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.
Key Developments
ISSB’s IFRS S1 and IFRS S2 standards continue to gain momentum.
In order to promote a global sustainability disclosure framework and avoid unnecessary duplicative reporting requirements, the International Organization of Securities Commissions has called on its 130 member jurisdictions (including Australia, China, Japan, the UK and the U.S. and members of the EU) to consider the incorporation of the ISSB standards into sustainability reporting frameworks. Jurisdictions such as the UK and Australia have already announced plans to release mandatory ISSB-aligned disclosure requirements in the coming months. Influential standard setters, such as the Financial Stability Board (which issued the TCFD framework) and CDP, are also promoting the widespread adoption of the ISSB standards by integrating the standards within existing voluntary disclosure frameworks.
EU adopts ESRS.
The European Commission has adopted the first European Sustainability Reporting Standards (“ESRS”), which are reporting standards for disclosures under the Corporate Sustainability Reporting Directive (“CSRD”). Although the ESRS requires reporting from a “double materiality” perspective whereas the ISSB standards reference a single materiality threshold, ISSB has stated that it is working with the European Commission on interoperability guidance material to assist companies that intend to apply both the ESRS and the ISSB standards.
Environmental, social and political topics remained the focus of the 2023 U.S. proxy season.
Rule 14a-8 proposals on environmental, social and political topics represented 65% of total submissions for shareholder meetings of the S&P Composite 1500 in H1 2023, and 26% more individual companies had at least one such proposal reach a vote compared to H1 2022. Submissions from so-called “anti-ESG” proponents increased by 65% compared to H1 2022 and 256% compared to 2021. The increase in proposals has been accompanied by record low shareholder support and pass rates. For more information, see our 11th annual Proxy Season Review and join us for our webinar on September 14th.
In this Issue
1. Disclosure-Related Updates
2. Financial Institutions Updates
3. Shareholder Engagement Developments
4. Energy Transition Updates
1. Disclosure-Related Updates
Global
IOSCO endorses ISSB standards. On July 25, a month after the final text of IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information and IFRS S2 Climate-related Disclosures were released by the International Sustainability Standards Board (“ISSB”), these standards (the “ISSB standards”) have received the endorsement of the International Organization of Securities Commissions (“IOSCO”). IOSCO, led by a 35-member board that includes U.S., UK, European and other major securities regulatory bodies, determined that the ISSB standards are “appropriate to serve as a global framework for capital markets to develop the use of sustainability-related financial information in both capital raising and trading.” In order to promote “consistent and comparable climate-related and other sustainability-related disclosures for investors” in globally integrated financial markets, IOSCO has called on its 130 member jurisdictions (regulating more than 95% of the world’s financial markets) to consider ways in which they might adopt, apply or otherwise be informed by the ISSB standards in their own jurisdictional frameworks.
ISSB to take over from the TCFD. The Financial Stability Board (“FSB”), which issued the widely-used voluntary disclosure framework of its Task Force on Climate-related Financial Disclosures (“TCFD”), has announced that it welcomes the publication of the final ISSB standards, which FSB believes “will serve as a global framework for sustainability disclosures and, when implemented, will enable disclosures by different companies around the world to be made on a common basis.” FSB previously stated that it will work with ISSB, IOSCO and other relevant bodies to promote the timely and widespread use of the ISSB standards. In July, FSB further stated that, after September 2023, the TCFD will be disbanded and ISSB will take over the monitoring of companies’ adoption of climate-related disclosures. In addition, FSB emphasized the necessity of jurisdictional frameworks that are interoperable with the ISSB standards, encouraging “bilateral discussions on interoperability between the ISSB and individual jurisdictions” to avoid duplicative reporting by companies.
CDP to integrate ISSB standards. CDP (formerly the Carbon Disclosure Project) has reaffirmed its decision to incorporate ISSB’s final IFRS S2 climate standard into its disclosure system starting in 2024. CDP estimates that 18,700 companies (worth half of total global market capitalization) disclosed environmental information through CDP’s disclosure system in 2022. As a result, CDP believes that its integration of the ISSB standards will mean “rapid accelerated early adoption of ISSB climate data disclosure across the global economy” and “improve the consistency of climate-related information for investors, and reduce the disclosure burden on entities through an alignment of requirements.”
IAASB proposes assurance standards compatible with ISSB standards. On June 28, the International Auditing and Assurance Standards Board (“IAASB”) released its proposed International Standard on Sustainability Assurance 5000 (ISSA 5000), General Requirements for Sustainability Assurance Engagements, for public consultation. ISSA 5000 was designed as a global assurance framework to drive the reliability of sustainability-related disclosures. Therefore, the proposed standards are intended to be compatible with multiple reporting frameworks, including the ISSB standards and climate-related disclosure rules proposed by the SEC. The consultation period closes on December 1, and IAASB expects to issue its final standard before the end of 2024.
European Union
European Commission adopts ESRS. On July 31, the European Commission took a further step towards finalizing implementation of the Corporate Sustainability Reporting Directive (“CSRD”) by adopting the reporting standards that certain in-scope companies will be required to apply when preparing CSRD-compliant disclosures. The European Sustainability Reporting Standards (“ESRS”) adopted by the European Commission will apply to EU companies and companies with certain EU-listed securities subject to the CSRD and provide standards for disclosures related to a broad range of environmental, social and governance matters. Companies reporting under the ESRS will be required to report both how social and environmental issues impact the company and how the company impacts people and the environment, which the EU refers to as “double materiality” perspective. In adopting the ESRS, the European Commission noted that the standards take account of discussions with other standard setters to ensure interoperability between EU and global standards and avoid requiring companies to prepare unnecessary duplicative reporting. According to ISSB, to assist companies that intend to apply both ESRS and the ISSB standards, the European Commission will work together with the European Financial Reporting Advisory Group (“EFRAG”) and ISSB on interoperability guidance material that will help such companies navigate between the standards and understand where there are incremental disclosures required by only one set of standards. EFRAG has also released a statement on interoperability between ESRS and GRI standards, noting that the ESRS uses the same definition for impact materiality as GRI, and that definitions, concepts and disclosures regarding impacts are either fully or closely aligned between the two standards.
United Kingdom
UK Government and FCA announce timetable for endorsement of ISSB standards and application to UK-listed companies. On August 2, the UK Government announced that the Secretary of State for Business and Trade will consider the endorsement of the ISSB standards to create the UK’s Sustainability Disclosure Standards by July 2024. The new UK standards will form the basis of future requirements in UK legislation or regulation for companies to report on risks and opportunities relating to sustainability, and will only deviate from the ISSB standards “if absolutely necessary for UK specific matters”. On August 10, the FCA published Primary Market Bulletin 45, welcoming the ISSB standards for providing “for the first time, a global reporting standard for corporate sustainability disclosures”, setting out its process for implementing the ISSB standards, and explaining how the FCA will continue to supervise existing disclosure under the TCFD framework until new requirements are implemented. Specifically, the FCA intends to consult in H1 2024 on proposals to update its current TCFD-aligned disclosure rules for listed companies to refer to the UK-endorsed ISSB standards (including moving from a “comply or explain” approach to mandatory disclosure). The FCA aims to begin requiring reporting in compliance with the UK-endorsed ISSB standards in 2026 with respect to accounting periods beginning on or after January 1, 2025.
Transition Plan Taskforce publishes update on disclosure framework for private-sector climate transition plans. On July 27, the UK Transition Plan Taskforce (“TPT”), an independent working group convened by the UK Government, provided a status update on its work to develop a disclosure framework for private-sector climate transition plans. Citing “an expected pivot to regulation for transition plans in the UK and globally”, TPT confirmed that it will publish its final disclosure framework and draft implementation guidance in October 2023. TPT expects to consult on sector-specific guidance in November 2023 and publish such guidance, together with a final version of the implementation guidance, in Q1 2024. To encourage global consistency, the final disclosure framework and its key concepts and definitions will closely align with the ISSB standards. The UK Government is due to consult on transition plan requirements for the largest UK-incorporated companies in H2 2023, once the TPT has finalized its framework. In Primary Market Bulletin 45, the FCA confirmed that it will consult on guidance for transition plan disclosures by listed companies in H1 2024, referencing the final outputs of the TPT.
2. Financial Institutions Updates
FSOC issues progress report on climate-related financial risk. On July 28, the Climate-related Financial Risk Committee (“CFRC”) of the U.S. Financial Stability Oversight Council (“FSOC”) issued a Staff Progress Report to provide updates on actions taken to implement recommendations contained in FSOC’s 2021 Report on Climate-Related Financial Risk. The CFRC divided progress into the major thematic areas of the 2021 report. The CFRC highlighted the following developments in its report:
- the Office of Financial Research’s new Joint Analysis Data Environment platform to improve regulators’ access to data and analytical software;
- the Federal Insurance Office’s request for comment on a proposed data collection from insurers to assess the potential disruptions of private homeowners’ insurance coverage in regions impacted by climate change;
- proposed principles for climate-related financial risk management for certain large financial institutions released by each of the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System (“Federal Reserve”);
- the CFRC’s climate scenario analysis working group’s exploration of the use of scenario analysis by regulators and regulated firms;
- the CFRC Risk Assessment Working Group’s development of a framework to identify and assess climate-related financial risk and a preliminary set of risk indicators for banking, insurance, and financial markets; and
- the Federal Reserve’s pilot climate scenario exercise for six large bank holding companies.
ISDA releases climate scenario analysis for trading book. On July 12, the International Swaps and Derivatives Association (“ISDA”) launched “A Conceptual Framework for Climate Scenario Analysis in the Trading Book” to expand the scope of climate-related scenario analysis from the banking book to the trading book. Adapted from a survey of ISDA’s members in 2022, the framework outlines 13 key considerations in developing an end-to-end approach to climate scenario analysis in the trading book. As part of this guidance, ISDA noted that, compared to traditional stress tests for the trading book, climate scenario analysis for the trading book would (i) be based on a climate risk event (physical risk or transition risk), (ii) need to have greater reliance on expert judgment, given climate data constraints, and (iii) focus on granular regional- and sector-level analysis of climate data.
3. Shareholder Engagement Developments
Environmental, social and political topics remained the focus of the 2023 U.S. proxy season. As we observed in our 11th annual Proxy Season Review, Rule 14a-8 proposals on environmental, social and political topics represented 65% of total submissions for shareholder meetings of the S&P Composite 1500 in H1 2023. Notably, the number of voted environmental proposals increased by 57% year over year, and 26% more individual companies—including several companies that did not receive any environmental, social or political proposals during the past five years—had at least one such proposal reach a vote. The polarization in the dialog on these topics, which is intensifying on the broader national stage, also is reflected in Rule 14a-8 proposals this year with submissions from so-called “anti-ESG” proponents increasing by 65% compared to H1 2022 and 256% compared to 2021. The increase in proposals has been accompanied by record low shareholder support and pass rates.
In particular, environmental proposals, which focused on climate-related issues in H1 2023, increased by 24% and focused on a broader range of detailed topics that, in many instances, echoed focus areas of the SEC and other governmental bodies (e.g., the U.S. and the EU’s support for the Global Methane Pledge, emissions reduction targets, transition plans, use of carbon offsets and scenario analysis). Support for these proposals dropped significantly (to 23% vs. 37% in 2022), reflecting in part the continued rejection of proxy advisors and institutional investors of shareholder demands that they considered excessively prescriptive.
This proxy season’s social and political proposals covered issues that have recently seized the public spotlight (such as labor rights and reproductive rights), and more companies (or companies in the same industry) received multiple proposals with opposing goals (e.g., proposals in favor and against the exclusion of certain industries from banking services, proposals in favor and against the consideration of race/gender in company hiring, training and retention efforts). Despite low overall support, we expect that proponents across the political spectrum will continue to submit shareholder proposals on social and political hot topics (such as companies’ racial equity and civil rights impact), especially in light of the Supreme Court’s June 2023 ruling against affirmative action in higher education admissions in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College and its potential broader implications for employers.
For more information, see our 11th annual 2023 Proxy Season Review and join us for our annual webinar on September 14th.
4. Energy Transition Updates
Global
GHG Protocol considers updates to Scope 2 guidance. On July 26, the Greenhouse Gas (“GHG”) Protocol released a summary of responses to a survey on its Scope 2 Guidance (which covers indirect emissions from purchased electricity, steam, heat and cooling), which was released in 2015. Based on the survey responses, the GHG Protocol plans to engage in a multi-stakeholder revision of its Scope 2 Guidance in order to account for developments in GHG reporting since 2015. Among other things, the GHG Protocol is considering an update of its requirement to provide dual reporting of Scope 2 emissions using two distinct methods (i.e., location-based and market-based), considering the significant feedback on the usefulness, appropriateness, implementation and overall results of the dual reporting requirements. The GHG Protocol has also invited stakeholder feedback via three additional surveys on its Corporate Standard, Scope 3 Guidance, and market-based accounting approaches.
S&P removes ESG credit indicators from credit reports. On August 4, S&P Global Ratings (“S&P”) discontinued the practice of publishing ESG credit indicators in its credit rating reports, effective immediately. Since 2021, S&P had published alphanumeric ESG credit indicators in its credit rating reports for companies in some sectors and asset classes, in addition to narrative paragraphs that describe the impact of ESG credit factors on creditworthiness. S&P explained that it had determined that the narrative paragraphs are most effective at providing detail and transparency on ESG credit factors material to its rating analysis, which will remain an integral part of its credit rating reports.
United States
CFTC holds second Voluntary Carbon Markets Convening. On July 19, the Commodity Futures Trading Commission (“CFTC”) held its second voluntary carbon markets convening (the CFTC’s first convening on voluntary carbon markets took place in June 2022). Information gathered in the convening may ultimately inform the CFTC’s recommendations for guidance, interpretations or policy statements related to voluntary carbon markets. Earlier in June, the CFTC also announced that it established an Environmental Fraud Task Force to address, among other topics, fraud with respect to the purported environmental benefits of purchased carbon credits.