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Key Developments
Standard-setting bodies issue guidance to support compliance with ESRS and interoperability between ESRS and ISSB standards.
The European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) have recently issued practical guidance to assist companies in complying with sustainability reporting requirements. On May 31, EFRAG issued its first three sets of implementation guidance documents. Two of the documents provide illustrative examples and details on how companies subject to the EU’s Corporate Sustainability Reporting Directive (“CSRD”) may conduct double materiality assessments and approach their reporting boundaries and value chain implications, while a third document lists all disclosure requirements in the sector-agnostic ESRS standards in excel format to support data gap analyses and data collection exercises. The implementation guidance documents were released one day after EFRAG issued an updated Q&A document reflecting a compilation of explanations to stakeholders’ technical questions on the European Sustainability Reporting Standards (“ESRS”). Earlier in the month, EFRAG and ISSB also published their interoperability guidance, which outlined the standard-setting bodies’ expectations for how companies that are subject to ESRS and ISSB standards should comply with the requirements under these standards, including the alignment and differences between the CSRD’s double materiality assessment and the ISSB standards’ single materiality assessment. Although these guidance documents do not have the force of law, companies subject (or expected to be subject) to these requirements should review the documents to understand EFRAG’s and ISSB’s interpretation of key elements of the standards, and to supplement their gap analyses and data collection processes.
EU adopts CSDDD.
On May 24, following approval by the European Parliament, the Council of the EU formally adopted the Corporate Sustainability Due Diligence Directive (the “CSDDD”), which introduces requirements for in-scope companies to identify, assess, prevent and mitigate adverse human rights and environmental impacts in their own operations, subsidiaries and value chains. The CSDDD also requires in-scope EU and non-EU companies to adopt transition plans to align their business model and strategy with the Paris Agreement’s goal of limiting global warming to 1.5°C. EU Member States are required to implement the CSDDD within two years. See our memo for additional information.
Litigation in the U.S. could impact legal and ESG regulatory landscape.
In the current term, the U.S. Supreme Court reviewed a number of cases that could have implications for the ESG legal and regulatory landscape in the United States. These decisions, as well as a number of other cases pending in the U.S. courts (e.g., legal challenges against the SEC’s and California’s climate-related disclosure requirements), could meaningfully impact future policymaking approaches.
In this Issue
1. Legislative and Regulatory Updates
2. Shareholder and Proxy Advisor Updates
3. Energy Transition Updates
1. Legislative and Regulatory Updates
Global
EFRAG and ISSB publish interoperability guidance for sustainability disclosure standards. On May 2, the European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB) published the ESRS-ISSB Standards Interoperability Guidance. In the guidance, EFRAG—which is responsible for developing the European Sustainability Reporting Standards (“ESRS”) setting forth the detailed disclosure requirements for compliance with the EU’s Corporate Sustainability Reporting Directive—and the ISSB—which is responsible for developing the IFRS Sustainability Disclosure Standards—outlined their expectations for how companies should comply with both sets of standards in ways that reduce complexity, fragmentation and duplication. The guidance is comprised of four sections: (1) interoperability of general reporting requirements, focusing on approaches to materiality, presentation, relief provisions and disclosures for sustainability topics other than climate; (2) common climate-related disclosure requirements, including a table listing the corresponding requirements between the two sets of standards; (3) information that an entity starting with ESRS needs to know when also applying the ISSB climate-related standards; and (4) information that an entity starting with the ISSB climate-related standards needs to know when also applying ESRS.
While the guidance does not override the requirements as set out in the standards or as adopted and implemented in the relevant jurisdiction, it provides insight into EFRAG’s and ISSB’s interpretation of key elements of the standards. For example, although ESRS requires a double materiality assessment (i.e., both financial and impact materiality) and the ISSB standards require a single materiality assessment (i.e., solely based on financial materiality), the guidance clarifies that materiality assessments under both standards are expected to provide an aligned outcome on financial materiality.
ISSB publishes digital sustainability taxonomy. On April 30, ISSB published the IFRS Sustainability Disclosure Taxonomy (the “Taxonomy”), a digital taxonomy that entities can use to classify and structure sustainability-related financial information required under the ISSB’s first two sets of sustainability disclosure standards, IFRS S1 (general requirements) and IFRS S2 (climate). The Taxonomy is intended to perform the same role that the IFRS Accounting Taxonomy does in relation to the IFRS Accounting Standards, and sets forth elements for tagging sustainability-related information. According to the ISSB, by tagging such information in general purpose financial reports, companies can make such information machine-readable, enable users of the reports to extract, compare and analyze such information more efficiently, and support the interoperability of the ISSB standards with other sustainability-related disclosure standards.
UNEP announces new insurance net-zero forum that will replace NZIA. On April 25, the United Nations Environment Programme (UNEP) announced the creation of the Forum for Insurance Transition to Net Zero (FIT), which is a structured dialogue and multi-stakeholder forum aimed at supporting the acceleration and scaling up of voluntary climate action by the insurance industry. The FIT, which will be chaired by the UNEP, will work with insurance market participants and engage with insurance regulators and supervisors, net-zero standard-setters and initiatives, the scientific and academic community, civil society and other key stakeholders to advance net-zero insurance thinking and practices globally. In the announcement, the UNEP notes that the FIT will build on experience gained with the Net-Zero Insurance Alliance (NZIA), which was discontinued in conjunction with the creation of the FIT on April 25.
United States
U.S. government announces new principles for high-integrity voluntary carbon markets. On May 28, the Biden-Harris administration released its Voluntary Carbon Markets Joint Policy Statement and Principles (the “Statement”) setting out the U.S. government’s approach to advancing high-integrity voluntary carbon markets (“VCMs”). The Statement was co-signed by the U.S. Secretary of the Treasury, the U.S. Secretary of Agriculture and the U.S. Secretary of Energy, as well as several senior White House advisors. The Statement encourages the U.S. private sector and other stakeholders in the carbon credit value chain to follow seven principles, which are designed to promote (1) integrity of credits (i.e., supply integrity), including protections regarding climate and environmental justice, (2) credible credit use (i.e., demand integrity), and (3) market-level integrity, including facilitating efficient market participation and lowering transaction costs. Although the principles are voluntary, companies that participate or are considering participating in VCMs should review the principles to better understand how the Administration intends to approach VCMs and its expectations for market participants. See our memo for additional information.
Federal Reserve releases results of its pilot exercise on bank climate scenario analysis. On May 9, the Board of Governors of the Federal Reserve System released a report summarizing the findings of its exploratory Pilot Climate Scenario Analysis Exercise. The Federal Reserve conducted the pilot exercise in 2023 with the six largest U.S. banks to learn about their climate risk management practices and challenges and to enhance the ability of large banks and supervisors to identify, monitor and manage climate-related financial risks. The report describes how participating banks are using climate scenario analysis to explore the resiliency of their business models to climate-related financial risks. The Federal Reserve observed that participants took a wide range of approaches in the exercise and that the exercise highlighted data gaps and modeling challenges that arise when estimating the financial impacts of highly complex and uncertain climate-related financial risks over various time horizons. Although the Federal Reserve’s observations and conclusions apply to only the participants of the pilot exercise, the design and findings of the exercise could inform supervisory expectations related to the use of climate scenario analysis as a risk management tool by banks. See our memo for additional information.
SEC adopts amendments to Regulation S-P. On May 16, the U.S. Securities and Exchange Commission (SEC) significantly expanded its consumer information protection framework by adopting rule amendments to Regulation S-P, which governs the protection of consumer financial information held by broker-dealers, investment companies, registered investment advisers and now transfer agents (“S-P entities”). Regulation S-P generally requires covered entities to create and maintain written policies and procedures regarding the protection of customer information (the “safeguards rule”) and properly dispose of customer information in a manner that protects against the unauthorized access or use of that information (the “disposal rule”). The amendments will require S-P entities to implement incident response programs that include a broad, presumptive notification requirement that applies to instances where sensitive customer information was or was reasonably likely to have been compromised, and to make such notice as soon as practicable but not later than 30 days after an entity becomes aware that an incident has occurred or is likely to have occurred. The amendments also expand the safeguards and disposal rules to cover all transfer agents, as well as a broader array of customer information, such as customer information received from another financial institution. In addition, under the amendments, Regulation S-P will require more extensive recordkeeping with respect to customer information and cybersecurity programs. The amendments will become effective on August 2, 2024. Larger S-P entities will have an 18-month compliance period after the date of publication whereas smaller entities will have a 24-month compliance period. See our memo for additional information.
The amendments are part of a broader effort by the SEC and other regulatory authorities to expand the scope of their rules and regulations with respect to entities’ response to cybersecurity incidents and the collection and protection of customer information. See, for example, our memo on the SEC’s cybersecurity disclosure rules for public companies and a May 21 statement from the SEC’s Director of Corporate Finance on how those rules should apply to reporting on Form 8 K.
Nasdaq proposes to modify phase-in periods for corporate governance requirements in connection with IPOs and other specified circumstances. On May 22, Nasdaq proposed to change Listing Rules 5605, 5615 and 5810 to clarify and modify phase-in schedules for certain corporate governance requirements and clarify applicability of certain cure periods. Among other proposed changes, Nasdaq proposes to allow a phase-in of compliance with its audit committee independence and professional competence requirements, such that one member must satisfy the requirements on the listing date, a majority must satisfy the requirements within 90 days of the effective date of the registration statement, and all members must satisfy the requirements within one year of the effective date. The proposal would also permit companies making their initial public offerings on Nasdaq to take a similarly phased-in approach to reaching a three-member audit committee. For the nomination and compensation committee, Nasdaq proposes to amend its current requirements so that IPO companies must have at least one member by the listing date and two members within one year. In addition, Nasdaq proposes to permit similar phase-in periods for companies listing as a result of carveouts or spin-offs.
Supreme Court maintains absence of bright-line standards in National Bank Act preemption. On May 30, the Supreme Court issued a unanimous opinion, authored by Justice Brett Kavanaugh, in Cantero v. Bank of America, the Court’s first decision on National Bank Act (NBA) preemption of state law since the codification of the Barnett Bank decision in Dodd-Frank in 2010. The Supreme Court directed lower courts to reach preemption decisions based on a “practical assessment” of whether the state law “prevents or significantly interferes with” a national bank’s power. The Supreme Court instructed lower courts to make this determination by comparing the state laws at issue to those the Court had analyzed in previous preemption decisions. The Supreme Court rejected the parties’ proposals for more “bright line” tests, or even additional guidance, for ascertaining the meaning of “prevents or significantly interferes” because Congress declined to establish such a bright-line test in Dodd Frank. The Supreme Court noted, but did not address, the role of the Office of the Comptroller of the Currency in making determinations about whether a state law regulating a national bank is preempted. See our memo for additional information.
Supreme Court holds that former NYDFS Superintendent potentially violated First Amendment by allegedly coercing regulated financial institutions into severing ties with the NRA. On May 30, the Supreme Court issued a unanimous opinion, authored by Justice Sonia Sotomayor, in National Rifle Association v. Vullo, reversing the Second Circuit’s decision ordering the dismissal of the National Rifle Association’s (NRA) lawsuit against Maria Vullo, the former Superintendent of New York’s Department of Financial Services (NYDFS). The Supreme Court held that the NRA’s complaint plausibly alleged that Vullo had violated the NRA’s First Amendment rights by urging insurance companies not to do business with the NRA in order to “punish or suppress the NRA’s pro-gun advocacy.” The Supreme Court found significant that, according to the NRA’s complaint, Vullo had told regulated financial institutions that NYDFS would not investigate them if they ceased providing services to the NRA and had issued official guidance to regulated entities explaining that severing ties with the NRA would be “fulfilling their corporate social responsibility.” The Supreme Court concluded that, given Vullo’s position of authority and the context of her statements to the regulated entities, the conduct alleged in the complaint constituted an unconstitutional attempt to punish the NRA’s gun-promotion activity. The Supreme Court further stated that “[u]ltimately, the critical takeaway is that the First Amendment prohibits government officials from wielding their power selectively to punish or suppress speech, directly or (as alleged here) through private intermediaries.” For more information on this and other Supreme Court decisions for the most recent Supreme Court term, look out for our annual Supreme Court Business Review, which will be published in the coming months.
Fifth Circuit dismisses challenge to SEC’s ESG proxy voting rule. On May 10, the U.S. Court of Appeals for the Fifth Circuit dismissed a lawsuit brought by Texas, Louisiana, Utah and West Virginia challenging the SEC’s November 2022 amendments to Form N-PX. The SEC adopted these Form N-PX amendments to enhance the information mutual funds, exchange-traded funds and certain other registered funds report about their proxy votes (including disclosing votes under categories such as environment or climate, human rights or human capital/workforce, corporate governance and diversity, equity and inclusion), as well as to require disclosure on Form N-PX of how institutional investment managers voted on “say-on-pay” matters. The amendments are scheduled to go into effect on July 1, 2024, covering votes occurring on or after July 1, 2023.
In early 2023, the four states challenged the Form N-PX amendments under the Administrative Procedure Act. The Fifth Circuit panel found that the states did not establish as substantial risk that investors will suffer economic injury as a result of the Form N PX amendments and that there was insufficient record evidence that the amendments infringe the states’ quasi-sovereign interest in the general economic well-being of its residents. As a result, the court found that the states had not established standing to bring the challenge and dismissed the lawsuit without prejudice, leaving the door open for the states to re-file the case if more substantial evidence of harm can be presented.
Eighth Circuit approves litigation schedule for SEC climate rule lawsuit; pro-climate groups withdraw. On May 20, the U.S. Court of Appeals for the Eighth Circuit approved the schedule for the consolidated challenges to the SEC’s climate-related disclosure rules. According to the schedule, the petitioners challenging the SEC rules will have until June 14 to file their opening brief, the SEC has until August 5 to file its response brief, and petitioners’ reply brief is due September 3, 2024. As further discussed in our memo, the SEC has stayed the effectiveness of the rules pending completion of judicial review, but it has not provided clarity on whether the initial reporting dates contemplated by the rules will be modified or extended.
In addition, on May 31, the “pro-climate” petitioners challenging the rules, Sierra Club and the Natural Resources Defense Council (NRDC), moved to voluntarily dismiss their petitions for review. In their motions, both organizations noted that, although they sought judicial review of certain discrete issues in the rules, they believe the rules are consistent with the SEC’s regulatory authority and have decided to focus resources on climate-related issues outside of this litigation. On June 4, 38 House and Senate Democrats sent a letter to SEC Chair Gary Gensler expressing concern that the rules were “significantly weakened” prior to its adoption and urging the SEC to “focus its efforts on vigorous implementation and enforcement” should the rules survive legal challenges. In addition, should the rules be upheld, the letter urges the SEC to: (1) “promptly” issue guidance detailing “how to assess ‘materiality’ and how companies must conduct and disclose materiality assessments”; (2) recognize alternative reporting regimes to satisfy compliance with the rules; (3) commit “sufficient staff and resources to the implementation and enforcement” of the rules; and (4) finalize a separate “strong” rule governing “ESG funds” with “mandatory Scope 1, 2, and 3 (including financed) emissions requirements for investment funds that market themselves based on climate-related criteria.”
California Governor moves forward with budget for climate-related disclosure laws despite ongoing litigation. On May 10, California Governor Gavin Newsom released a revision of his prior 2024-2025 California state budget proposal for the 2024-2025 fiscal year (May Revision), which contains funding for Senate Bill 253 (SB 253) and Senate Bill 261 (SB 261), as the Governor noted in a press conference. California enacted SB 253 and SB 261, two climate-related disclosure laws, last Fall. The laws are being challenged on constitutional grounds—including claims based on the First Amendment, the Supremacy Clause and extraterritoriality—in a California federal court by groups including the U.S. Chamber of Commerce. On May 1, the plaintiffs filed their opposition to the California Air Resources Board’s motion to dismiss the Supremacy Clause and extraterritoriality claims. On May 24, the plaintiffs filed a motion for summary judgment on the First Amendment claims. On May 17, the court approved the litigation schedule in the case, which sets forth a September 2024 date for a hearing on both the motion to dismiss and the motion for a summary judgment.
United Kingdom
UK government publishes update on UK implementation of ISSB standards. On May 16, the UK government set out its next steps towards establishing UK Sustainability Disclosure Requirements (“SDR”) for UK-listed and UK-incorporated companies based on the ISSB standards. The UK Secretary of State for Business and Trade, aided by an independent Technical Advisory Committee, will decide whether to endorse the ISSB standards for use in the UK to create UK Sustainability Reporting Standards (“UK SRS”). After endorsement and a consultation process, the Financial Conduct Authority (FCA) will determine whether and how to implement new sustainability reporting requirements for UK-listed companies (wherever incorporated) based upon UK SRS. The UK government will consult on how UK SRS will apply to UK-incorporated companies outside the FCA’s regulatory perimeter. The UK government expects to publish UK SRS for IFRS S1 and IFRS S2 in Q1 2025, and for decisions on the reporting requirements for UK-listed and UK-incorporated companies to be taken in Q2 2025. The requirements are not expected earlier than for accounting periods beginning on or after January 1, 2026.
European Union
EU adopts CSDDD. On May 24, after intense negotiations among EU Member States and following approval by the European Parliament, the Council of the EU formally adopted the Corporate Sustainability Due Diligence Directive (the “CSDDD”). The CSDDD introduces requirements for in-scope companies to identify, assess, prevent and mitigate adverse human rights and environmental impacts in their own operations, subsidiaries and value chains. The CSDDD also requires in-scope EU and non-EU companies to adopt transition plans to align their business model and strategy with the Paris Agreement’s goal of limiting global warming to 1.5°C. EU Member States are required to empower supervisory authorities to investigate and impose penalties on companies that fail to comply.
The CSDDD will enter into force on the 20th day after its publication in the Official Journal of the EU. EU Member States will have two years to implement the regulations and administrative procedures to comply with the CSDDD. The directive will begin to apply between 2027 and 2029 depending on company turnover and, for EU companies, employee thresholds. See our memo for additional information.
EFRAG finalizes first three ESRS implementation guidance documents. On May 31, EFRAG announced the finalization of its first three ESRS Implementation Guidance documents reflecting the outcome of public feedback. These publications do not have legal authority, but are designed to support the implementation of ESRS. The documents released include:
- Materiality Assessment Implementation Guidance, which provides an illustrative materiality assessment process for in-scope companies, as well as a number of examples to illustrate the concept of impact and financial materiality (including how these two concepts interplay).
- Value Chain Implementation Guidance, which outlines the reporting requirements for the value chain from materiality assessment to policies and actions to metrics and targets. It illustrates the reporting boundary of the group for sustainability reporting (including the concept of operational control in environmental standards), and includes a “value chain map” summarizing value chain implications under disclosure requirements across all ESRS.
- List of ESRS Datapoints, which translates detailed ESRS requirements in Excel format, including additional information such as the types of requirement (for example, quantitative or qualitative) and whether requirements are subject to transitional provisions. This list is designed to support data gap analyses and data collection exercises, and is accompanied by an explanatory note.
One day before the announcement of the ESRS Implementation Guidance, EFRAG also released an updated Q&A document, reflecting a compilation of 68 explanations in response to stakeholders’ technical questions on the ESRS. The Q&A document was developed on the basis of questions submitted to EFRAG’s ESRS Q&A Platform initially launched in the fourth quarter of 2023, which was designed to collect and answer technical questions related to implementation of the ESRS.
ESMA issues final funds’ names guidelines. On May 14, the European Securities and Markets Authority (ESMA) published its final report setting forth guidelines on funds’ names using ESG or sustainability-related terms. The guidelines provide that a minimum of 80% of investments by funds with sustainability-, transition-, social-, governance-, environmental-, or impact-related terms must meet environmental or social characteristics or sustainable investment objectives in accordance with their investment strategy. In addition, depending on their strategy, the funds will be required to comply with the exclusion criteria in either the EU Paris-aligned Benchmarks or the EU Climate Transition Benchmarks. In addition, sustainability-related funds will be required to commit to investing meaningfully in sustainable investments referred to in the Sustainable Finance Disclosure Regulation. The guidelines will apply three months after their publication in all official EU languages on ESMA’s website, with funds pre-dating such date having six months to come into compliance with the guidance. These guidelines are similar to other rules recently adopted by regulators such as the SEC and FCA.
2. Shareholder and Proxy Advisor Updates
United States
Exxon directors reelected despite shareholder pushback related to shareholder proposal lawsuit. On May 20, CalPERS published an open letter noting that it would vote against Exxon’s entire slate of directors at the company’s May 29 annual meeting of shareholders. CalPERS’s letter focused on Exxon’s lawsuit against two shareholders who submitted a climate-related shareholder proposal under Rule 14a 8, stating that the lawsuit, if successful, “could diminish the role—and the rights—of every investor in improving a company’s bottom line.” (See our February ESG Newsletter for additional information on the lawsuit.) For similar reasons, on May 21, a group of U.S. treasurers, comptrollers and pension plan trustees, including the New York City Comptroller, also filed a notice of exempt solicitation urging investors to vote against Exxon’s lead independent director and the company’s CEO.
On May 22, a Texas federal court ruled that Exxon could continue its lawsuit against one of the two shareholder proponents (the U.S.-based Arjuna), but dismissed Exxon’s claims against the shareholder proponent based in The Netherlands. On May 27, Arjuna filed a letter with the court, promising to refrain from submitting any future proposals to Exxon shareholders related to greenhouse gas emissions or climate change. Exxon filed reply briefs on May 31 and June 7, contending that the case was not moot by reason of Arjuna’s letter and should proceed. The court has scheduled a hearing on June 17.
Meanwhile, at Exxon’s May 29 annual meeting, shareholders voted to elect the entire slate of directors, including the CEO and lead independent director.
3. Energy Transition Updates
United States
Final regulations issued on U.S. Clean Vehicle Credit – Critical Minerals and Battery Component Requirements. On May 6, the U.S. Department of the Treasury and U.S. Internal Revenue Service published final regulations that establish the qualifications for the U.S. clean vehicle tax credit available under the U.S. Internal Revenue Code that was amended and extended by the U.S. Inflation Reduction Act of 2022. The final regulations adopt most of the proposed regulations issued in April 2023 with clarifying changes and additional modifications, and are of significance to participants across the U.S. electric vehicle battery supply chain. The final regulations will take effect on July 5, 2024. See our memo for additional information.
EPA releases final regulations to reduce pollution from fossil fuel power plants. On April 25, the U.S. Environmental Protection Agency (EPA) released final regulations aimed at reducing pollution from fossil fuel-fired power plants which may have implications for existing and future carbon capture/sequestration and storage projects in the U.S. The final EPA regulations are similar to the proposed regulations that were issued in May 2023, except for the finalization of greenhouse gas emission guidelines related to existing fossil fuel-fired stationary combustion turbines, which has been deferred to a later date. The final EPA regulations will take effect on July 8, 2024. On May 9, attorneys general from 27 states, along with industry trade groups, sued the EPA challenging these regulations.
Australia
Australian government releases Future Gas Strategy and Future Made in Australia Plan. The Australian government recently announced the Future Gas Strategy (the “Strategy”) and the Future Made in Australia plan (the “Plan”), both of which are intended to attract investment in sectors that the Australian government has identified as vital to the transition to net zero, promote Australia’s energy security and ensure Australia’s ability to remain competitive in a changing global economy. The Strategy, announced on May 9, explains the principles the Australian government plans to use to guide policymaking around gas production and consumption in Australia to support the transition to net zero by 2050. The Plan, which was announced as part of the Australian government’s 2024-2025 budget, is a proposal for a framework the Australian government plans to establish under future legislation that would earmark A$22.7 billion to support critical minerals producers and clean energy industries over a 10-year period. The Plan is intended to promote Australia’s energy security, as well as Australia’s ambition to become a “renewable energy superpower.” The Australian government’s ability to fully implement both the Plan and the Strategy may be impacted by upcoming federal elections required to be held by May 21, 2025. See our memo for more information.