On 26 June 2023, the International Sustainability Standards Board (“ISSB”) published its inaugural International Financial Reporting Standards Sustainability Disclosure Standards (the “ISSB Standards”) (read our previous blog post on this here). In August 2023, the UK Financial Conduct Authority (“FCA”) published Primary Market Bulletin 45, confirming its intentions to update its climate-related disclosures
ISSB issues inaugural global sustainability disclosure standards
On 26 June 2023, the International Sustainability Standards Board (the “ISSB”) issued its inaugural International Financial Reporting Standards (“IFRS”) Sustainability Disclosure Standards (the “Standards”), heralding progress in the development of a global baseline of sustainability-linked disclosures. The Standards build on the concepts that underpin the IFRS Accounting Standards, which are required in more than 140 jurisdictions, but notably not in the United States for domestic issuers subject to regulation by the Securities and Exchange Commission (“SEC”), which must apply US Generally Accepted Accounting Principles (“US GAAP”). Despite broad investor appetite for transparent, uniform and comparable disclosure rules, the scope of required sustainability disclosure and timing for adoption of the SEC’s pending climate disclosure rule remains unresolved.
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (“IFRS S1”) requires an entity to disclose information about all sustainability-related risks and opportunities that could reasonably be expected to affect the entity’s prospects. The effect on the entity’s prospects refers to the effect on the entity’s cash flows, its access to finance, or cost of capital over the short, medium or long term.
- IFRS S2 Climate-related Disclosures (“IFRS S2”) requires an entity to provide information about its exposure to climate-related risks and opportunities. Information to be disclosed includes both physical risks—such as extreme weather events—as well as transition risks, such as changes in customer behaviour.
Both IFRS S1 and IFRS S2 are effective for annual reporting periods beginning on or after 1 January 2024. Accordingly, where the Standards have been adopted for a 2024 reporting cycle, relevant disclosures will begin to be published in 2025 in an entity’s general purpose financial reports (subject to transitional provisions), alongside an “explicit and unreserved statement of compliance” when disclosing against the Standards. Whilst the launch of the Standards has been a welcome step, seeking to provide greater uniformity in corporate reporting, individual jurisdictions will decide whether entities will be required to comply with the Standards.
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The Climate Crisis
This week’s report by the World Meteorological Organisation makes for alarming reading. The report warns there is a 66% likelihood of exceeding the 1.5°C threshold in at least one year between 2023 and 2027 and notes that such a rapid change in global temperatures will take the world into ‘uncharted territory’, with an anticipated El Nino weather system likely to push already high temperatures even higher this year. Since we have already seen the impact of a 1.1°C rise, the conclusions of the WMO report are deeply uncomfortable.
This blog looks at some of the data which give context to the Report’s conclusions.
Gas
Russia is the world’s largest natural gas exporter; the second-largest exporter of crude oil; and the third-largest producer of crude oil. The Russian invasion of Ukraine spooked global gas markets and pushed prices to record highs – the TTF European gas price peaked at a record €343/MWh in August (equivalent in oil terms to more than $500 a barrel). But as world gas markets have adjusted, the price has fallen – €75 per megawatt hour at the end of December and under €50/MWh by the end of April 2023.
Like global markets, the EU has demonstrated remarkable agility in its response to Russia’s invasion. In 2020, Russia supplied nearly 43% of all EU energy imports. The EU set itself the target of reducing Russian gas imports to 55 bcm/year by March 2023 (down from 158 bcm in 2021). At the time, this seemed ambitious, but in the event, the EU easily exceeded that target and, by October 2022, the EU’s Russian gas imports had fallen to 38 bcm (12 % of the EU’s energy consumption).
Last spring, the EU required that Member States’ winter storage be 90% full by the end of autumn. Again, at the time, that seemed a tough ask in the face of global constraints on alternative supplies. But in any event, the EU easily exceed the target, reaching 96% by the beginning of November 2022.
A combination of factors means the outlook for the EU is more positive than expected:
- A mild winter meant the EU emerged with record high gas inventories (EU storage was 56% full);
- The success of demand-side efficiencies (the Commission set a cross-EU efficiency target of 15% reduction in demand: the EU reduced demand by an average 19%);
- Global gas markets have been nimble in responding to EU demand for non-Russian gas. New and alternative supplies flowed in from Norway, Qatar, the US and (importantly) Algeria through existing, but under-used pipelines and new LNG capacity;
- The EU has built new LNG infrastructure at record speed – with Germany opening its first LNG jetty in November 2022.
The Green Claims Global Drive: Developments in the UK, US and EU
2022 and 2023 may be remembered as pivotal years for efforts against so-called “greenwashing.” In this article, we look at some recent developments in the regulation of “green claims” in the UK, the US, and the EU that corporates should be aware of. We provide a broad summary and comparison snapshot of the UK, US and EU regimes to help companies navigate these rules. Now is a critical time for companies to get up to speed: authorities in all three jurisdictions are focusing more and more intently on this issue; company reputations will increasingly rise and fall with the strength of their green claims, and national regulators are set to get new powers (including the power to levy significant fines) to tackle companies found in breach.
I. Summary of recent developments: What’s new in greenwashing?
In January 2022, the UK’s Competition & Markets Authority (“CMA”) launched a sector‑by‑sector review of misleading environmental claims. The CMA started with the fashion sector, and called out a number of high‑profile, fast‑fashion companies for their practices. Twelve months later, the CMA announced that it was expanding the investigation to greenwashing around “household essentials”, including food, drink, toiletries and cleaning products. The CMA’s review is the first concerted application of the CMA’s new Green Claims Code, published in September 2021, which gives guidance for any business (wherever based) making environmental claims in the UK.
Meanwhile, in December 2022, the US Federal Trade Commission’s (“FTC”) launched a review of the “Guides for the Use of Environmental Claims” (“Green Guides”), which was last updated in 2012. The initial comment period closed on April 24, 2023. The FTC plans to update the Green Guides to reflect developments in consumers’ perception of environmental marketing claims. As a part of its ongoing review, the FTC also announced a workshop to examine recyclable claims. The workshop is scheduled for May 23, 2023 and the public can submit comments on the subject of recyclable claims through June 13, 2023. For more detail on the review, please see our dedicated blog post, here.
Finally, the EU has proposed two Directives to modernize and harmonize the rules on green claims across the bloc (together, the “EU Green Claims Proposals”). Currently, EU law does not specifically regulate environmental claims. Instead, environmental claims are subject only to general consumer protection and advertising rules (set out in Directive 2005/29 on Unfair Business-to-Consumer Practices and Directive 2006/114 on Comparative Advertising). Admittedly, the EU has published guidance on interpreting and applying the general rules in the context of green claims (see the guidance here, and see our previous blog post discussing the guidance here). However, in practice, EU Member States approach interpretation and enforcement in a variety of different ways. On March 3, 2022, the European Commission published a Proposal for a Directive Empowering Consumers for the Green Transition, also known as the “Greenwashing Directive.” The Greenwashing Directive amends the EU’s existing consumer protection rules, and bans a number of general green claims, such as “climate neutral” or “eco-friendly.” It also imposes some rules on the use of non-environmental sustainability claims or “social impact” claims, such as “locally produced” or “fair labour.” One year later, on March 22, 2023, the European Commission presented a Proposal for a Directive on Green Claims (“Green Claims Directive”), which we discussed here. The Green Claims Directive proposes a new and strict framework, applicable to all companies operating in the EU/EEA, to harmonize the rules on the substantiation of voluntary green claims.
Below, we outline the key aspects of the different legislative frameworks.
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The World Court Set to Become the Latest Venue for Climate Change Jurisprudence
UN General Assembly Adopts Resolution Requesting Advisory Opinion on States’ Obligations Concerning Climate Change
On March 29, 2023, the UN General Assembly (“UNGA”) adopted by consensus a resolution (A/77/L.58) requesting an advisory opinion from the International Court of Justice (“ICJ” or “Court”) on the obligations of states in respect of climate change. The resolution results from coordinated efforts by the Republic of Vanuatu, along with a “Core Group” of states, including Antigua and Barbuda, Bangladesh, Costa Rica, the Federated States of Micronesia, Morocco, Mozambique, New Zealand, Portugal, Samoa, Sierra Leone, Singapore, Uganda, and Viet Nam. The efforts of the Core Group drew on grassroots and civil society support, and the resolution was ultimately co-sponsored by more than 130 UN member states (although not the United States, Brazil, India, China, or Russia).
This marks the latest effort to ask international courts and tribunals to clarify the legal obligations of states in relation to climate change. In the last few months, similar requests for advisory opinions have been submitted to the International Tribunal for the Law of the Sea (“ITLOS”) and the Inter-American Court of Human Rights (“IACHR”).
Questions in the UNGA Resolution
The UNGA resolution observes that “as temperatures rise, impacts from climate and weather extremes […] will pose an ever-greater social, cultural, economic and environmental threat.” It asks the ICJ to issue its opinion on the following questions:
a) What are the obligations of States under international law to ensure the protection of the climate system and other parts of the environment from anthropogenic emissions of greenhouse gases for States and for present and future generations;
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COP27: Loss and Damage COP
Perhaps the best way of summarizing COP27 was that, in the end, it boiled down to solving a tension between competing views of global priorities in addressing climate change. The Developed World was primarily focused on improving mitigation (emissions reduction offers at COP27 in the shape of a welter of improved Nationally-Defined Contributions (NDC). However, the Developing World was focused on the need to address the impacts of increased global temperatures which climate change is already inflicting on them – the now famous ‘Loss and Damage’ issue (broadly, unavoidable losses and damages caused by climate impacts that are not tackled through adaptation and risk reduction strategies).
The fact that COP27 will be remembered for the historic creation of a Loss and Damage Fund (LADF) perhaps demonstrates a recognition that without addressing climate justice now, it will be difficult to achieve progress on mitigation (even though any delay in taking aggressive emissions reduction action is likely to increase dangerous global warming and therefore cause greater climate-changed-related damage in the future).
The History of the LADF
The creation of a dedicated LADF was proposed more than three decades ago, by the Alliance of Small Island States (AOSIS). Although discussions on the issue since then had remained superficial and highly technical, in retrospect there were some important developments which prepared the ground for the agreement in Sharm.
US Government Proposes Rule Requiring Major Federal Contractors to Disclose Greenhouse Gas Emissions and Establish Science-Based Emissions Reduction Targets
As noted in our COP27 recap, this year’s climate summit in Sharm el-Sheik involved both the historic creation of a fund to compensate countries most impacted by climate change, as well as lost opportunities to adopt more ambitious and accelerated climate mitigation commitments. Perhaps hidden between these headlines, President Biden announced an initiative with significant implications for federal contractors. Under this proposal, the United States would become the first country to require major government suppliers and contractors to set science-based emissions reduction targets aligned with the Paris Agreement. It would also require contractors to disclose their greenhouse gas (GHG) emissions and climate risks.
This initiative—the proposed Federal Supplier Climate Risks and Resilience Rule—would have wide-reaching impacts if ultimately finalized. Collectively, the proposed rule would cover about 86 percent of the federal government’s supply chain GHG impacts and 86 percent of federal annual spending. To put this in perspective, in the last fiscal year alone the United States purchased $630 billion in goods and services.
The comment period for the proposed Federal Supplier Climate Risks and Resilience Rule closes on January 13, 2023. The proposed compliance requirements for major contractors would start two years after publication of a final rule. If promulgated, this rule may be challenged in court along the lines of the Biden Administration’s COVID-19 vaccine mandate for federal contractors.
COP27: A Flawed though still Consequential Climate Summit
The United Nations annual climate change conference—officially known as the 27th Conference of the Parties to the UN Framework Convention on Climate Change (“UNFCCC”), or COP27 for short—held in Sharm el Sheik, Egypt, finally concluded early Sunday morning, more than 24 hours late.
COP27 was held amidst the ongoing Russian war in Ukraine and the consequent economic turmoil, including Europe’s scramble to secure non-Russian gas. It was previewed by a UNFCCC report which concluded that on its current trajectory the world faced warming of between 2.5 and 2.9 degrees Celsius by the end of the century, and accompanied by a new report from the International Energy Agency’s 2022 World Energy Outlook which concluded that the world needed to spend at least $4 trillion annually to tackle climate change from now until 2030.
Against this challenging backdrop, COP27 was never going to be straightforward. But those difficulties were compounded by divisions between developing and developed world over the priorities that should form the focus for COP27. Those divisions manifested themselves most clearly in tensions before, during, and at the conclusion of the Conference over the issue of “loss and damage.” This acrimony overshadowed almost all other aspects of the COP, which will nonetheless be viewed as historic for being the first COP to not only place the loss and damage issue on the official agenda, but for its creation of a separate fund to compensate countries most impacted by climate change. But loss and damage aside, the broader picture that emerged from COP27 was one of lost opportunities to adopt more ambitious and accelerated climate mitigation commitments in response to the dire scientific warnings about the impact of rapid global warming on the planet. In particular, efforts calling for a phase down of all fossil fuels were ultimately unsuccessful in the Summit’s final agreement and highlighted the mismatch between the pace of global emissions reduction commitments and that which is needed to avoid the most disruptive climate impacts.
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COP 27 – Week one Summary
COP27 was never going to be a ‘Big COP’ in the way that COP26 in Glasgow was. It was not originally designed to be one of the five-year ratchet reviews of NDCs set out by the 2015 the Paris Agreement and there were no major new climate change texts due to be negotiated. Sharm’s value is likely to be assessed, at least in part, on whether it effectively tees up important items for next year, including:
- the Global Stocktake (the technical dialogue will conclude in June next year, and the political phase at COP28);
- the Global Goal on Adaptation, due to conclude next year;
- the New Collective Quantified Goal on climate finance, due to conclude in 2024; and
- the increasingly important future discussions on loss and damage.
However, COP27 remains an important waypoint – not least in how successful it eventually is in avoiding acrimonious debate and significant tensions over loss and damage.
Glasgow was a five-year review point. But the UNFCCC assessed that not enough progress had been made by countries’ emissions reductions targets towards the 1.5 degree target and required all member countries to return to COP27 with improved goals. So COP27 represents an important departure from the UNFCCC’s agreed timetable and in that sense demonstrates the increasing urgency of reducing emissions: an urgency juxtaposed against the record high attendance of representatives from oil and gas companies and the anguished debate about the role of gas as a transitional fuel.
What to Expect from COP 27
COP27 began in Sharm el Sheikh, Egypt, yesterday. It begins inauspiciously, set against the global impacts of Russia’s invasion of Ukraine and the resulting food and energy insecurity and dramatic price rises which have pushed climate change down domestic political agendas across the world and increased demand for new sources of fossil fuel to reduce reliance on Russian gas. By the same token, the Russian aggression creates a lever that presents COP27 with a rare, perhaps unique, opportunity to accelerate the energy transition.
Furthermore, since the effects of climate change are non-discriminatory, the need to tackle it is a genuine global need: a visionary take on COP 27 is that it could offer a ‘safe haven’ for international dialogue and collaboration where world leaders can find effective pathways forward on food, energy, nature and security. However, the augurs are not positive…
Billed as the ‘Implementation COP’ it was designed to require countries to improve their Nationally Determined Contributions (NDC) to reducing climate-change inducing emissions. However, the tussle over the agenda, which began at 1300 on Saturday and did not conclude until midday on Sunday, suggests that the alternative name for this COP – ‘The African COP’ – is more appropriate and that the focus and key to its success lies elsewhere.
Why Does COP27 Matter?
COP27 marks 30 years since the adoption of the UNFCCC[i] and seven years since the 2015 Paris Agreement of COP21[ii], which was the first legally-binding global treaty on climate change. It was the Paris Agreement that introduced NDCs which require countries to set out by how much they will reduce their national emissions each year, with a target of limiting global warming to 1.5°C by the end of the century. The Paris Agreement also imposed a requirement to improve ability to adapt and build resilience to climate change; and to align finance flows with ‘a pathway towards low greenhouse gas emissions and climate-resilient development’.