Key ESG Developments – November 2022
COP27: decision on the establishment and operationalization of a loss and damage fund
The 27th Conference of the Parties to the United Nations Framework Convention on Climate Change (COP27) took place in Sharm el-Sheikh between the 6th and the 20th of November 2022. A summary of the decisions taken can be found here. One of the most striking decision concerns the establishment and operationalization of a loss and damage fund for vulnerable countries more affected by climate disasters. In the words of UN Climate Change Executive Secretary Simon Stiell:
“We have determined a way forward on a decades-long conversation on funding for loss and damage – deliberating over how we address the impacts on communities whose lives and livelihoods have been ruined by the very worst impacts of climate change”.
Corporate Sustainability Reporting Directive adopted
On 28 November 2022, the Council gave its final approval to the Corporate Sustainability Reporting Directive (“CSRD”) which amends the 2014 Non-Financial Reporting Directive (“NFRD”):. The CSRD was published as Directive (EU) 2022/2464 of the European Parliament and of the Council of 14 December 2022.
The CSRD covers large European undertakings, listed SMEs, small and non-complex credit institutions and captive insurance undertakings, as well as certain non-European undertakings. The CSRD introduces more detailed reporting requirements (compared to the NFRD) on sustainability matters, including environmental rights, social rights, human rights, and governance factors. The report will need to include the information required to comprehend the undertaking’s impact on sustainability matters and how sustainability matters impact the development, performance, and the position of the undertaking.
The CSRD will be applicable in four stages:
- Undertakings already subject to the NFRD: reporting in 2025 on the financial year 2024;
- Large undertakings not subject to the NFRD: reporting in 2026 on the financial year 2025;
- Listed SMEs (except micro undertakings), small and non-complex credit institutions and captive insurance undertakings: reporting in 2027 on the financial year 2026;
- Non-European undertakings subject to the SFDR: reporting in 2029 on the financial year 2028.
The first set of draft European Sustainability Reporting Standards
The European Financial Reporting Advisory Group (EFRAG) approved the first set of draft European Sustainability Reporting Standards (ESRS), which are meant to set the general requirements that undertakings must comply with when preparing and presenting the report on sustainability matters, under the CSRD. The proposed standards are divided in 4 themes:
- General information: general disclosures, such as general principles, and general, strategy, governance and materiality assessment disclosure requirement;
- Environmental information: climate change, pollution, water and marine resources, biodiversity and ecosystems, and resource use and circular economy;
- Social information: own workforce, workers in the value chain, affected communities, and consumers and end-users;
- Governance information: business conduct.
The proposed set of draft ESRSs was submitted to the European Commission which will consult the EU bodies and Member States on the draft standards before adopting the final standards as delegated acts in June 2023, followed by a scrutiny period by the European Parliament and Council.
UN Forum on Business and Human Rights 2022
The 11th UN Forum on Business and Human Rights took place from 28 to 30 November 2022 on the topic of: “Rights Holders at the centre: strengthening accountability to advance business respect for people and planet in the next decade”. The transcripts can be consulted here.
Proposal of the EU Commission for certification of carbon removals to help reach net zero emissions
As part of the European Green Deal and, in particular, EU’s objective of being climate-neutral by 2050, the European Commission adopted, on the 30th of November 2022, a proposal for an EU-wide voluntary framework with the purpose of consistently certifying high-quality carbon removals.
In order to guarantee transparency and credibility of the certification process, the proposal provides for rules for the independent verification of carbon removals, and for recognising certification schemes that can be used to demonstrate compliance with the EU framework. Also, to guarantee the quality and comparability of carbon removals, the proposed regulation establishes four QU.A.L.ITY criteria:
- Quantification: Carbon removal activities need to be measured accurately and deliver unambiguous benefits for the climate;
- Additionality: Carbon removal activities need to go beyond existing practices and what is required by law;
- Long-term storage: Certificates are linked to the duration of carbon storage so as to ensure permanent storage;
- Sustainability: Carbon removal activities must preserve or contribute to sustainability objectives such as climate change adaptation, circular economy, water and marine resources, and biodiversity.
Proposal of the EU Commission for the revision of the Packaging and Packaging Waste Directive
On 30 November 2022, as part of the European Green Deal and the new circular economy action plan, the European Commission proposed to revise the Packaging and Packaging Waste Directive, with the aim of turning all packaging fully recyclable by 2030.
New developments relating the CSDDD
The Rapporteur on the European Parliament’s Committee of Legal Affairs, Lara Wolters, published proposed amendments to the EU Corporate Sustainability Due Diligence Directive. The proposed amendments highlight that all companies have the responsibility to respect human rights and should be required to conduct due diligence. It proposes to include within its scope of application a much wider number of companies compared to the European Commission’s draft by reducing the threshold relating to the number of employees and worldwide net turnover and increasing the number of sectors described as high-impact sectors to include notably the financial services and the information, communication and technologies services. The proposed amendments get rid of the concept of ‘established business relationships’ in relation to the reach of the due diligence obligations and prefer instead an approach much more aligned with the UNGPs whereby companies should carry out due diligence with respect to their own operations as well as their ‘products and services’ (new addition), ‘those of their subsidiaries, as well as their direct and indirect business relationships throughout their value chains’. It also proposes for the due diligence obligations to include ‘good governance’ alongside human rights and environmental adverse impacts. The proposal introduces the UNGP’s trichotomy between the three modes of involvements in adverse impacts – cause, contribute and direct linkage – and the respective responses that should result from them. It also adds important considerations about responsible disengagement, contractual clauses, remediation and its eco-system and the need for effective, meaningful and informed engagement with stakeholders throughout the due diligence process.
Additionally, other draft opinions from several other EP Committees as well as amendment proposals were published in November.
UN Report on Greenwashing
The Report from the United Nation’s High-Level Expert Group on the Net Zero Emissions Commitments of Non-State Entities provides for five principles and ten recommendations addressed to non-state entities, including industry, financial institutions, cities and regions, for the transition to net-zero no later than 2050, as to avoid green washing.
Authors: Ana Carina Duarte and Inês Crispim