Key news in this edition:
- US Securities and Exchange Commission adopts new rules on cyber security disclosure for public companies
- UK announces changes to its emissions trading scheme
- European Commission adopts the new European Sustainability Reporting Standards.
North America
US Environmental Protection Agency launches additional USD 20 billion in green funding
On 14 July, the Environmental Protection Agency (‘EPA’), the US’s national regulatory body for environmental protection, announced that it had launched an additional USD 20 billion in funding for green projects that predominantly target lower-income communities in the US. Out of the total amount, a USD 14 billion National Clean Investment Fund (‘NCIF’) will provide grants to two or three clean financing institutions. The second grant, a USD 6 billion Clean Communities Investment Accelerator, will provide grants to two-to-seven nonprofit organisations that can offer funding and technical assistance to public, non-profit, and community lenders in low-income communities. 40 percent of NCIF’s funds have been earmarked towards lower-income and disadvantaged communities – including those with environmental justice and energy concerns. These two grants came in succession of the USD 7 billion Solar for All Competition, which was launched on 28 June 2023 and aims to provide up to 60 grants to states, tribal governments, municipalities, and nonprofits, with the aim of increasing residential solar power investments in disadvantaged communities.
SEC adopts new rules on cyber security disclosure for public companies
On 26 July, the Securities and Exchange Commission (‘SEC’), the US securities market regulator, adopted final rules which will require public companies to disclose material cyber security incidents and their cyber security risk management, strategy, and governance. The rules aim to provide investors with timely and consistent information about the cyber security risks facing public companies. Specifically, the rules will require companies to report any material cyber security incidents within four days of a breach, including a comprehensive plan on assessing, identifying, and managing material risks for cyber security threats and provide disclosure of the board’s oversight of cyber security risk. Foreign private issuers will also have to make comparable disclosures. The adopted rules will be effective 30 days after its publication in the Federal Register; affected companies will be required to disclose this information in annual reports for fiscal years ending in December 2023.
Asia
Chinese government publishes interim regulations on AI generated content
On 13 July, seven government authorities in China published the country’s interim regulations on Artificial Intelligence Generated Content ('AIGC’). These authorities included Cyberspace Administration of China, the national internet regulator; and the National Development and Reform Commission, the department responsible for formulating economic development policy. The regulations indicate that service providers and users of AIGC are required to safeguard national security, public interests, and lawful rights. The new interim measures include a requirement for service providers to install safeguards to prevent algorithmic discrimination, respect intellectual property and privacy, ensure lawful data sourcing, obtain user consent for personal data, enhance transparency, properly label generated content, and complete safety assessments. The new regulations will be effective from 15 August 2023.
SEBI launches ESG sub-category for mutual funds
On 20 July, the Securities and Exchange Board of India (‘SEBI’) introduced a new category of mutual fund schemes for ESG investing and related disclosures by mutual funds. Prior to this change, mutual funds were only allowed to launch one ESG scheme under the thematic category of Equity schemes. Effective from the date of publication, mutual funds would be permitted to launch multiple schemes with the following ESG strategies: exclusion, integration, best-in-class and positive screening, impact investing, sustainable objectives, and transition or transitional related investments. The move aims to facilitate green financing, while mitigating the risk of green washing.
These funds are obliged to invest a minimum of 80 percent of assets in line with their chosen strategy, with the remaining portion of the investment not being in contradiction to the strategy of the scheme. For example, mutual funds operating under the impact investing strategy will aim to focus on generating a measurable and positive environmental and social impact, in addition to a positive financial outcome; whereas, those that follow a best-in-class and positive screening strategy will aim to invest in entities that rank better than their peers on one or more ESG related performance metric.
Europe
UK announces changes to the UK Emissions Trading Scheme
On 3 July, the UK Emissions Trading Scheme Authority (‘ETSA’), which consists of the UK, Welsh and Scottish governments, as well as the Department of Environment and Rural Affairs in Northern Ireland, announced a new package of reforms focusing on carbon emissions. ETSA runs the Emissions Trading Scheme, which has been in force since 2021, and puts limits on greenhouse gas emissions in a number of high-emitting industries, including energy and aviation. The limits are placed with the aim of incentivising industry-wide trends toward renewable technologies and lower emission alternatives to fossil fuels. From 2024 onwards, the industries subject to the Emissions Trading Scheme are required to reduce their emissions at the rate needed to meet net zero goals. In order to achieve a smooth transition, ETSA introduced extra carbon allowances to industries between 2024 and 2027 – according to ETSA’s response to a consultation on the reforms, 53.5 million extra allowances will be released to the market from reserves. Furthermore, following the reforms, two more industries were added to the remit of the Emissions Trading Scheme, namely: domestic maritime transport, effective from 2026; and the waste sector, effective from 2028.
European Union launches Common Supervisory Action for disclosures and sustainability risks in the financial sector
On 6 July, The European Securities and Markets Authority (‘ESMA’), the EU’s financial markets regulator and supervisor, and the National Competent Authorities (‘NCAs’), European regulatory authorities monitoring compliance with national regulations, launched a Common Supervisory Action (‘CSA’) focusing on sustainability related disclosures and the integration of sustainability risks in the investment management sector. The CSA’s main aim is to evaluate supervised asset managers’ level of compliance with relevant regulations, including the Sustainable Finance Disclosure Regulation, an EU regulation which came into effect in 2021 to improve transparency for investment products. Until the third quarter of the 2024 financial year, NCAs will supervise sustainability related disclosures, paying particular attention to compliance with regulations, greenwashing risks in the sector, and the identification of points of intervention to address these issues. The NCAs’ cooperation with ESMA and the sharing of this information are intended to lead to greater convergence in sustainability risk integration and the supervision of disclosures.
The European Commission adopts the European Sustainability Reporting Standards
On 31 July, the European Commission (‘EC’) adopted the new European Sustainability Reporting Standards (‘ESRS’), which outlines the ESG reporting criteria for companies in the European Union (‘EU’). These criteria were adopted to help investors, civil society organisations, and consumers in the EU to better understand the environmental, social and governance impacts of companies. The new ESRS takes into account recommendations made by the European Financial Reporting Advisory Group (‘EFRAG’) – an independent advisory body, majority funded by the EU – that were submitted to the EC in November 2022. However, the adopted version of the ESRS includes significant modifications to ERFAG’s initial suggestions.
These modifications include: new phase-in provisions for companies with less than 750 employees, including postponing the reporting requirements for biodiversity, value-chain workers, affected communities, and consumers by up to two years depending on the company and criterium; allowing companies greater flexibility in deciding what information to disclose, depending on its relevancy, thereby allowing disclosures to be subject to “materiality”; and making a number of reporting requirements voluntary instead of mandatory, including reporting on biodiversity transition plans. The adopted ESRS will now be scrutinised by the European Parliament and the European Council; these institutions may reject the draft but cannot amend it. If both bodies approve the ESRS, it will be officially adopted by the EU.
MIddle East
The Abu Dhabi National Oil Company brings forward its net zero carbon emissions target
On 31 July, Khaled bin Mohamed bin Zayed, the Crown Prince of Abu Dhabi, approved the accelerated decarbonisation plan of Abu Dhabi National Oil Company (‘ADNOC’), UAE’s state energy company. The plan brings forward ADNOC’s net zero emissions target by five years, from 2050 to 2045. Furthermore, the company aims to achieve zero methane emissions within the next seven years, by 2030. Members of ADNOC’s executive committee and the Crown Prince have called for new global partnerships to support the plan.
