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Simpson Thacher Sustainability and ESG: Regulatory Update – November 2024

11.14.24

This update includes the most significant developments regarding ESG-related laws, regulations, litigation and initiatives during the past 30 days. For more information on any item listed here, please contact us.

Practice News:

  • Leah Malone, Head of Sustainability and ESG Practice, and Martha Kammoun, Infrastructure Finance Partner, co-authored an article published by Bloomberg Law titled “Financing the ‘as-a-Service’ Business: A New Model.”

  • Leah Malone spoke at The Conference Board’s roundtable on ESG regulations, titled “Managing the Proliferation of Federal and State ESG Regulations,” on October 24.
  • Emily Holland, Sustainability and ESG Counsel, has been appointed to the U.S. Department of State’s Federal Advisory Committee on Responsible Business Conduct’s Subcommittee on National Action Plan Implementation.

Americas

SEC Announces New Greenwashing-Related Enforcement Actions

On October 21, the SEC announced a $4 million settlement with WisdomTree Management Inc. relating to alleged misstatements and compliance failures in connection with ESG investment screening processes. Similarly, on November 8, the SEC announced a $17.5 million settlement with Invesco Advisers, Inc. relating to misleading statements made between 2020 and 2022 about its incorporation of ESG factors in its investment portfolio.

California Climate Rule Litigation Survives Motion for Summary Judgement

The litigation challenging California’s climate disclosure laws, SBs 253 and 261, continues as the Central District of California denied plaintiffs’ motion for summary judgment on November 5. In its order, the court found that the Plaintiffs’ First Amendment challenge requires a fact-driven analysis to determine the applicable level of scrutiny. For more information on California’s mandatory climate disclosures, see our client alert.

Coalition of States and the Department of Labor File Competing Briefs on Loper Bright’s Implications for ESG Fiduciary Rule

A coalition of Republican-led states, spearheaded by Utah, challenged the Department of Labor’s (“DOL”) 2022 rule stating that ERISA plan fiduciaries can elect (but are not required) to consider material ESG factors when offering plan investments. The parties filed competing briefs in a Texas federal district court following July’s Fifth Circuit remand, specifically addressing the impact of the Supreme Court’s Loper Bright decision upending the Chevron doctrine of agency deference. The states argued that ERISA prescribes a duty to act “for the sole and exclusive financial benefit of beneficiaries.” In the DOL’s brief, the agency argued that Loper Bright does not alter the district court’s previous finding that the ESG rule is lawful because it is consistent with ERISA and the DOL’s position for nearly three decades.

EU/U.K.

EFRAG Publishes Draft CSRD Reporting Standards for Non-EU In-Scope Entities

On November 7, EFRAG published its first working papers on sustainability reporting standards for non-EU parent entity reporting under CSRD (which will begin for the 2028 fiscal year), designated as the “NESRS.” The cross-cutting NESRS largely track ESRS 1 and ESRS 2, which apply to EU-organized entities, but require reporting relating only to impact materiality–not financial materiality. As a result, the draft NESRS state in-scope EU subsidiaries will not be allowed to rely on parent reports prepared in accordance with the rule, in order to dispense their own reporting obligation. The deadline for the adoption of NESRS has been extended to June 2026 and EFRAG has until the end of 2025 to deliver draft NESRS to the EU Commission for approval. EFRAG expects to launch a public consultation on the NESRS in January 2025.

ESMA Announces 2024 European Common Enforcement Priorities for Corporate Reporting

On October 24, the European Securities and Markets Authority (“ESMA”) published its annual European Common Enforcement Priorities statement for corporate reporting, which outlines the areas that ESMA, together with national enforcers in the EEA, will pay particular attention to when reviewing annual financial reports for compliance with relevant reporting requirements. ESMA includes three topics related to sustainability statements–materiality considerations in reporting under ESRS; scope and structure of sustainability statements; and disclosures relating to Article 8 of the Taxonomy Regulation.

FCA Publishes Pre-Contractual Disclosure Examples for SDR and Investment Labels

On November 1, the Financial Conduct Authority (“FCA”) published a non-exhaustive list of pre-contractual disclosures good practice examples under the Sustainability Disclosure Requirements (“SDR”) and investment labels regime, which enters into force on December 2. The examples are based on the FCA’s experience with applications to date and aim to provide firms with practical considerations and insight into the types of information that funds should disclose in the pre-contractual disclosure documentation if they are seeking to use sustainability labels on investment products. In addition, the FCA briefly notes examples of poor disclosure practices that do not meet the SDR requirements, such as disclosing an asset selection process that does not link to a product’s specified sustainability objective and aim.

EFRAG Publishes ESRS Draft Implementation Guidance on Transition Plans for Climate Mitigation

On November 4, EFRAG published its draft implementation guidance on transition plans for climate mitigation. The draft guidance is intended to provide non-authoritative, sector-agnostic support for companies disclosing their transition plans for climate change mitigation under the European Sustainability Reporting Standards (“ESRS”). While not mandatory under CSRD, the guidance provides valuable insights for companies that will be required to prepare transition plans under the Corporate Sustainability Due Diligence Directive or other EU frameworks. The draft guidance characterizes a number of key points, including Paris Agreement compatibility, actions and decarbonization levers (such as operational and product adjustments that support emissions reduction) and investment and funding supporting companies’ climate transition plans, including EU Taxonomy-aligned CapEx. The draft guidance still needs to be approved by EFRAG’s Sustainability Reporting Technical Expert Group and Sustainability Reporting Board. Once the draft is approved, it will be put out for public feedback and then finalized in 2025.

AMEA

Hong Kong Publishes Code of Conduct for ESG Ratings and Data Products Providers

On October 3, an industry-led working group sponsored by the Hong Kong Securities and Futures Commission (“SFC”) published a voluntary code of conduct for ESG ratings and data products providers in Hong Kong. The code sets out principles relating to good governance, securing quality, conflicts of interest, transparency, confidentiality and engagement, with the aim of improving the availability and quality of information provided to investors at product and entity levels, enhancing market integrity, and promoting competition. Both ESG ratings and data products providers who elect to follow the code are expected to complete and publish a self-attestation document that details their approach to adhere to the code’s principles.

Australia Clarifies Carbon Market Participation Regulations

The Australian Securities & Investments Commission (“ASIC”) has released new guidelines–Regulatory Guide 236 (“RG 236”)–to clarify carbon market participation regulations and whether an Australian financial services license (“ASSL”) is required to participate in the Australian carbon market. Parties involved in the Australian Carbon Credit Unit scheme, responsible emitters for safeguard facilities, market intermediaries and advisors to buyers and sellers in the carbon market are advised to consult the guidelines before consummating transactions that involve carbon projects or credits. ASIC intends to update corresponding Information Sheet 156, Regulated emissions units: Applying for or varying an AFS licence, in Q4 to reflect the changes made in RG 236.

China Releases Guidelines on Promoting Renewable Energy

On October 30, China’s National Development and Reform Commission, alongside five other government departments, released a set of guidelines on boosting the utilization of renewable energy as part of its green energy transition, aiming to reduce fossil fuel consumption (available in Chinese here). These guidelines are designed to decrease reliance on fossil fuels and detail China’s objectives for the development of renewable energy consumption by 2030. The plan envisions an increased adoption of renewable energy across various sectors, including industrial enterprises, transportation, construction, agriculture, rural regions, and infrastructure. 

China Issues Program to Improve Carbon Emissions Accounting

On October 24, the National Development and Reform Commission of China unveiled a “Work Program for Improving the Statistical Accounting System of Carbon Emissions,” aiming for a fully operational national and provincial carbon emission reporting system by 2025 and a systematic and complete statistical accounting system for carbon emissions for key industries by 2030 (available in Chinese here). The program plans to enhance regional carbon emission statistics and data quality management, and to establish a national greenhouse gas emission factor database. It also aims to refine carbon emission accounting methods for enterprises, develop a project carbon emission accounting system, and strengthen the carbon footprint management system.

Standards

IAASB Publishes New Standard on International Sustainability Assurance

The International Auditing and Assurance Standards Board (IAASB”) has published a finalized International Standard on Sustainability Assurance 5000 (ISSA 5000”). ISSA 5000, initially proposed in 2023, provides for a new standard for practitioners conducting sustainability assurance assessments and is designed to be compatible with a variety of sustainability reporting frameworks, including CSRD and IFRS standards.