ESG Newsletter - Autumn 2022

ESG timeline

Our ESG timeline is an important resource for corporates and alternative asset managers seeking to manage ESG compliance. The timeline sets our recent and expected UK and EU legal and regulatory developments in the ESG sphere. As we all know, ESG regulation moves apace. The timeline is updated periodically and the next update is due around the end of the year.

The timeline is supported by regular updates and lengthier guidance and analyses of ESG-related developments which can be found on the ESG pages of our website.

Sustainability insights

Our Sustainability Insights series of briefings provides the latest thinking from our team of experts on sustainable finance topics for the alternative asset management industry. Recent topics include:

• Sustainability labels in the UK
  
  
• Tax and ESG in private markets
  
  
• Focusing on stakeholders
  
  
• The regulatory focus on "greenwashing"
  
  
• Sustainability disclosure standards

Subscribe to the entire series.

ESG podcasts and videos

Alongside our collection of news articles and legal briefings on ESG topics, you may also be interested in our Spotlight on ESG video series and our Talking.Sustainability podcast series.

COP27

COP27, hosted by Egypt in Sharm El-Sheikh from 7-18 November 2022, came at a difficult time for the global economy, faced with acute energy and cost of living crises and severe inflationary pressures. At the same time, the UN's Emissions Gap Report 2022, published shortly before the summit opened, warned that the world is currently on course for a 2.6° increase in temperatures by 2100, far exceeding the 1.5° goal of the Paris Agreement which underpinned the commitments sought at COP26 in Glasgow last year. As the summit opened, UN Secretary General, Antonio Guterres, delivered an impassioned speech warning that "we are in the fight of our lives. And we are losing". 

Against this challenging backdrop, the summit was seen as a critical opportunity to turn targets into concrete action. As we reported in our briefing which looked at the agenda and prospects for success at COP27, the summit was developed around the following four key themes: Mitigation, Adaptation, Finance and Collaboration:

Mitigation

To keep the 1.5°C target within reach, immediate action is needed. COP27 saw a renewed call to review national commitments and create a work programme for ambition on mitigation – including using renewable energy sources, changing behaviour and making older equipment more efficient.

Adaptation

The Global Goal on Adaptation was one of the significant outcomes of COP26, focussing on measures to assist vulnerable communities adapt to climate change. Progress was expected at COP27 on an enhanced global agenda for action on adaptation.

Finance

Developing countries were hoping for progress on the issue of climate finance (including the previously agreed annual US$100 billion commitment).

Collaboration

Better collaboration will help to deliver the goals of COP27 and implement the outcomes from COP26. At a time of significant friction between major international stakeholders, finding common ground is seen as increasingly important.

As outlined in this briefing, of these four themes, finance was the big issue this year, and, as noted above, progress towards delivery of the annual $100bn to developing countries from developed ones a key measure of success.

The agreement on reparations for "loss and damage" sustained by developing nations was a sign of progress, particularly given the global squeeze on government budgets, but overshadowed attempts to obtain actionable commitments to implement measures aimed at achieving the targets agreed at COP26.

Please visit our COP27 site for reflections on the outcomes from the summit and progress made on these issues.

Balancing economic growth and environmental protection: the Government's energy dilemma

Whilst Rishi Sunak has reversed many of his predecessor's policies, he has also said that Truss was right to focus on growth.  Our pre-Autumn Statement briefing explored the implications for UK environmental legislation and energy and infrastructure projects based on early indications of the Sunak administration's expected approach.

The Autumn Statement promised that clean technology and energy efficiency would be at the heart of Government policy but the focus on regaining stability meant that those who were looking for a clear and detailed policy agenda on achieving the Government's Net Zero Strategy as well as growth in the UK economy were left disappointed. For more on the Autumn Statement, please visit our mini website here.

The Government will also have to pay heed to the High Court's ruling earlier this year that the Government's Net Zero Strategy breaches its obligations under the Climate Change Act 2008.  In a case brought by Friends of the Earth and ClientEarth, among others, the Government was found to have failed to produce detailed climate policies to show how the UK’s legally binding carbon budgets will be met, in line with its obligations under the Climate Change Act. For more on this ruling, see our briefing.

Climate transition planning

The UK's Transition Plan Taskforce ("TPT") has issued draft guidance on preparing climate transition plans. Comments on the draft implementation disclosure framework and related implementation guidance will be accepted until 28 February 2023. This guidance will be welcomed by organisations wondering how to begin drafting a transition plan, as well as investors currently experiencing a broad range of approaches to transition planning in the market, with little comparability.

Our recent briefing explains the background and role of the TPT guidance in more detail.

Energy infrastructure

The global energy crisis has prompted governments across the globe to create incentives for private investment in energy infrastructure. For its part, despite its current difficulties, the UK Government has already introduced some initiatives for investment in clean energy projects designed to help the UK reach its Net Zero target by 2050 and we continue to see deployment of equity and debt into energy transition such as EV charging, battery storage, district energy and hydrogen. 

Traditionally in a high-inflation environment, energy, infrastructure and other real assets can provide a safe harbour for investors. It is no coincidence that a number of core infrastructure mega-funds have been launched recently. H1 2022 set the record for annual fundraising for infrastructure funds.  Considering the cash availability, asset stability and political agenda, we remain optimistic that past the current global turbulence, the sector will remain an attractive value proposition to investors.

For more on clean energy infrastructure investment, see our recent Infrastructure Newsletter.

UK sustainable finance regulatory update

UK SFDR and investment labels

On 25 October 2022, the FCA published CP22/20: Sustainability Disclosure Requirements (SDR) and investment labels, which, in effect, represents the UK's answer to the EU Sustainable Finance Disclosure Regulation (EU SFDR) but with the addition of formal product labelling. You can read our recent briefing on the consultation, and our commentary on the proposals, particularly as regards the introduction of labels, in our Sustainability Insights publication.

UK Green Taxonomy

On 1 October 2022, the Green Technical Advisory Group (GTAG) published its independent advice to the Government on the development of the UK Green Taxonomy. The paper summarises what GTAG calls the first "tranche" of its advice: this includes advice and recommendations on the 'onshoring' of the highly-detailed EU technical screening criteria (broadly, GTAG has moved to a position of close alignment with the EU TSC, except in the case of incompatibility, under an "adopt some and revise some" approach), the concept of 'do no significant harm' (DNSH) (with a view to streamlining DNSH having learned the lessons from EU implementation), the need for international interoperability between various taxonomies and related policies) and Taxonomy use cases. The Government's UK Green Taxonomy consultation is still awaited. GTAG has made it clear that there are a number of important issues that the Government should consult on before finalising the relevant legislation. GTAG will be publishing further advice and recommendations on these issues later this year, and on other matters, in due course.

TCFD requirements for UK asset managers

By way of reminder, the FCA's TCFD-aligned disclosure rules under the Environmental, Social and Governance sourcebook (ESG) will come into force for UK asset managers with assets under management of less than £50bn on 1 January 2023 (except for those firms with assets under management of less than £5bn calculated as a 3-year rolling average on an annual assessment which will be exempt from the disclosure requirements for as long as they remain below that threshold). Such in-scope firms will therefore have a deadline of 30 June 2024 for their first entity-level disclosure and (if relevant) their first public, product level disclosure. However, public product disclosure is not required for certain types of product – e.g. discretionary portfolio management and AIFMs managing non-listed unauthorised AIFs. Here, disclosures should be made available to clients on request ("on demand TCFD product reports") to satisfy their own climate-related financial reporting obligations. The first demand cannot be any earlier than 1 July 2024, in respect of any reporting period starting after 1 January 2023. Note that the above SDR proposals are intended to overlay these existing requirements in the ESG sourcebook.

EU sustainable finance regulatory update

Greenwashing and fund names

On 18 November 2022, the European Securities and Markets Authority (ESMA) published a consultation on the text of proposed guidelines relating to the use of ESG - or sustainability-related terms in funds' names – see our briefing for further details.

Taxonomy-aligned screening criteria for nuclear and fossil gas

The Taxonomy Complementary Climate Delegated Act – which introduces Taxonomy-aligned screening criteria for certain nuclear and gas activities and specific disclosure requirements for businesses related to their activities in those sectors – will apply from 1 January 2023. On 30 September 2022, the European Supervisory Authorities published their Final Report on draft regulatory technical standards, which amend the existing RTS in Delegated Regulation (EU) 2022/1288)(the EU SFDR RTS) on information to be provided in pre-contractual documents, on websites, and in periodic reports. The amendments relate specifically to disclosures about the exposure of financial products to investments in fossil gas and nuclear energy activities. Whether these amendments are adopted by the Commission in time to be applicable as from the start date of the Taxonomy Complementary Climate Delegated Act remains to be seen.

Q&As on the EU SFDR Delegated Regulation

On 17 November 2022, the European Supervisory Authorities published a set of Q&As on the EU SFDR Delegated Regulation (i.e. the EU SFDR RTS). This includes Q&As on the current value of all investments in PAI and Taxonomy-aligned disclosures, PAI disclosures, financial product disclosures, multi-option products and Taxonomy-aligned investment disclosures. There is also a section on financial advisers and execution-only FMPs. The ESAs' Q&As on EU SFDR follow those from the European Commission in relation to the interpretation of EU SFDR and the EU Taxonomy Regulation earlier in the year.

Technical screening criteria for the four remaining environmental objectives under Article 9

At the time of writing, we are still awaiting the arrival of the technical screening criteria for the four remaining environmental objectives under Article 9 of the EU Taxonomy Regulation – i.e. the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems. Earlier in the year (March 2022), the Platform on Sustainable Finance had published a report with its recommendations on such technical screening criteria, together with an Annex setting out the proposed technical screening criteria themselves. On 28 November 2022, the Platform on Sustainable Finance published a report with supplementary advice on methodology and technical screening criteria for the climate and environmental objectives of the EU Taxonomy. This supplements the Platform's March report.

Minimum safeguards in sustainable finance regulation

Earlier this year (July 2022), the EU's Platform on Sustainable Finance  – an expert group established to advise the European Commission – published a helpful draft report on so-called "minimum safeguards" under sustainable finance legislation. The concept of "minimum safeguards" appears in various recent EU ESG rules and is concerned with the negative impacts of economic activities.  Most notably, the EU Taxonomy Regulation makes clear that an activity will not be "taxonomy-aligned" unless it is "carried out in compliance with minimum safeguards", which are defined as "procedures implemented by an undertaking … to ensure … alignment with the OECD Guidelines for Multinational Enterprises (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGP)".

For more on this, please refer to our briefing.

ESG and competition law: sustainability collaborations and information exchange in financial services

Industry collaborations have been high on the competition law agenda in recent years, with businesses seeking to navigate an ever-growing number of 'horizontal' competitor collaborations, industry initiatives, and bilateral as well as multilateral information exchanges. Indeed, many forms of collaboration covered by the European Commission's Horizontal Guidelines have been placed under strain in recent years, due in part to fast-moving developments in the Tech and ESG spheres. Within the financial services sphere specifically, the interaction between industry cooperation and competition law has been thrown into sharp and public relief in recent months by the decision – on competition law grounds – of the Glasgow Financial Alliance for Net Zero (GFANZ) to drop adherence to the UN's "Race to Zero" initiative as a requirement of its membership.

Change is, however, being seen at both the EU and UK levels. The European Commission is currently revising its Block Exemption Regulations and has published new proposed Horizontal Guidelines, taking into account recent case law and developments relating to ESG and the growth of the digital economy. The new rules will likely come into effect on 1 July 2023.  The UK Competition and Markets Authority will also need to produce its own horizontal guidelines and Block Exemption Orders.

Our briefing discusses two key themes within the EU Guidelines, each of which will have an important bearing on collaborations within the financial services industry, particularly in relation to: sustainability and ESG cooperation; and the information which needs to be exchanged between parties to make horizontal co-operation effective.

ESG and pension schemes

Mandatory climate-related disclosures

Many workplace pension schemes are now subject to mandatory TCFD climate-related governance and disclosure requirements.  With the first wave of schemes having come into scope on 1 October 2021, we are expecting their TCFD reports to start appearing online imminently.  A second wave of schemes came into scope on 1 October 2022, with reporting to start during 2023.  The Pensions Regulator has indicated it is likely to take a flexible approach to enforcement of the regime for schemes in their first reporting year.

Following COP26, the Government has added to these requirements.  Trustees subject to the regulations are now required to calculate and disclose an additional 'portfolio alignment' metric, setting out the extent to which their investments are aligned with the Paris Agreement goal of limiting the global average temperature increase to 1.5 degrees Celsius above pre-industrial levels.

This requirement applies in addition to the existing requirements for in-scope schemes to calculate and disclosure a minimum of one absolute emissions metric, one emissions intensity metric and one additional climate change metric.

For more on the climate-related governance and disclosure requirements for pension schemes, you can watch this episode of our Spotlight on ESG video series.

Our chapter in the International Comparative Legal Guide to ESG law also highlights the less frequently discussed governance perspective that underpins most ESG legal requirements for pension schemes.

The current Government's plans for further sustainability-related disclosure requirements for pension schemes is not yet clear.

Stewardship

The Government has finalised some ambitious best practice stewardship guidance for pension schemes including non-statutory guidance in relation to their statements of investment principles (SIPs) and statutory guidance in relation to implementation statements (ISs) relating to those SIPs.  The statutory guidance applies to ISs in respect of scheme years ending after 1 October 2022.  The non-statutory guidance on SIPs applies immediately but is not mandatory.

The guidance is intended to help occupational pension schemes develop their investment policies and stewardship approaches including, in particular, a focus on voting and engagement, interaction with investment managers, taking account of member views and producing member-friendly summaries of the SIP and IS. 

Social risks

The Government has published its response to the March 2021 call for evidence on consideration of social risks and opportunities by pension schemes.  A new task force will aim to help pension schemes address the risks and take advantage of opportunities of the “social” element in ESG investing, including the identification of reliable data and metrics.

Employer covenant

There is a growing focus on the implications of climate change and other ESG factors for the employer covenant in defined benefit schemes.  As well as being covered by the mandatory TCFD climate-related regulations referred to above, both the Employer Covenant Practitioners' Association and the Society of Pension Professionals have published commentary on this area.

UN-PRI integrating sustainability goals across the UK investment industry

A Travers Smith team comprising Pensions experts, Andy Lewis and Harriet Sayer, Head of our Derivatives and Structured Products team, Jonathan Gilmour, and Simon Witney, Senior Consultant in our Financial Services and Markets team, have contributed to the latest paper from Principles for Responsible Investment (PRI): A legal framework for impact (UK): integrating sustainability investment goals across the investment industry.

Produced by the UN-supported PRI in partnership with the United Nations Environment Programme Finance Initiative and the Generation Foundation, the paper examines relevant aspects of the UK legal and regulatory framework and identifies areas where guidance and policies are insufficiently clear, potentially limiting institutional investors’ willingness or ability to pursue sustainability impact goals. It then recommends policy measures that would empower investors both to consider sustainability factors and to pursue sustainability impact goals, in particular, where these are relevant to financial returns.

Our team worked collaboratively with the PRI and other contributors, providing ongoing legal input into the paper on a variety of topics including the common law, statutory and regulatory frameworks for workplace pension funds and other institutional asset owners and managers in this important area.

TCFD disclosures: update on corporate compliance

We have recently contributed to a LexisNexis market trends report which synthesises findings from the 2022 reports of premium listed companies and draws conclusions on how well companies have reported against TCFD standards in the current cycle.  Earlier this year, in July 2022, the Financial Reporting Council ("FRC") released an in-depth analysis of a sample of 25 premium-listed companies' disclosures in the first year of TCFD reporting.

Together, these documents provide useful guidance for organisations who are either still to make their first disclosures or looking to improve the quality of disclosures for the next financial year.  The FRC identified five key areas in which disclosures could be improved, namely:

• granularity and specificity
• balance
• interlinkage with other narrative discussions
• materiality, and
• connectivity with other financial statements disclosures.

Please see our briefing for further details.

For a more general overview of TCFD compliance, in October 2022, the Taskforce on Climate-related Financial Disclosures (TCFD) published its 2022 Status Report, which sets out findings in relation to the reporting of climate-related financial risk information in the five years since the TCFD published its Recommendations.  Whilst the report identifies a steady increase the number of companies making TCFD disclosures, it also states that not enough companies are disclosing "decision-useful climate-related" financial information and that faster progress is needed to improve the transparency of companies' disclosures relating to the impact of climate change. In particular, the report notes that in 2021 only 43% of companies made disclosures aligned with at least five out of the recommended 11 TCFD disclosures. The report provides useful examples covering all 11 recommended TCFD disclosures to help companies formulate their own disclosures.

TCFD: board accountability

The shareholder advisory body Institutional Shareholder Services ("ISS") recently published its annual Benchmark Policy Survey about investor priorities for the upcoming annual meetings ("AGMs") season. Half of shareholders polled said ISS should consider recommending votes against directors at oil and gas and other heavily emitting companies that do not have realistic scope 1 and 2 emissions targets, whilst 79 per cent of shareholders were in favour of ousting board directors if businesses that are "significant greenhouse gas emitters" fail to report in line with the TCFD recommended disclosures.

There are obvious reputational risks when a company's board does not have the support of investors. This, combined with increasing shareholder activism in the ESG space, is likely to put even more pressure on company directors and make them increasingly accountable for climate-related matters going forward.

The future of climate reporting under CSRD

Back in the summer of 2022, the EU Council and EU Parliament reached a political agreement on a revised text of the directive on corporate sustainability reporting (CSRD) that would also bring into scope entitles with a branch or subsidiary with significant turnover in the EU. Though reporting obligations are not imminent, entities with EU operations should already take note, as the combination of extra-territorial scope and the extent of the draft reporting obligations have the potential to pose a considerable burden for such entities.

You can read more about CSRD, which is expected to start coming into force for financial years beginning on or after 1 January 2024 for the largest entities (public interest entities already subject to NFRD/non-financial reporting), in our briefing.

Launch of TNFD in 2023

Just as TCFD has become an accepted part of the UK financial reporting framework, TNFD will start making its way onto board agendas. The Task Force on Nature-related Financial Disclosures (TNFD) aims to provide a framework for organisations to report and act on evolving nature-related business risks and opportunities, and intends to launch its framework (currently in beta form) for wide adoption from 2023 onwards.

Like TCFD, it will adopt a four-pillar approach consisting of:  governance; strategy; risk management; and metrics and targets. It is anticipated that companies will be able to use the TNFD framework to disclose how environmental and natural capital-related issues impact their financial reports, together with their climate-related disclosures, to provide a holistic view of how climate change and natural capital can affect the companies' performance and the actions they could take to address and exploit the risks and opportunities.

Trends in ESG-related group litigation

In recent years, the English courts have demonstrated a willingness to allow novel and ambitious claims against UK-domiciled parent companies for events involving their foreign subsidiaries to overcome early procedural hurdles in England in certain circumstances.  UK-based companies with overseas operations should therefore continue to keep under close review group-wide policies and procedures, and consider their potential liability arising through the operations of their overseas subsidiaries.

As recently as July of this year, in Municipio De Mariana & Ors v BHP Group (UK) Ltd & Anor [2022] EWCA Civ 951, the Court of Appeal granted permission for around 200,000 Brazilian claimants to pursue in the English courts their group claim for damages arising from the collapse of the Fundão Dam in Brazil, overcoming various procedural and jurisdictional challenges raised by the defendants.   In the new climate of corporate governance and accountability, the Municipio De Mariana decision is important in signalling that the English courts are prepared to hear complex multi-jurisdictional group claims even where there are parallel proceedings on foot abroad and other potential routes of redress.  

We expect high-profile claims such as Municipio de Mariana to embolden UK claimant law firms to bring more ambitious transnational litigation claims, likely with the support of litigation funders.  However, it is important to note that the decision related to early procedural applications only and questions of substantive liability are yet to be considered fully (for our more detailed article on the case, click here). 

While it is clear that these recent cases have provided foreign-domiciled claimants with more flexibility when seeking to bring transnational tort claims in England, they do not mean that succeeding on such claims will be straightforward. In this article, we look at the potential hurdles for claimants in bringing these transnational parent company liability claims and ask what's next?

Dyson and global value chain liability

As noted above, there is a growing trend amongst activists and claimant law firms to pursue novel causes of action against companies for acts or omissions that, while not directly attributable to them, are said to result in alleged human rights breaches in their value chains.

In our related article, we explore the background to these types of claims, before summarising the claim against Dyson. We also highlight other recent regulatory developments in this area and suggest ways in which businesses might manage both value chain liability risk, and ESG risks more generally.

EU seeks to ban products made using forced labour

The EU recently revealed its proposal for a new Regulation to combat the use of forced labour in the production of goods. A key aim of this new Regulation is that it will be used alongside other initiatives within both the EU and externally, to further eliminate modern day slavery from supply chains.

The new Regulation could potentially have far-reaching impacts on both EU entities and entities based outside of the EU providing goods into the EU, with requirements on EU Member States to focus their enforcement efforts, in particular, on those parts of the value chain where the likely risk of forced labour occurs and take into account the size of the economic operators, the quantity of products concerned and the scale of suspected forced labour.

Our briefing contains more on this topic.

Elevated ESG risks in mining sector impact automotive and technology industries

While all industries grapple with ESG issues and respond to legal and investor pressures to address them in their supply chains, companies manufacturing products which increasingly rely on minerals and metals mined in parts of the world without high environmental and social standards face a particular challenge. The dramatic increase in demand for lithium has led Tesla to consider mining its own, having acquired rights to do so back in 2020.

Human rights and environmental challenges are well-understood risks in the mining sector.  However, these risks are not necessarily well understood in other sectors and businesses seeking closer control and oversight of their supply chains in the mining sector may find that they are inadvertently exposing themselves to increased litigation risk.  As more scrutiny is being given to ESG disclosures, businesses in all sectors need to give thought to how they identify and implement their ESG objectives, and how they manage and balance the associated risk.

We look at these issues and how to tackle them in our briefing.

Linking employee incentives with ESG targets - podcast

In the latest episode of our Talking. Sustainability. podcast series, Incentives & Remuneration Knowledge Counsel Kulsoom Hadi discusses the idea of connecting ESG targets to employee incentives. You can view this podcast here.

Protection of vulnerable workers

Ensuring the fair treatment of vulnerable workers (including casuals, zero hours and lower paid workers) is a core component of maintaining an ethical workplace. There have been a number of recent developments for employers in this regard:

• Classification of workers: The UK Government has published new guidance on the different categories of employment status (employee, worker and self-employed) and the different rights which apply. This follows a series of rulings in recent years, particularly in the gig economy, that workers have been wrongly classified and therefore denied worker rights. In 2018, the government indicated it would legislate to improve clarity in this area but has now confirmed it does not intent to make legislative changes at this stage.
  
  
• Holiday pay for casuals: The Supreme Court has delivered a ruling on the correct way to calculate holiday pay for workers on permanent contracts who do not work the full year, including term-time workers, casuals and zero hours workers. The ruling confirms that the common practice of prorating holiday for such workers is unlawful. See our Employment Update for more detail on the ruling.
  
  
• Exclusivity clauses: The UK Government has introduced legislation to extend the ban on exclusivity clauses in employment contracts. Currently any contract provision which prevents a zero hours worker from working for another employer is unenforceable. This ban will be extended to all workers who earn below the lower earnings limit (currently £123 per week) with effect from 5 December 2022.
  
  

Workforce reporting

Following changes to the UK Listing Rules, some listed companies must now report annually on their progress towards certain board diversity targets, as well as publish numerical data on the gender and ethnic diversity of their board, senior board positions and executive management. The changes, which apply to financial accounting periods beginning on or after 1 April 2022, are summarised in our Listed Company Update.

Separately, the UK Government has indicated that it plans to exempt businesses with fewer than 500 employees from some reporting requirements and other regulations. It is not yet clear whether this will mean the threshold will be raised for existing workforce reporting requirements, such as gender pay gap reporting (which currently applies to all businesses with 250 or more employees) and CEO pay ratio reporting (which currently applies to quoted companies with more than 250 employees).

Workplace investigations - Podcast

In a podcast for the Employment Law Alliance, Employment Partner Adam Wyman and Senior Associate Zoe Dearmer discuss recent trends in workplace investigations, including the rise in the number of complaints and important considerations before starting an investigation.

Ethical taxation – website resources

In response to social pressure as well as regulatory and tax drivers, ESG issues are now mainstream for the business community. The last decade has seen a raft of new tax regimes – both international and domestic – aimed at increasing the amount of transparency and disclosure. The last few years have also seen an increased focus on the amount of substance in entities, from the introduction of substance rules in Jersey, Guernsey and the Isle of Man to EU proposals for minimum substance requirements in EU entities (ATAD 3).

See our website page for further information about these and other key tax-related developments in the ESG space.

OECD Pillar 2

The Chancellor confirmed in his Autumn Statement that the Government will go ahead with its implementation of OECD BEPS Pillar 2, also known in the UK as "multinational top-up tax". This measure is aimed at large multinational corporates, but there are various exclusions, including for investment funds and pension funds. Given that the UK has been a strong advocate of the OECD two pillar corporate tax reform plan, it is not surprising that the Government has confirmed the introduction of measures to implement Pillar 2. 

The main plank of Pillar 2 is the Global anti-Base Erosion rules that seek to establish a global minimum corporate tax rate of 15% for multinational enterprises that meet a €750m turnover threshold test. A global minimum corporate tax rate will come into effect via two new rules: an income inclusion rule (IIR) and an undertaxed profits rule (UTPR). The IRR can result in tax for a parent entity if one of its subsidiaries is subject to taxes which are considered to be too low (a bit like the UK's existing CFC charge). The UTPR might come into play if a parent entity is in a country that has not implemented the IIR. It works by imposing top up taxes on other group entities that meet certain criteria.

A first draft of the multinational top-up tax legislation (which would implement the IIR into UK law) was published on L day on 20 July 2022.  The Autumn Statement stated that the legislation will be included in Spring Finance Bill 2023. It is not clear when the Spring Finance Bill will be published; it is expected that the Government will want to have a reasonable period of time to digest and reflect measures agreed between OECD members in the Pillar 2 Implementation Framework, which is due to be finalised by the end of 2022. As previously announced, the legislation implementing the IIR will take effect in relation to accounting periods commencing on or after 31 December 2023.

The Autumn Statement also announced (for the first time) that:

• The UTPR will also be implemented into UK law, but with effect no earlier than in relation to accounting periods beginning on or after 31 December 2024; and
  
  
• A qualified domestic minimum top-up tax (QMDTT) will be introduced into UK law and will take effect in relation to accounting periods commencing on or after 31 December 2023. The QMDTT will require large groups to pay a top-up tax where their UK operations have an effective tax rate of less than 15%
  
  

Securing the Activity Framework of Enablers (SAFE) (also known as ATAD 4)

The EU Commission has introduced a number of new measures in recent years aimed at preventing tax avoidance and aggressive tax evasion within Member States. This has included, notably, the EU directive on cross-border tax arrangements "DAC 6" and the Anti-Tax Avoidance Directive "ATAD", which is now entering its third stage with ATAD 3 targeting entities with low or minimal substance set up within the EU to take advantage of tax benefits, including those available under double taxation treaties.

However, despite these initiatives, tax avoidance, both by corporates and high net worth individuals, is still high, with up to an estimated EUR 194 bn of tax revenue lost to tax avoidance each year by Member States collectively.

The EU Commission has identified various areas of concern including, for example, the fact that ATAD 3 targets only EU-resident "shell companies" and not entities with low substance or otherwise established for aggressive tax planning purposes outside of the EU. They also note that a lack of clear, objective criteria for defining aggressive tax planning is exploited by enablers in order to design schemes which erode the tax base of Member States.

In an effort to address some of these issues, the EU Commission has launched a consultation on a new regime which would be targeted at "enablers", being the service providers responsible for providing tax and structuring advice to EU taxpayers. The current indicative timing for the Commission’s adoption of the proposal is first half of 2023.

Several alternative options are currently being considered. The regime could be limited to setting up a code of conduct for all enablers to ensure that they do not facilitate tax evasion or aggressive tax planning. However, other options go much further and, if implemented, would positively prohibit enablers from assisting in the creation of arrangements abroad that facilitate tax evasion or aggressive tax planning and require enablers to complete appropriate due diligence. The proposals also suggest that there could be a new EU register, which firms providing tax services would be required to join if they wish to continue providing such services to EU taxpayers or residents. Sanctions would apply for non-compliance, including the potential for removal from the register (meaning that the service provider could no longer operate within the EU). 

In a world where multi-jurisdictional transactions are commonplace, a cross-border approach to these issues may well be essential to driving down the tax avoidance rate. The new proposals are ambitious and there are several areas of potential difficulty, not least in finding a consensus definition of "aggressive tax planning". However, political support for the EU Commission's work in this area, including for ATAD 3, has generally been high, with measures moving forward despite criticism from taxpayers. It therefore seems reasonably likely that these proposals will also receive sufficient support to progress in some form.

Increased transparency required of fund managers

Over the last few years, taxation authorities worldwide have increased their focus on strengthening disclosure requirements.  The last decade has seen a raft of new tax regimes, both international and domestic, aimed at increasing the amount of transparency and disclosure. Increased disclosure to tax authorities internationally has been required by regimes including, US FATCA and the OECD's Common Reporting Standard. There has also been an increased focus on greater disclosure to the public, for example under UK rules requiring large businesses to publish their tax strategy and approach to tax planning.

As a result, the asset management industry is coming under increased scrutiny for its tax practices and, correspondingly, increasing pressure from investors. 

This issue is discussed by Tax partner, Elena Rowlands, and Investment Funds partner, Sam Kay, in this article first published in Private Equity International.

ESG in our pro bono work

Pro bono is of paramount importance to Travers Smith and the firm utilises its strengths to address "the most pressing needs of society, locally and globally". Our award-winning pro bono practice is structured around four key pillars which run in parallel with the ESG agenda:

• Climate, environment and sustainability
• Diversity, inclusion and social mobility
• Vulnerable groups (Refugees, Human Trafficking, Domestic Violence and Homelessness)
• Rule of Law

Some recent examples of our work in these areas are set out below.

Climate

The firm is proud of its collaboration with The Chancery Lane Project (CLP) in helping to create a bank of template contract clauses to enable communities and businesses to fight climate change. These innovative legal solutions are contained in CLP's Climate Contract Playbook. So far, we have worked on the following projects with CLP:

• a template ratchet provision for inclusion in investment documents to incentivise management teams to meet climate-related targets (Bella's clause).
  
  
• ESG-based performance conditions for employee incentive awards (Scarlett's Performance Conditions).
  
  
• a template board paper with detailed prompts for considering the climate impacts and associated climate risks of significant contracts/transactions (Griff's clause).

The Climate Contract Playbook, featuring our clauses, has been downloaded over 60,000 times. Scarlett's Performance Conditions were also included in CLP's 'best in class' Net Zero Toolkit, a legal blueprint to enable organisations to align themselves with a decarbonised economy.

Vulnerable Groups

Partner and Head of Pro Bono at Travers Smith, Sam Cottman, recently founded DARA, the Domestic Abuse Response Alliance, a group of leading law firms providing end-to-end representation for victims of domestic abuse. The alliance features nine firms and over 250 lawyers, representing the largest pro bono advocacy response to domestic abuse ever assembled. It was recognised by the Financial Times as the most innovative Responsible Business initiative in Europe and more recently won ESG Initiative of the Year at the British Legal Awards.

Sustainability in Travers Smith's kitchen

Our Kitchen, which caters both for staff and clients, is a proud member of the Sustainable Restaurant Association, a diverse and progressive community of food businesses, all with the common goal of making the food industry a more sustainable place.

A number of initiatives support the Kitchen's drive to generate as little food waste as possible; including the introduction of Use Up Fridays and no longer serving food at internal meeting room lunches, where attendance was always hard to predict; instead staff are encouraged to get lunch at the staff café, which is free for everyone.

An important part of the Kitchen's function is education; and helping people to find ways they can reduce food waste, and waste of all kinds, at home. For this the Kitchen team work alongside the firm's charity partner, The Felix Project.

Reducing our carbon footprint - print services

Lawyers have a reputation for producing long legal documents. However, our paper consumption has decreased drastically since the Covid pandemic as our lawyers became accustomed to working from home without access to super-fast printers in the office.  As we returned to the office, we have continued to look for ways to embed paperless working practices and to reduce the carbon footprint of our Print Services team, installing new heat-free, 94% more energy-efficient printers on the floors, sourcing all of our paper from Forest Stewardship Council-certified providers, and removing all desktop printers.

Read more on our responsible business activities on our website here.