper on Climate-Related Financial Disclosures, setting out and requesting comments on Australia’s proposed mandatory climate reporting regime. The Consultation Paper confirms that mandatory climate disclosure is proposed to apply on a phased basis, starting with large listed and unlisted entities reporting from 2024-25. The domestic climate disclosure standards will be developed by the Australian Accounting Standards Board and are intended to align as far as practicable with the International Sustainability Standards Board’s disclosure standards.
Delaware court holds that corporate speech on public policy issues falls within purview of business judgment. On June 27, the Delaware Court of Chancery in Simeone v. The Walt Disney Company held that a stockholder’s disagreement with a corporation’s decision to speak on public policy did not constitute a “proper purpose” for making a books and records demand under Delaware law. This decision stems from public statements made at Disney’s 2022 annual stockholder meeting by its then-CEO, Robert Chapek, expressing the company’s opposition to Florida House Bill 1557 and its support of the LGBTQ+ community. For additional information about implications of the Simeone decision for corporate boards, please see S&C’s memo on the decision here.
U.S. state attorneys general question companies’ diversity practices in hiring and contracting. A group of 13 Republican U.S. state attorneys general sent a letter to chief executives of Fortune 100 companies warning them that “discriminating on the basis of race, whether under the label of ‘diversity, equity, and inclusion’ or otherwise” may violate federal and state anti-discrimination law. The letter cited a recent U.S. Supreme Court decision concerning certain affirmative action policies at U.S. universities and asked that recipient companies “comply with these race-neutral-principles in your employment and contracting practices.” The letter, in discussing recent diversity-related employment and contracting initiatives at U.S. companies, noted that “[w]ell-intentioned racial discrimination is just as illegal as invidious discrimination.”
House Republicans expand ESG-related antitrust inquires to asset management sector. Republican lawmakers on the House Judiciary Committee sent additional letters in early July to asset management firms and net zero-focused financial services industry alliances questioning whether their efforts to reduce emissions from assets under management in conjunction with other asset managers may violate U.S. antitrust law. The letters request that the recipients provide certain information to the committee regarding how they have developed their decarbonization targets and communicated about them with other asset managers. This set of letters follows similar campaigns by other Republican lawmakers and state attorneys general looking into whether financial services firms in particular are violating U.S. antitrust laws in their efforts to reach their net zero goals.
NGOs seek judicial review of UK Government’s net zero plans. On July 7, ClientEarth, Friends of the Earth and Good Law Project (the “NGOs”) announced they are seeking permission to apply for judicial review of the UK Government’s Carbon Budget Delivery Plan, published in March 2023. The High Court had ordered the UK Government to publish a revised net zero plan following a successful legal challenge brought by the NGOs last year, as discussed in our September 2022 newsletter. The NGOs allege that, in preparing the plan, the UK Government failed to consider the risk of its net zero proposals and policies not being delivered and also failed to include in the plan a proper assessment of such delivery risk, in alleged breach of the UK Climate Change Act 2008.
EU and UK securities regulators discuss sustainability disclosures in prospectuses. On July 11, the European Securities and Markets Authority (“ESMA”) released a public statement on sustainability disclosures in prospectuses to underline the relevant requirements for equity and non-equity securities under the Prospectus Regulation. ESMA noted that material sustainability disclosures should be included in prospectuses and that the circumstances of the issuer and type of securities are critical to the materiality determination. ESMA also outlined the information required in prospectuses and final terms for non-equity securities advertised as taking into account a specific ESG component or pursuing ESG objectives, such as green or sustainability-linked bonds. Similarly, the UK Financial Conduct Authority (“FCA”) has published a series of engagement papers that touch upon the FCA’s proposed approach to sustainability-related disclosures under forthcoming revisions to UK’s prospectus regime. The deadline for responses to the FCA’s engagement papers is September 29, 2023.
Publication of draft code of conduct for ESG ratings and data product providers. On July 5, an industry-led working group, the Data and Ratings Working Group (“DRWG”), published a consultation on a draft, voluntary code of conduct for ESG ratings and data product providers. The draft code sets out six principles (and associated actions and outcomes) covering: governance; securing quality; conflicts of interest; transparency; confidentiality; and engagement. The code is intended to have broad application and can be followed by providers based in any jurisdiction, including where no local code or regulation is in place. The DRWG’s membership includes UK and international market participants, and its work is supported by the International Capital Market Association. UK regulators have acted as observers. The draft code closely aligns with the International Organization of Securities Commissions’ recommendations, published November 2021, and has been welcomed by the FCA. The consultation closes for responses on October 5, 2023, with the final code due to be published at the end of 2023. In addition, the UK Treasury is considering whether ESG ratings providers should be regulated by the FCA and, if so, the scope of the potential regulatory regime.
FCA warns of greenwashing in the sustainability-linked loans market. The UK’s financial services regulator has published a letter identifying its concerns regarding the market for sustainability-linked loans (“SLLs”). The FCA notes possible risks to market integrity and suspicions of greenwashing if loans have weak sustainability performance targets. The FCA also observed that margin step-ups for failing to meet sustainability performance targets among investment-grade borrowers were de minimis and raised concerns that having only small savings on margin may discourage borrowers from using SLLs. The FCA also highlighted potential conflicts of interest that may encourage lenders to promote loans with weak performance targets where their remuneration is linked to the achievement of ESG financing targets. The FCA noted that it would continue to monitor the market and consider the need for further measures to support transition finance.
Public-private initiative launched to reduce LNG methane emissions. In mid-July, a group of major LNG industry participants, with the support of the U.S., South Korea, Australia, the European Commission and Japan, launched a new initiative to reduce methane emissions throughout the LNG value chain. The initiative, the Coalition for LNG Emission Abatement toward Net-zero (CLEAN), and its supporters aim to create a globally-aligned methane emissions assessment framework for LNG projects and to reduce methane emissions both by LNG producers and throughout the supply chain.
Energy sector investors focus on proposed changes to Energy Charter Treaty. In early July 2023, the European Commission formally proposed the withdrawal of the EU from the Energy Charter Treaty (“ECT”), an investment treaty that protects energy sector investments. The ECT has come under increased criticism in recent years in connection with some investors’ invocation of its dispute resolution provisions to challenge policy initiatives aimed at advancing the transition to “greener” economies. In light of such developments, it is likely that there will be substantial changes to the ECT’s existing framework and the protections it provides to investors in the energy sector across several key regions. For a deep dive into the debate over the ECT and implications for investors, see S&C’s recent memo, available here.
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