Asia: Japan to Require ESG Disclosures from Public Companies
The Japan Financial Services Agency ("JFSA") recently proposed an amendment to the Financial Instruments Exchange Act of Japan. First announced in 2021, the legislation requires companies listed in Japan with a current fiscal year ending on March 31, 2023 or later to disclose additional ESG information. New general rules concerning forward-looking statements impose liability on companies for disclosing false statements of material information as well as for failing to disclose material factual information.
Under the updated law, affected companies must disclose information about gender ratios in management and the participation of individuals in leadership roles. Companies could also be subject to mandatory disclosures concerning sustainability in a range of areas, which—though not yet finalized—may include the environment, society, employee matters, human rights, anti-corruption and anti-bribery measures, governance, and cybersecurity and data security measures.
Furthermore, affected companies must disclose their sustainability governance and risk management frameworks including internal policies designed to identify and manage risks and opportunities concerning sustainability. In the event that a company determines that strategy and "index and target" disclosures—i.e. those related to the evaluation, management and monitoring of sustainability risks and opportunities—are material, these disclosures are also mandatory. Otherwise, strategy and "index and target" disclosures are encouraged but not required.
Europe: Switzerland's Federal Council Moves to Reduce
On December 16, 2022, the Swiss Federal Council released a position paper on the prevention of greenwashing in the financial sector. The Swiss authority defines greenwashing as "when, for example, a financial instrument or service is portrayed as having sustainable characteristics or pursuing sustainability goals, and this portrayal does not adequately reflect reality." The country currently has no legislative or regulatory mandates on transparency or compliance with sustainability criteria for financial services or products, except for funds.
The paper identifies greenwashing risks, including: (a) clients, investors, and insured persons being misled; (b) legal and reputational risks for financial institutions; (c) disfunction of the financial markets and reputation of the Swiss financial center; and (d) capital flows intended to contribute to sustainability goals being diverted to non-sustainable activities, which in turn could impair Switzerland's international sustainability commitments.
The Federal Council wants financial products to be labeled as sustainable only if they contribute or align with at least one specific sustainability goal. This means that those which aim generally to reduce ESG risk cannot be classified as sustainable. Sustainability goals may be described broadly, and a firm offering a sustainable product will need to report on its goals regularly and publicly to ensure transparency and comparability.
The Swiss body has appointed a working group under the Federal Department of Finance (alongside representatives from several other government authorities) to determine the best course for implementation of these principles. The Federal Department of Finance said it would present the Federal Council with proposals in September 2023.
U.S.: Automakers Facing Senate Inquiry into Possible Links to
Uyghur Forced Labor
On December 22, 2022, Senate Finance Committee Chair Ron Wyden sent a letter to eight automakers about possible links in their supply chains to forced labor in Xinjiang, China. The inquiry follows a report by researchers at Sheffield Hallam University, which found links between Chinese companies operating in Xinjiang and automakers that import parts from them, including batteries, wiring, and wheels. Importing goods made with forced labor violates U.S. trade law.
The eight automakers who received the letters are Ford, General Motors, Honda, Mercedes-Benz, Stellantis, Tesla, Toyota, and Volkswagen.
The letter asks the automakers to answer questions related to supply chain due diligence in order to aid the Committee's investigation of the effectiveness of trade-based efforts by the U.S. to prevent human rights abuses abroad.
The automakers have until January 13, 2023 to respond.
Senate press release
U.S.: Jump in U.S. Firms Making Scope 3 Disclosures Even Though
Proposed Climate Disclosure Rule Is Not Yet in Force
In November 2022, MSCI published a report indicating that the number of U.S. listed firms making Scope 3 disclosures has increased by 67% since the Securities and Exchange Commission ("SEC") published its proposed climate disclosure rule in March 2022 (which has not yet come into force). Under the proposed rule, SEC-registered companies would be required to disclose Scope 1 emissions (from direct sources), Scope 2 emissions (from purchased electricity, heat or steam), and Scope 3 emissions (from other sources in the value chain). The proposal requires reporting of Scope 3 emissions only where they are deemed material or where the company has included them in emissions targets.
Despite the qualified nature of the SEC's proposed Scope 3 emissions disclosure, MSCI found that in the six months since March, the number of U.S. listed firms disclosing at least some of their Scope 3 emissions jumped from 15% to 25%. In addition, companies in the emissions-intensive materials, utilities, and energy sectors saw an 18%, 33% and 19% rise in Scope 3 disclosures respectively. On average, Scope 3 emissions account for 75% of companies' greenhouse gas ("GHG") emissions and are necessary to understand climate-related financial risks and to facilitate actual emissions reductions.
Global: ISSB Announces Support for Companies Disclosing Scope 3
On December 15, 2022, the International Sustainability Standards Board ("ISSB") published guidance and reliefs to support companies applying the requirement within its Climate-related Disclosures Standard to disclose Scope 3 GHG emissions where material.
The ISSB voted unanimously to include Scope 3 emissions in its corporate disclosure guidelines in October 2022. The ISSB agreed at the time to provide relief provisions in order to ensure compliance with the Scope 3 requirements, the detail of which was discussed at ISSB's December meeting.
Once a company adopts a framework for the measurement of Scope 3 emissions, supplemented by disclosures for the benefit of investors, it can benefit from the following safe harbors:
- A temporary exemption from Scope 3 disclosures for a minimum of one year (i.e. a grace period to allow for effective implementation); and
- The inclusion of information not aligned with a company's own reporting period (i.e., should it obtain relevant data from companies in its value chain with a different reporting period).
Companies adopting the framework must use the most recent data that is available to them without exerting undue cost or effort to estimate and disclose its Scope 3 emissions. Among other conditions, companies must disclose the effects of significant events and changes occurring between its own reporting periods and those of the companies in its value chain.
Global: COP15 Concludes with the Adoption of the Kunming-Montreal
Global Biodiversity Framework
On December 7–19, 2022, delegates from more than 190 countries gathered in Montreal for the UN Conference on Biodiversity ("COP15"). Environment ministers, civil society, and other stakeholders were tasked with developing a final Global Biodiversity Framework akin to the Paris Agreement on climate change, with the central mission of halting and reversing biodiversity loss over the coming decade.
The Kunming-Montreal Global Biodiversity Framework ("GBF")—adopted on the final day of COP15—committed countries to ensuring that at least 30% of areas of degraded terrestrial, inland water, and coastal and marine ecosystems are under effective restoration and that 30% of terrestrial, inland water, and coastal and marine areas are effectively conserved by 2030. Developed countries also committed to providing to developing countries $20 billion in annual funding starting in 2025 and $30 billion annually by 2030 through a new biodiversity fund that will be created under the Global Environment Facility.
COP15 also demonstrated an increasing awareness around the economic risks posed by nature loss and hence the need to engage the private sector to transform the global economy into a nature-positive, sustainable economy. The GBF encourages businesses to reduce progressively their negative impacts on biodiversity and increase positive impacts. Likewise, countries must ensure that companies and financial institutions monitor, assess, and transparently disclose nature-related risks, dependencies, and impacts across their operations and supply chains.
A Debevoise publication on COP15 will be published shortly. It will be made available on the Debevoise ESG Resource Center, accessible here.
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