Key news in this edition:
- European Commission investigates 20 airlines for alleged greenwashing.
- DRC government threatens legal action against Apple, citing evidence of ‘blood minerals’ supply chain.
- EU Critical Raw Materials Act comes into force.
editorial
Recent developments in the ESG landscape reflect a growing trend towards increasing regulatory pressures and heightened corporate accountability. The European Commission's investigation into 20 airlines for alleged greenwashing signals a crackdown on misleading sustainability claims, echoing recent advertisement bans and lawsuits against major airlines in the UK, the Netherlands, and the US. In parallel, the Democratic Republic of Congo's potential legal action against Apple for using 'blood minerals' underscores the global demand for ethical supply chains, a concern amplified by the recently approved EU's Corporate Sustainability Due Diligence Directive. This directive mandates thorough due diligence on human rights and environmental impacts, setting a new standard for corporate operations.
The revised EU Environmental Crime Directive and the new Critical Raw Materials Act ('CRMA') further illustrate this shift. These regulations enhance environmental protection through stricter penalties and aim to secure sustainable raw material supplies essential for Europe's climate and digital objectives.
Meanwhile, the recent increase of EU tariffs on Chinese electric vehicles reflects a strategic move to protect European industries from unfair competition, despite the risks of sparking a trade war. These interconnected issues underscore the necessity for businesses to navigate an increasingly complex ESG landscape, prioritizing transparency, sustainability, and regulatory compliance.
European Commission investigates 20 airlines for alleged greenwashing
On 30 April 2024, the European Commission announced that it had initiated an investigation, in cooperation with the EU’s Consumer Protection Cooperation Network (‘CPCN’), into potentially misleading sustainability claims made by 20 airlines. The Commission did not provide the names of the airlines targeted, however the investigation centres around alleged claims made by the airlines that customers would be able to offset CO2 emissions caused by flights by paying extra fees to fund the use of sustainable fuels or investments in climate projects. The Commission and CPCN identified several potentially misleading claims, including improperly using the terms “green”, “sustainable”, or “responsible”; presenting consumers with comparisons of flights according to their CO2 emissions, without providing sufficient information detailing what elements they base these comparisons on; and, discussing “sustainable aviation fuels” without detailing their environmental impacts. The airlines were given 30 days to respond to the Commission and CPCN with proposals to address the concerns. After which, the Commission, CPCN, and airlines will meet to discuss the implementation of agreed-upon changes.
Airlines are coming under increasing scrutiny as well as facing regulatory or legal action by civil groups and government authorities for sustainability claims made in advertising and marketing. In December 2023, the UK’s Advertising Standards Authority (‘ASA’) banned advertisements from Lufthansa, Etihad Airways, and Air France for misleading consumers about their environmental impacts; and in June 2023, judges in Amsterdam ruled to allow Fossielvrij, a Netherlands-based environmental advocacy group, to proceed with its case against KLM for alleged misleading advertising for its carbon offsetting program. Earlier, in May 2023, a consumer reportedly filed a class action lawsuit against an undisclosed airline at the U.S. District Court for the Central District of California for alleged false advertising regarding carbon neutrality. In 2021, Adblock Bristol, a UK-based grassroots anti-advertising organisation, filed a complaint to the ASA against EasyJet, alleging that the airline made unsubstantiated claims regarding emissions reduction in its advertising. That same year, Qatar Airways was subject to a similar complaint filed at the ASA by Adfree Cities, another UK-based anti-advertising group.
So what?
The airline industry will continue to face growing public scrutiny over its effects on the Earth’s climate, while simultaneously facing increased demands for air travel year by year. Meanwhile governments and authorities are passing newer, and more complex, regulations on sustainability, green investing, and combating climate change. It will be paramount for the industry and its investors to keep abreast of these changing regulations on marketing of sustainability and climate impacts, and ensure that they have the data and evidence to support any environmental claims they are making.
[Contributor: Rami Assaf]
DRC government threatens legal action against Apple, citing evidence of ‘blood minerals’ supply chain
On 22 April, Amsterdam & Partners LLP (‘A&P’), a Washington-headquartered law firm, representing the Democratic Republic of Congo (‘DRC’), served Apple Inc. (‘Apple’) with a set of questions regarding the alleged use of ‘blood minerals’ in the multinational technology company’s supply chain. A&P has been retained by the DRC government to investigate allegations of money laundering, terrorism financing, child labour, and environmental degradation in the illicit trade of critical minerals from the DRC, through Rwanda, to the international market. On 22 May, A&P published a press release indicating that Apple had not responded to the questions posed, and that the DRC is now considering legal action in both the US and France, given the evidence collected by A&P.
Scrutiny of global supply chains has increased steadily in recent years, particularly in the EU, where the Corporate Sustainability Due Diligence Directive (‘CSDDD’) was formally adopted into law on 24 April. The CSDDD will oblige companies with significant operations in the EU to conduct focused due diligence on human rights issues and environmental impact throughout their operational supply chains. In a recent survey conducted by S-RM, the CSDDD was identified as one of the key concerns currently facing US corporates and investment professionals, given the broad scope of the regulations. The DRC v. Apple case shows that supply chains right across the world are coming under growing scrutiny, particularly those which begin in resource-rich emerging economies.
So what?
Governments and regulators the world over are increasing their requirements for monitoring of corporates’ impact on people and the environment. Regardless of their jurisdiction of operation, large companies are now expected to answer for the impact of both their own operations and those of their suppliers, and prepare to face legal action if deemed non-compliant. Corporate sustainability and human rights due diligence is becoming a must-have, rather than a nice-to-have.
[Contributor: Emma Shewell]
EU Critical Raw Materials Act comes into force
Critical raw materials are of high economic relevance as the EU relies on imports from suppliers concentrated in a limited number of countries and with a high risk of supply disruption. On 23 May 2024, the EU’s Critical Raw Materials Act ('CRMA') entered into force to increase and diversify the EU’s critical raw materials supply, to monitor and mitigate risks of disruptions and to enhance circularity and sustainability.
The CRMA has set non-binding targets for the EU and member states to support the development of domestic capacity, while reducing the EU’s reliance on third countries by ensuring the EU’s annual consumption will be composed of at least 10% locally extracted minerals, 40% elements processed within the EU, and 25% from recycled materials. In addition, no single third country will supply more than 65% of Europe’s annual consumption of any of the key materials.
As part of the transition to a circular economy, the CRMA includes measures to promote collecting and recycling critical raw materials. Member states must implement national plans on circularity containing measures encouraging technological progress and resource efficiency. Operators must also prepare waste management plans and submit studies with a preliminary economic assessment of the possible recovery of critical raw materials from any waste stored or generated at their facilities.
The Act sets deadlines for the assessment of projects within the EU. Extraction projects are set to go through the permitting process within 27 months while recycling and processing projects should receive their permits within 15 months.
so what?
The new intra-EU extraction and recycling targets for critical raw materials will pressure companies to diversify their supply chains by reducing reliance on single-country sources and increasing the use of locally extracted and recycled materials. Additionally, some businesses will face stringent regulatory requirements, including the need to submit detailed waste management and resource recovery plans. While these measures aim to enhance supply chain resilience and sustainability, they also introduce new compliance challenges and potential costs. Companies that swiftly adapt to these regulations can gain a competitive edge, ensuring secure access to essential materials and contributing to the EU's broader climate and sustainability goals.
[Contributor: Belén Satorre]
The revised EU Environmental Crime Directive entered into force
On 20 May 2024, the European Commission announced that the new Environmental Crime Directive, which was adopted on 11 April 2024, entered into force. The new act replaces the previous directive adopted in 2008, which was failing to facilitate cross-border cooperation and act as an effective deterrent due to low sanctions. The Commission also raised increasing concerns over the significant damages caused by environmental crime on individuals’ health and economy in the EU and globally. Environmental crime has now become the fourth largest organised crime activity globally, costing EUR 80 million to EUR 230 million annually.
The revised directive provides an up-to-date list of offences categorised as environmental crimes and establishes new penalties. New offence categories include unlawful ship recycling and water extraction, serious breaches of EU chemicals and mercury legislation, and placing on the market and exporting certain commodities and products in breach of the Union Anti-Deforestation Regulation. Additionally, the new law establishes a category of qualified offences, which cause serious damage and destruction of the environment, and are subject to more severe penalties. In terms of penalties, the directive introduces a graduated system of imprisonment, and—for the first time—fines between EUR 24 million and EUR 40 million. It also expands the role of investigators and police officers in the EU’s fight against environmental crime and envisions the inclusion of environmental defenders in the criminal proceedings against environmental crime.
EU member states are obliged to translate the directive into national law by May 2026.
so what?
The revised directive compels companies with extensive supply and production chains and complex export-import activities to pay even more attention to comprehensive audits of their suppliers and subcontractors to ensure compliance. Businesses must prioritise environmental due diligence or risk severe legal and financial repercussions, including hefty fines and potential imprisonment, for non-compliance.
[Contributor: Selen Duruşkan]
EU to impose additional 25% tariffs on Chinese electric vehicles
The EU are pushing forward with an additional 25% tariff on electric vehicles imported from China, in spite of warnings from Germany and others that this may spark a larger trade war.
Car makers were notified that additional duties of up to 25% will provisionally apply to Chinese manufactured EVs, in addition to the standard 10% EV tax that already applies. German, Sweden and Hungary were all opposed to the measures, which were given the green light in spite of intense lobbying by the German government. Olaf Scholz, German Chancellor, warned that ‘isolation and illegal customs barriers ultimately just makes everything more expensive, and everyone poorer’. Many European EV manufacturers have fiercely condemned the tax-hike, fearing retaliatory measures from Beijing, or even an entire boycott. European EVs make up approximately 6% of the Chinese market, while Chinese EVs accounted for 8% of the European market in 2023.
France and Spain championed the new measures, arguing that Chinese EV manufacturers already benefit from subsidies that undercut their European rivals, and that the additional tax could generate an estimated EUR 2 billion in revenue for the block. China has already threatened retaliation, with their foreign ministry spokesperson branding the initiative a ‘typical example of protectionism that violates market economy principles and international trade rules’.
Brussels have been increasingly worried about China’s ability to manufacture and export cheaper EVs in large quantities, undermining opportunities for European vehicle manufacturers to sell domestically. Sceptics and manufacturers fear that retaliatory measures from Beijing will severely impact their ability to sell in to the Chinese market, and that any net gains from the increased taxation will be offset by the diminished appetite from China to both sell to Europe and to buy European products. We are seeing similar concerns across luxury goods and FMCG manufacturers in Europe. European member states will vote on whether or not to apply the additional tariffs on 2 November.
so what?
European companies may initially benefit from reduced competition, potentially increasing their market share domestically. However, they also risk facing retaliatory steps from China, which could lead to increased production costs and supply chain disruptions, particularly for those reliant on Chinese components. European manufacturers will need to navigate this evolving trade landscape carefully, which may include reviewing and potentially diversifying their supply chains.
[Contributor: Kendall Reid]
