Key news in this edition:
- UK Court of Appeal demonstrates applicability of money laundering legislation to ESG violations in product supply chains.
- French court gives green light to a Duty of Vigilance Law litigation.
- Switzerland and Brazil align with the EU and ISSB on sustainability reporting.
editorial
Recent legal and regulatory developments underscore the increasing emphasis on ESG issues in global supply chains and corporate practices. On June 27, the UK Court of Appeal ordered the National Crime Agency to revisit its decision against investigating forced labour allegations in cotton imports from China, highlighting the applicability of the UK Proceeds of Crime Act 2002 to ESG violations. In France, the Paris Court of Appeal allowed litigation against TotalEnergies for alleged breaches of the Duty of Vigilance Law, which mandates companies to address human and environmental risks in their operations. We have also seen strides toward harmonising sustainability disclosure standards to facilitate consistent and comparable ESG reporting, announced at the annual conference of the IFRS Foundation last month. At the same time, countries like Switzerland and Brazil are aligning their sustainability reporting standards with the ISSB or the EU’s Corporate Sustainability Reporting Directive, and despite opposition, the EU is steadfast in enforcing its Regulation on Deforestation-free Products by December 2024.
Special edition: Next month we will publish a special edition of ESG Watch, taking a deep dive into carbon credits.
UK Court of Appeal demonstrates applicability of money laundering legislation to ESG violations in product supply chains
On 27 June, the UK Court of Appeal ordered the National Crime Agency (‘NCA’), the UK’s national law enforcement agency, to reconsider its decision not to investigate allegations of forced labour in the production of cotton products imported from China to the UK. The appellant in this case, the World Uyghur Congress (‘WUC’), a non-governmental organisation, had challenged the NCA’s 2021 decision not to investigate whether cotton products imported to the UK from the Xinjiang Uyghur Autonomous Region of China were the product of human rights abuses. WUC argued that the cotton products’ supply chain should have been investigated under the UK Proceeds of Crime Act 2002 (‘POCA’), and based on evidence collected by the organisation and submitted to the NCA.
POCA is a set of UK legislation providing for the confiscation or civil recovery of the proceeds of crime and is considered to be the country’s principal anti-money laundering legislation. This decision confirms that POCA can be applied to criminal conduct in product supply chains, indicating to UK-based companies that they risk prosecution for money laundering or confiscation of assets if found to have traded in goods exposed to human rights abuses.
So what?
Although these goods were produced several thousand miles away from UK shores, this Court of Appeals decision highlights the broad jurisdictional scope of POCA, and its encompassing definition of criminal property at risk of confiscation, including goods exposed to human rights abuses or environmental crimes. This decision reinforces the importance of comprehensive due diligence on suppliers and counterparties conducted by those with significant trading operations in the UK, with particular focus on potential ESG violations in the production supply chain.
[Contributor: Emma Shewell]
French court gives green light to a Duty of Vigilance Law litigation
On 18 June, the dedicated due diligence chamber at the Paris Court of Appeal examined three appeals regarding the dismissal of lawsuits alleging breaches of corporate vigilance obligations.
The original complaints were filed by a consortium of six NGOs and 15 local authorities against three French energy and waste management companies. In the case of TotalEnergies, the plaintiffs alleged wrongdoing in the company’s oil activities in Uganda and called for the company to take the necessary measures to align with the 1.5°C target of the Paris Agreement, in accordance with the law on the duty of vigilance. In the other two cases, the campaigners alleged damage to land and the violation of rights of indigenous peoples when constructing a wind farm in Mexico by EDF, and contamination of drinking water by Vigie Groupe in Chile. The Court of Appeal upheld the original dismissals in the cases against EDF and Vigie Groupe, but allowed the TotalEnergies one to be examined on its merits.
France’s Duty of Vigilance Act, published in 2017, requires companies with more than 5,000 employees in France and/or more than 10,000 worldwide to publish a vigilance plan, covering the human and environmental risks of their activities across their global operations and supply chains. However, since its implementation, the law has faced controversy over restrictive interpretations which, according to campaigners, significantly jeopardises its effectiveness.
So far, the only company to have been found to fail to respect the Duty of Vigilance Law, has been La Poste, the French state-owned postal operator, which was criticised by trade unions for the use of undocumented workers by its subcontractors. In December 2023, the Paris Judicial Tribunal ordered La Poste to adjust risk mapping to adequately reflect the dangers associated with illegal labour and implement a subcontractor evaluation and monitoring framework.
So what?
This month’s decision of the appellate court paves the way for future judgements on corporate accountability regarding environmental and human rights. Such rulings could lead to significant changes in the way companies subject to the Duty of Vigilance Law manage their due diligence obligations, stressing the need for comprehensive risk assessment procedures and readiness to address identified issues.
[Contributor: Dominik Wilk]
ISSB announces two-year plan to further harmonise sustainability disclosures
The IFRS Foundation, a not-for-profit responsible for developing sustainability standards, held its annual conference on 24-25 June, where the chair of the Foundation’s standard-setting body, the International Sustainability Standards Board (ISSB), announced plans for further harmonisation of sustainability reporting.
Since its inception, the ISSB has worked towards reducing the complexity of reporting standards in ESG, where too many acronyms and fragmentation in information can often feel overwhelming for practitioners. The Foundation’s efforts also seek to help investors make informed decisions by being able to compare sustainability disclosures across companies and industries with standardised and consistent reporting.
The ISSB latest plans include streamlining and consolidating frameworks and standards for disclosures about transition plans - which are entities’ plans to address any target to transition to a lower carbon economy. The ISSB also aims to ensure ongoing compatibility with the work of the GHG Protocol, the global framework to measure and manage greenhouse gas emissions, by putting in place new governance arrangements.
so what?
The use of multiple reporting standards by entities makes it difficult to access consistent ESG data and compare companies’ ESG performances. Further work to harmonise ESG reporting standards will support effective sustainability reporting that will enable investors and other stakeholders to assess impact, risk and opportunities more efficiently.
[Contributor: Elif Korca]
Switzerland and Brazil align with the EU and ISSB on sustainability reporting
ESG reporting has gained momentum worldwide in light of the European Union’s Corporate Sustainability Reporting Directive (‘CSRD’), which requires that as of 2024, nearly 50,000 companies in the EU are subject to mandatory sustainability reporting. Now, we are seeing individual countries not subject to these regional requirements make moves to bring their own ESG legislation in line with the EU. For example, Switzerland has recently commenced consultation surrounding proposed amendments to the Swiss Code of Obligations, the civil code responsible for contract law and corporations, that would increase sustainability reporting requirements in the country. The proposed amendments would expand reporting requirements to cover over 3,000 Switzerland-based companies, including subsidiaries of multinational corporations. The Swiss amendments are intended to align the country’s reporting requirements with those of the EU, and as such, heavily echo the reporting requirements of the CSRD.
Switzerland is not the only country looking to make changes to its sustainability requirements – in 2023, the Brazilian Ministry of Finance announced that it will implement the International Sustainability Standards Board’s (‘ISSB’) International Financial Reporting Standards (‘IFRS’) into Brazil’s regulatory framework starting in 2024, with mandatory use starting in 2026. Additionally, Colombia and Chile have mandated use of the Sustainable Accounting Standards Board frameworks, which formed the basis of the ISSB’s standards, in companies’ annual reports.
so what?
These actions demonstrate countries’ willingness to implement ESG strategies by incorporating standardised requirements into their own financial regulatory policies. Further, it opens the door for similar sustainability reporting mandates outside the EU.
[Contributor: Haddie Hamal]
EU deforestation regulation to be enforced despite calls for a delay
Despite facing pressure from multiple political and industry actors to delay the enforcement of its Regulation on Deforestation-free Products (‘EUDR’), the EU has indicated the law will be implemented in December 2024 as originally planned.
The EUDR was introduced on 29 June 2023 and obliges companies which want to continue trading within the EU to prove that their products and supply chains do not benefit from deforestation. The regulation primarily targets commodities which pose deforestation risks, including beef, cocoa, coffee, palm oil, rubber, soy, and wood – as well as derivatives of these products. Companies have been given 18 months to comply with the legislation before it is enforced from 30 December 2024. Penalties for failing to comply include fines which could amount to at least 4 percent of a company’s annual EU turnover.
According to reporting by Reuters, several governments, including the US, as well as industry groups such as the Confederation of European Paper Industries (‘CEPI’), have appealed to the EU to delay the law’s enforcement, citing concerns regarding the bloc’s readiness to deal with breaches. Stakeholders have also expressed concern over the fact that the guidance and online platform for submitting due diligence statements are not yet ready for use. In a letter addressed to CEPI, the EU’s Environment Commissioner acknowledged the concerns expressed by industry representatives but stated that many sectors and countries had shown “encouraging” progress in preparing for the EUDR’s implementation.
so what?
The EU's commitment to enforcing the Regulation on Deforestation-free Products underscores the need for companies to ensure their supply chains are free from deforestation risks to avoid significant fines and maintain their ability to trade within the EU market.
[Contributor: Amy Davies]
