ESG Newsletter - Spring 2022

We have recently launched a timeline of UK and EU regulatory and legislative developments in the ESG space, which covers new requirements coming down the line as well as those implemented in the last 12 months.

We recognise that the breadth of ESG considerations, coupled with the volume and pace of change in the legal and regulatory landscape, presents an immense challenge to businesses, particularly at a time when the geopolitical and economic environment continues to be so uncertain. Equally, we know that many businesses are keen to take a proactive stance on ESG compliance, staying ahead of the regulatory curve as well as anticipating changes in public sentiment.

We hope our ESG timeline will help you to anticipate new requirements and put in place the policies and processes needed to manage compliance. The timeline will be updated quarterly, but as ESG is such a fast-moving area, our ESG and Knowledge teams are also publishing regular updates on developments which are available on our Sustainable Business site or via our Spotlight on ESG LinkedIn site.

Our New Year briefing on financial services regulation for asset managers and asset owners discussed these topics in more detail (see Part 1: ESG and Sustainability) along with the UK perspective on a range of other EU and UK regulatory measures.

Sustainability insights

Over the past year or so, we have also published a regular newsletter for the asset management community, Sustainability Insights, commenting on relevant developments in ESG regulation. In recent weeks, topics have included:

• a fresh perspective on the EU's Sustainable Finance Strategy
  
  
• EU's proposed Corporate Sustainability Due Diligence Directive
  
  
• the development of the UK's Green Taxonomy
  
  
• the implications of the Environment Act and the proposed new framework for Nature-related Financial Disclosures and
  
  
• the transition to net zero in the alternative asset management industry.

Access the full series. 

Sign up to the mailing list for Sustainability Insights.

SFDR - Final regulatory technical standards now available 

In early April 2022, the European Commission published the long-awaited final version of the detailed rules – the Regulatory Technical Standards (RTS) – under the EU Sustainable Finance Disclosure Regulation (SFDR). Crucially, annexed to the RTS are the final prescribed-form templates for:

• pre-contractual disclosures for Article 8 products (those which promote environmental or social characteristics)
  
  
• annual reports for Article 8 products
  
  
• pre-contractual disclosures for Article 9 products (those which invest exclusively in "sustainable investments" within the meaning of Article 2(17) SFDR)
  
  
• annual reports for Article 9 products and
  
  
• the statement for presenting key performance indicators under the principal adverse impacts regime

"Final" almost certainly does now mean final – it is highly unlikely that further changes will be made before the RTS come into effect on 1 January 2023. For more on this, see our recent briefing.

Mandatory climate-related disclosures 

The roll-out in the UK of mandatory climate-related disclosure requirements in line with the recommendations of TCFD (Taskforce on Climate-related Financial Disclosures) continues, with smaller entities beginning to be brought into scope, as summarised below.

The UK is not alone in pursuing this path. The International Sustainability Standards Board (ISSB), established at COP26 last November, has just published for consultation two draft Standards on (i) general sustainability-related disclosures and (ii) climate-related disclosures which build on TCFD and will eventually form the baseline for sustainability disclosures globally. The ISSB aims to issue the new Standards by the end of 2022 and is working with regulators across the world to ensure its Standards are adopted consistently.

Meanwhile, in the US, the SEC has recently published proposed rules requiring enhanced and standardised climate-related disclosures of public companies (both domestic and foreign private issuers) under the Securities and Exchange Act of 1934, as outlined in this comprehensive briefing from Cravath, Swaine & Moore.

Impact investing goes mainstream

For many of our private equity clients, the importance of, and opportunities presented by, impact investing are becoming a key focus. Private investment in renewable energy, innovative climate technologies and natural capital can all play a key role in meeting the accelerated need for progress and are increasingly recognised as being aligned with financial return.

For a closer look on trends in impact investing and specifically, how mainstream private equity players are increasingly showing interest in the impact investing market, please see our recently published briefing.

Dispute risks in sustainability-linked finance

Please see our article below and in our recent Dispute Resolution Yearbook 2022 on this topic.

Proposals for a social taxonomy under EU sustainability legislation 

In February 2022, the EU Platform on Sustainable Finance (the Platform) published its Final Report on a potential Social Taxonomy. This sets out the Platform's proposals for a structure for a social taxonomy under EU sustainability legislation.

The purpose of the proposed social taxonomy (Social Taxonomy) would be broadly to direct capital flows to activities that operate with respect for human rights and support capital flows to investments that improve living and working conditions, especially for the disadvantaged.  The Social Taxonomy will be largely based on internationally agreed norms and principles such as those under the Universal Declaration of Human Rights and European Social Charter.

We discuss the Platform's proposals in further detail in our briefing. Further work on a Social Taxonomy is expected in due course but no timings are provided in the Final Report.

Concurrently, the EU Commission is also considering an extension to the existing environmental taxonomy; look out for our update on this development in future newsletters.

Corporate sustainability due diligence

In February 2022, the EU Commission released its revised proposal for a directive on corporate sustainability due diligence, more than a year since the European Parliament proposed a draft directive that would have required a wide range of entities to conduct due diligence within their value chains in order to identify and manage risks relating to human rights, the environment and good governance (previously the "mHRDD").

The revised and renamed proposal is significantly decreased in terms of covered entities – the EU Commission suggests that around 9400 EU companies will meet the threshold of 500+ employees and at least EUR 150 million net turnover worldwide. A further approximately 3400 EU companies operating in high impact sectors with 250+ employees and at least EUR 40 million will be in scope at a later stage. Certain non-EU companies with significant business in the EU and meeting the above thresholds are also expected to be covered.

The planned timeline for implementation of the draft directive is quite long; member states' national implementing laws must be applied from two years after the entry into force of the directive for larger organisations and 4 years for smaller organisations. Given that the legislative process may itself take 18 months or more, we would expect that the due diligence obligations may apply from 2025 or perhaps even later.

For further details, please see our briefing and our commentary in Sustainability Insights.

Dispute risks in sustainability-linked finance

Recent years have seen a notable surge in the breadth and number of financial instruments offered and executed in the market that carry a sustainability-linked component. No doubt this trend forms part of concerted global efforts to meet sustainability-related objectives, with the growth curve expected to continue.

This article, which appears in our Dispute Resolution Yearbook 2022, focuses on sustainability-linked loans ("SLLs"), sustainability-linked bonds ("SLBs") and sustainability-linked derivatives ("SLDs") (collectively "sustainability-linked financial instruments"), which are fast becoming a mainstay of the global financial marketplace. Investors are increasingly attracted to this asset class: between September 2019 and April 2021, approximately US$27.9 billion of SLBs alone were issued.

Climate change litigation

Litigants continue to push the boundaries of liability in bringing novel climate-related claims in jurisdictions across the globe. Last year, we commented on these trends in our briefing on a Dutch case brought by a group of activists, Milieudefensie v Royal Dutch Shell, that imposed carbon emission limits on the oil-producing multinational and an Australian case that found the Minister for the Environment had a duty to protect young people from the effects of climate change.

Towards the end of last year, in Smith v Fonterra [2021] NZCA 552 ("Fonterra"), New Zealand's Court of Appeal provided a counterweight ruling to the Dutch Milieudefensie claim discussed in our earlier briefing above.

For more commentary on the Fonterra case, please refer to our briefing.

The developing role of the Courts in climate change cases

Claimants around the globe are continuing to bring novel and ambitious climate change-related cases before common law Courts. Several of these claims have achieved initial success, only for appellate courts to pushback and reject the idea that specific climate change-related duties exist.  In this article we review two recent decisions from Australia and the UK and comment on how these decisions might impact on businesses operating in the UK going forward.

The Environment Act 2021

The long-awaited Environment Act 2021 was finally passed into law in November 2021, nearly three years after a bill was first proposed to govern environmental matters post-Brexit. The Government has described it as "the most ambitious environmental programme of any country on earth". Although many of the detailed rules are yet to be developed, the Act will have wide-ranging consequences for environmental management and governance arrangements as well as operational implications. Here is a brief overview.

Environmental principles: The Act will enshrine into law 5 environmental principles which will underpin future Government policy, contributing to the improvement of environmental protection and sustainable development.

Environmental targets: The Government must set at least one legally binding, environmental target lasting at least 15 years in each of four priority areas (being water, air quality, biodiversity and waste/resource efficiency), as well as on species abundance and fine particulate matter.

Waste and water resource efficiency: The Act increases the Government's powers to manage the impact of products throughout their lifecycle, moving towards "extended producer responsibility" ("EPR"), with producers bearing the full financial cost of managing products at the end of their life, incentivising durability, repairability and recyclability of materials. There is already a consultation underway on an EPR scheme for packaging.

Forest risk commodities: The Act aims to ensure that UK businesses are not contributing to illegal deforestation via imported products, introducing a ban on the use of "forest risk commodities" produced on land which is occupied or used illegally, alongside new due diligence and corporate reporting requirements. An outline of future requirements is set out in a separate consultation, also summarised in more detail in our briefing.

Real estate developments: -The Environment Act contains measures designed to protect the environment whilst facilitating sustainable real estate development. For a summary, see the textbox, and for more detail, see our briefing.

The Government has set itself an ambitious timetable to conduct the multiple workstreams needed to implement the Act, some of which were underway before the Act became law. Organisations looking to translate these framework provisions into actionable requirements must await further consultations and draft legislation.

CMA investigation into greenwashing: an update

Following its investigation into greenwashing (which we reported on last year), the Competition and Markets Authority has published a "Green Claims Code" which aims to provide guidance to businesses on environmental claims. This was accompanied by a warning that the CMA intends to carry out a review of such claims (both online and offline) in early 2022 and that businesses which have failed to comply with consumer law may face enforcement action.

Sustainability and competition law

On 14 March 2022, the UK Competition & Markets Authority (CMA) published advice to the Secretary of State for Business, Energy and Industrial Strategy (BEIS), detailing its view on the role of competition law in furthering environmental sustainability goals (although we await the final outcome of BEIS and the CMA's proposals). This came hot on the heels of the European Commission's new draft Horizontal Guidelines, published on 1 March 2022, which dedicate an entire chapter to 'Sustainability Agreements' and shed light on the EU's proposed approach to the interaction between competition law and sustainability.

Achieving ESG ambitions will unavoidably require industry collaboration, and ESG purposes do not automatically immunise conduct from competition law scrutiny. Industry players have therefore long been calling for practical and reliable solutions to be developed in the competition law field so that businesses can confidently promote ESG considerations in their decision-making. Please see our briefing in which we discuss how far these latest updates from the Commission and CMA go towards providing those solutions.

Sustainability and consumer law

As part of its advice to Government on sustainability issues from March 2022 (see above under "Sustainability and competition law"), the UK Competition and Markets Authority (CMA) has also recommended a number of changes to UK consumer law, including:

• Imposing an express positive obligation on businesses to disclose information about the environmental impact of their products; in support of this, it proposes developing standardised definitions of terms such as "recyclable" or "carbon-neutral"; and
  
  
• Changes designed to make it easier to enforce consumer law against companies making misleading environmental claims and to allow orders to be made requiring businesses to make redress payments for environmental harm. 

The Government has yet to respond and most of these changes would require legislation, which would take time to implement;  but if enacted in full, they would be likely to have a significant impact on B2C businesses.

Fire and rehire

The practice of "fire and rehire", which refers to an employer changing employees' terms by dismissing them and offering to re-engage them on new contracts, has come under the spotlight in recent months. Employers who have sought to change terms in this way have been criticised by trade unions, and there have been calls for the practice to be banned altogether, most recently in the wake of P&O's mass dismissal of ferry workers. There have been several recent developments in this area. Last year, Acas published guidance on changing employment contracts  which states that "fire and rehire" should only be considered as a last resort.

The Government so far has indicated that it does not plan to legislate against the practice but has committed to producing a new statutory Code of Practice to detail how businesses should consult on proposed changes to employment terms.

Although the legal position relating to "fire and rehire" has not changed so far, the process that employers should follow when seeking to change employees' terms may become more prescriptive once the Code of Practice is produced. But regardless of what the law requires, the reputational risks are likely to be an equally important consideration given the increased focus on this area, and employers may be reluctant to use this route unless they have no other choice.

Workplace sexual harassment

The Government ran a consultation in 2019 on possible reforms to the law on workplace sexual harassment. It has now published its response to that consultation, saying that it intends to introduce a new positive duty on employers to prevent sexual harassment in the workplace, along with a statutory code of practice on what the duty means in practice. The Government will also introduce explicit protections from workplace harassment by third parties (such as clients, customers and suppliers) and will consider extending the time limit for bringing discrimination and harassment claims in employment tribunals from 3 to 6 months. The Government has not yet set out a timetable but has said the changes will be introduced as soon as parliamentary time allows.

Ethnicity pay gap reporting

In 2018/2019, the Government consulted on introducing a mandatory requirement for large organisations to report publicly on the ethnicity pay gap within their organisation. The Government has not yet formally responded to the consultation and has come under mounting pressure to act in this area.  However, in its recent response to a report by the Commission on Race and Ethnic Disparities, the Government said that it would not be legislating for mandatory reporting at this stage, as it wants to avoid burdens on businesses as they recover from the pandemic. Instead, the Government will encourage more voluntary reporting. A number of employers already publish their data on a voluntary basis or are considering doing so as part of wider efforts to promote diversity and inclusion. The Government has not ruled out introducing a mandatory requirement for ethnicity pay gap reporting in the future.

Taxation of workers

There have been recent changes to the UK anti-avoidance rules which are designed to ensure that only workers who are genuinely self-employed can benefit from the tax advantages in self-employed status. Please see our article in Insights for In-house Counsel on this topic.

Developing an ethical tax policy - podcast

In the latest episode of our Talking.Sustainability. podcast series, Tax Partner Madeline Gowlett and Associate Rob Smith discuss the concept of "ethical taxation" and the key issues for businesses to consider.

International tax reform - OECD's BEPS pillar one and pillar two proposals

International agreement has been reached on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The two-pillar corporate tax reform plan forms part of the OECD's project tackling base erosion and profit shifting (or BEPS). For more detail, please see our article in our recent Insights for In-house Counsel publication.

EU directive on shell entities (ATAD 3)

The EU Commission has published a draft directive (ATAD 3) designed to tackle misuse of entities resident in EU member states that do not have sufficient substance.

Entities within the scope of the directive are subject to adverse tax consequences. There are also increased information reporting requirements which extend to entities at risk of being within scope as well as those that actually are.

For more detail please see our recent briefing on the shell entity directive which includes a flowchart to help businesses navigate the new rules and assess whether the directive is likely to apply to them.

Notification of uncertain tax treatment

A new set of rules has been introduced from 1 April 2022 which require large businesses (those with a UK turnover exceeding £200m and/or a UK balance sheet exceeding £2bn) to notify HM Revenue & Customs (HMRC) if they have adopted a tax treatment which is "uncertain". A notification will be required if either of the following two triggers arise:

• The taxpayer adopts a tax treatment that differs from HMRC's known position; or
  
  
• A provision has been recognised in the accounts of the taxpayer to reflect the probability that a different tax treatment will apply to the transaction to that adopted.

A third trigger (substantial possibility that a court or tribunal would find the treatment adopted to be incorrect) was not included in the current rules but remains under review by the Government.

The threshold for notifications is £5m.

Update to EU list of non-cooperative jurisdictions for tax purposes

In February 2022, the EU published the latest update to its list of non-cooperative jurisdictions for tax purposes (sometimes referred to as the EU 'blacklist').

No changes were made to the main blacklist in the February update. As a result, the blacklist continues to comprise 9 jurisdictions, being: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.

Perhaps of more interest were the changes made to the so-called 'grey list' of jurisdictions that are not yet fully compliant but have made sufficient commitments to satisfy the EU's concerns. The following 10 jurisdictions were added to the grey list: the Bahamas, Belize, Bermuda, the British Virgin Islands, Israel, Monserrat, Russia, Tunisia, Turks and Caicos Islands and Vietnam. In addition to the jurisdictions added in February, the grey list also includes the following jurisdictions: Anguilla, Barbados, Botswana, Costa Rica, Dominica, Hong Kong, Israel, Jamaica, Jordan, Malaysia, Montserrat, North Macedonia, Qatar, Seychelles, Thailand, Turkey and Uruguay.

Any businesses with entities or operations in grey-listed countries should pay particular attention to future updates of the EU list to ensure that jurisdictions currently on the grey list are not moved to the blacklist.

New tax on non-recycled plastic packaging

In pursuit of its commitment to prevent all avoidable plastic waste by the end of 2042, the UK Government has recently begun to impose a tax on the manufacture and import of significant volumes of plastic packaging which does not contain a minimum amount of recycled content. The aim of the tax, which came into effect on 1 April 2022, is to increase demand for recycled plastics, creating an incentive to collect and recycle plastic waste and divert it away from landfill and incineration.

For more information on the Plastic Packaging Tax, please read our briefing.

Enhanced VAT relief on energy saving materials

In the Spring Statement it was announced that VAT relief on the installation of energy saving materials (ESMs) would be expanded.

VAT relief is available on the installation of ESMs such as heat pumps and solar panels in residential properties. Following a CJEU decision in infraction proceedings against the UK in 2019, the UK was required to restrict the availability of such relief. Now that the Brexit transitional period has ended, the UK has the freedom to depart from the results of the infraction proceedings.  The measures unwind the effect of the CJEU decision and mean that complex eligibility criteria no longer need to be satisfied.  Wind and water turbines have also been added back to the list of ESMs.

In addition, the applicable VAT rate has been reduced from 5% to 0% for a five-year period from 1 April 2022 to 31 March 2027.

The changes took effect from 1 April 2022. Different rules apply to Northern Ireland, which is required to harmonise with EU VAT rules on goods under the Northern Ireland Protocol. The measure is intended to incentivise the take-up of ESMs in line with the Government’s net zero objectives.

Recent events

Spotlight on ESG Spring Social –we recently hosted a networking drinks evening for clients and contacts of the associates in our ESG team from across the firm. We were delighted to welcome representatives from two of our pro-bono clients, the Chancery Lane Project and WWF UK, who delivered excellent talks on their inspiring work and which provoked much discussion during the evening. If you would like to be invited to similar events in future, please register your interest.

BVCA course – "Developing an ESG strategy for your portfolio" - Travers Smith Senior Consultant Simon Witney recently spoke at the British Private Equity & Venture Capital Association (BVCA)'s exciting new course on 'Developing an ESG Strategy for your Portfolio'. In his session, Simon covered the regulatory context for sustainability strategies in private equity and venture capital firms, looking at the current priorities of EU and UK regulators.

"Recent developments in ESG regulation" – the most recent webinar in our series for Alternative Asset Managers looked at:

• the latest on SFDR, including reporting requirements for Article 6, Article 8 and Article 9 products
  
  
• status of the EU Taxonomy and its application to private funds
  
  
• the FCA's final rules on TCFD reporting for UK regulated asset managers and PE adviser/arrangers
  
  
• the UK's SDR and Green Taxonomy and
  
  
• recent ESG developments in the United States

Details of the next webinar in the series are set out in the Planned activities section below.

Cambridge Institute for Sustainability Leadership - to deepen our collective expertise on sustainable finance, Travers Smith Senior Consultant Simon Witney and Knowledge Counsel Carys Clipper recently completed an 8-week course on sustainable finance with the Cambridge Institute for Sustainability Leadership (CISL) gaining fascinating insight into sustainable finance trends and strategies, innovation and disruption and leadership skills that help to create impact.  

Planned activities

ESG risk at London International Disputes Week (11 May 2022)- Heather Gagen, one of our Dispute Resolution partners, will be chairing a panel at this event on 11 May 2022 which will explore the contours of the ESG risk landscape globally and highlight key ESG risk trends, including:

• Corporate liability frameworks – what are the global litigation trends and key risk areas, including parent company and value chain liability?
  
  
• Business ethics and human rights – what is the right balance between soft law frameworks, regulatory intervention and litigation?
  
  
• The role of the Courts – are they becoming legitimate guardians of business ethics or unelected quasi-regulators?
  
  
• ESG activist litigation – could it create a chilling effect and hinder the pursuit of innovative corporate ESG agendas, or will it ensure corporate good behaviour and robust policy response?

The panel will share their own experiences of effective strategies for navigating this developing risk landscape. It will also debate whether increasing regulatory and litigation activism on business ethics and corporate accountability is proving effective in driving better ESG outcomes.

Speakers: Heather Gagen – Chair, Partner, Travers Smith; Kathryn Britten, Managing Director, Alix Partners; Adam Heppinstall QC, Barrister, Henderson Chambers; Dan Lambeth, Partner, ESG, Brunswick

To find out more about LIDW22 and to register for the event, please visit the LIDW website here. The event is available to attend virtually and in-person. Registration is free for in-house and government lawyers.

The Lawyer General Counsel Strategy Summit – (11-13 May 2022) – Head of Risk & Operational Regulatory Doug Bryden, Disputes Resolution partner Stephanie Lee and Employment Partner Adam Wyman will be hosting a roundtable session at this event on the role of the GC in addressing governance risks in a "purposeful" business. The session will explore what "good" looks like as regards to the "G" in ESG and how GCs should respond to the pressure on the business to do the 'right' thing

The Regulation of Impact Funds in the UK – (16 June 2022) - The next in our series of webinars aimed primarily at the Alternative Asset Management community will address some of the challenges in the EU and future UK regulation of impact funds, especially for private funds, and will look at the proposals for the establishment of minimum standards for SFDR Article 8 and 9 products. The webinar will feature a panel discussion with a range of experts from Travers Smith as well as external speakers. Sign up via our website to ensure you receive all future communications about this event.