Sustainable Views: What you need to know about ESG rules, investment and litigation

Welcome back to Sustainable Views, the podcast about all things ESG for people working in this area or for those considering a move perhaps into it. We're going to do something slightly different with this episode. So rather than bringing you the views of experts from business, finance, or academia, today I'll be chatting to our very own experts here at Sustainable Views, our talented and delightful to work with journalists who report on some of the most interesting and often little understood corners of ESG. I'm Silvia Pavoni, your host and editor of Sustainable Views. Let's start the show. So as many of you know, Sustainable Views is not just this podcast. In fact, these recordings are a small fraction of the content we create online, and the team here focuses on a number of key areas. Today we'll take you through some of the most consequential developments of 2023 and what we will be focusing on next year. So we're sitting in our FT London studio. As you know, Sustainable Views is part of the Financial Times Group. And around the table we have Filippa, Alex, Claudia, and Florence. Filippa, you've just come in from Brussels. You're based there and you cover everything that the EU machine is doing. What would you say are the biggest developments this year in rulemaking from the EU? And what is everyone very much concerned about looking at next year?

Thanks, Silvia. Yeah, so I think this year the main developments in the EU have been obviously the continuation of the regulation as part of the EU Green Deal. Then in terms of more sort of looking at the sustainable finance side, we've now got the EU Corporate Sustainability Due Diligence Directive, which is in its last throes of being negotiated as we speak. So we'll see whether, you know, that comes into being. Come into being. I think it will come into being, but it needs to see in what form exactly and how ambitious this is. And we've also got the EU Corporate Sustainability Reporting Directive, which has finally been signed off on, and the first companies will have to report on that from January 2025, the largest companies. So, and then in terms of the Green Deal, I mean, one of the most controversial dossiers this year has been around the EU Nature Law, where there was a big pushback from center-right MEPs. And I think this is probably the trend going forward, is how much legislation can be got through. This the Commission and the Parliament that are in power at the moment, it's the end of their 4-year mandate. And next year there will be the European elections. And so I think it's under that which most people expect to be a shift towards the right of the political spectrum, how much momentum regulation around sustainable finance and the Green Deal and climate and nature targets will they will manage to push through or whether there will be sort of a bit of a regulatory slowdown in terms of those areas.

And this year, we've had actually big leaders, political leaders within the EU, France with President Macron, who actually called earlier on this year for a pause to rulemaking, right? And depending on who you speak to across the sustainability area and industries, some view what the EU is doing as groundbreaking. Of course, this stuff has to be regulated and some others saying actually, you know, rulemakers really should stay out of it. And I think this is really coming under a very, very bright spotlight with the CSDDD, or the, as it mentioned the corporate sustainability due diligence directive. So you recently spoke to a lawyer based in Washington and he was saying this is outrageous, pretty much. I'm paraphrasing, of course. How can such regulation from the EU dictate how a company based and domiciled in the US should behave? Right. But then this is going to go ahead, isn't it? And we already have some of this legislation already present in the EU, so in France and Germany. And So this is happening. Are companies ready, do you think? I know the answer is not yet, but are they going to be ready?

Yeah, I think to take a step back from what you've said, I think it's interesting in terms of what was said from the lawyer I spoke to in the US that there are already many laws within the EU, such as the EU Deforestation Law, which was signed this year, and various parts of law pertaining to workers' rights, which already have an impact on what happens outside the EU. So I think it's a bit disingenuous to suggest this is the first time that's happened because that's not the case. Also, lots of companies on both sides of the Atlantic are already following either UN guidelines or OECD guidelines around due diligence. And so there is already lots happening in this space. So it's not something that's coming from nowhere. I think in terms of what you said about whether this is adding too much of a burden or not, I think it was, it's quite interesting speaking to people within the financial world or the banking world, and there are very divided opinions. But I think what most people seem to be saying, and I think is that they don't just want a box ticked, so they want to have regulation that actually makes sure that it translates onto on-the-ground action. And I think this is the concern as well from some companies, that if the reporting burden is just taken on in companies as a sort of a simple ESG reporting exercise, it becomes a box-ticking exercise. And what it needs is regulation which permits a whole company and therefore really causes significant change. And I think that's what we're going to see as to how much it really is taken on board and creates a wider change rather than just a sort of a reporting, very simple kind of change that a box has been ticked and that's kind of done and dusted. I think in terms of the EU, I mean, we've seen already that they've altered the legislation in terms of the definition of small and medium-sized enterprises. There is a definite will not to appear to be putting an extra burden either on companies, farmers, anybody else, and this is definitely being played by people on the far right. I think it'll be interesting to see who comes into power, for example, in the Netherlands, whether Geert Wilders and his party manages to form a government, because that will obviously also change the dynamics. So yeah, there's lots to play for in the EU at the moment and to kind of see where the ambition goes or doesn't go.

So fewer companies are going to be captured by these corporate disclosures rules, which I guess is going to be positive for those smaller companies. Nonetheless, this kind of mandatory disclosures are certainly coming. And the responsibilities that companies will have to take on throughout supply chains is also being examined. As you said, and you were talking about going back and forth and trying to find, to fine-tune regulations so that it makes sense for companies. And Alex, this is arguably one of the biggest challenges when we look at sustainable investing, because of course, the US also produced specific rules around sustainable finance that initially, and still are, directed at disclosures, but in practice have been used to label funds. And of course, for anyone listening who is not yet familiar with Sustainable Views, we do like to look and study regulation. We are interesting people like that. So, Alex, there's been quite a lot of back and forth about SFDR. The UK is also looking at these kinds of disclosures. What's going to happen next year?

It's been a year for banging the drum on the importance of channeling private capital into renewables. Governments don't have the means to tackle this issue on their own and just with the public purse. So they have to regulate in order to mobilize that private capital. And part of the strategy of doing that is making it easier for investors to understand what it is that they're investing in. And that's important because greenwashing has deterred or seen as a potential blocker to putting money into so-called ESG funds. You might remember a few years ago, Boohoo, the fast fashion company ending up in a ton of ESG funds. And that was particularly galling given credible allegations of difficulties in supply chain, working conditions, that kind of thing. So the EU, as you mentioned, has been consulting on its sustainable finance disclosure regulation. The UK's finalized its own sustainability disclosure requirements. And from speaking to the market, there's clearly a preference for the UK's approach, one of more kind of category-led. The UK's really made the most of watching from the sidelines on quite a few areas, be it on disclosure regulation or on coming up with its own taxonomy, watching the European Union effectively try and come to consensus between 27 nations and produce a coherent framework, which at times proved challenging for them. Basically taking the best of it and then making— talking to the market a bit longer and making what works. One of the pieces I found really interesting to work on this year was the use of Article 9 funds with SFDR. And their ability to invest in transition. So Article 9 funds, for those who aren't familiar with this, is the, I guess what you call the highest standards within S&P.

The greenest of the green.

Yeah, this is technically supposed to be like 100% sustainable investment. And some fund managers will say they should only be investing in the greenest of the green. Others will say, well, actually, no, we're not going to get anywhere if funds only divert capital into— and so they will invest in polluters. And there's a big disagreement between the fund management community as to what these are, what, you know, what these are to be used for. And ultimately where the position of the EU's arrived at is that, well, it was, I think it's fair to say Philippa was deliberately vague in parts to try and I guess help them, help the market come to position and be pragmatic. But ultimately they are pivoting to more kind of a category-led, less hierarchical approach, and one that's more permissive of investing in transition.

So we may see actually some funds that can, would be allowed to be called themselves sustainable, actually investing in those companies. We're thinking about potentially an oil company trying to be less oily. Are we thinking about those kinds of investments?

Well, it's, yeah, it's a lack. Yeah, exactly. And it's a lack of like certainty of what constitutes sustainable investment in the first place. It's an oil company that's trying to make itself green. Many will argue, well, we should actually be trying to back those companies, whether they are, of course, doing that in practice is a different thing entirely. But yes, it looks like the EU is going to take up the UK's approach, moving to more kind of less hierarchical product categories. If you speak to Article 9 managers, it's not meant to be a hierarchy, but they want you to know they manage an Article 9 fund, not an Article 8 fund, right? I mean, the asset managers themselves, they've got more to do. So noted, like a recent global survey of them by Mercer, some interesting facts. So 35% of these managers report having set net zero targets, and that's up from 27% last year. But while 44% of them haven't set those targets and don't plan to introduce them in the next couple of years, last year that was only 38%. So it seems like moving in the wrong direction. But yeah, broadly, like the UK and the EU are trying to regulate and legislate. And a really interesting area next year is looking at the US, look what happens in the presidential election. Joe Biden, you know, introduced the Inflation Reduction Act. And I think the real genius of that is that it's a bipartisan win. The left, the Democrats, get green investment and devolve into various states, and the right get job creation. So while there's concern about the prospects of President Trump coming in, and it looks likely currently that Trump will win, the argument has been put to me that a lot of this action, a lot of this capital has already been devolved, and states want their job creation. Like, the US's job creation data is actually pretty good. It's economic. This economy is doing pretty well compared to the rest of the world. So actually, the Republicans may not be able to come in and just put a brake on that because it's really going to shoot them in the face.

So again, this is really being played out, policy, but also public finance being directed at these kinds of areas as, well, political theatre, if you want to use this word. But underneath, and I think this is something that pretty much, well, most people tell us is correct, companies and administrations at a more local level are still working on this and will continue to work on this, the ones that are very much behind But Claudia, let me bring you in because of course Alex was talking about greenwashing and how this huge body and ever-expanding and complex body of regulation around the world is tackling greenwashing and trying to avoid all of us being misled by companies misstating their sustainability credentials. And increasingly, these kind of claims are ending up in court. And you've been following climate litigation and more broadly ESG litigation quite closely. I would say that perhaps 70% of your time, Claudia, is now spent looking at what lawsuits are being brought in front of courts around the world. So tell us a little bit about what has been happening this year and what we are going to monitor in 2024.

Yes, we have tried our best to follow up the several trends that we have observed. And as you were saying, we have reported on. So perhaps to take a basic backstep view is that over the last few years, there has been a lot more research on climate litigation, especially from academic institutions. One of the main institutions that has quite a good detailed database on this is the Seven Center for Climate Change Law at Columbia Law School in New York. And they have recorded over more than 2,500 climate lawsuits worldwide. The majority of those are in the United States because the US is generally a jurisdiction prone to litigation, but many others have been recorded in other jurisdictions. So when we look at litigation, You kind of have roughly two categories. You have lawsuits against national or local government bodies, or you have lawsuits against companies. Now, the people who initiate those lawsuits can be either NGOs, investors, regulators, corporate competitors, or in some cases also individuals. So within that, you have several trends that we have reported on. You mentioned already greenwashing as a recurring theme. So these are cases where companies are being held to account related to green claims in their products or marketing, which seem not to be sufficiently substantiated. These cases are generally launched by regulators or NGOs or even competitors who believe that these claims result in unfair competition.

And we do have one case in Italy, right, between two competitors within the textile industry. So this kind of, this kind of cases are already happening.

Yes. Definitely. Other topics we have seen pop up in climate litigations are government net-zero plans being contested in court on the basis that national climate policymaking is actually not aligned with governments' pledge to reach net-zero by 2050. An example of that would be the UK that has been asked to revise its net-zero strategy because it was found to not meet the emissions reduction targets set under law. So there you see the interplay between climate action regulation and sort of the spur towards progressive movements, really. Other theme could be the polluter pays cases. So these are instances where plaintiffs are asking for financial compensation for alleged loss and damage. In the US, there have been a number of cases filed recently that directly target oil and gas majors for their contributions to climate change. These are still going through the courts, but they're set for trial. So that will be definitely an area that we will be looking at more closely. Perhaps a very much discussed lawsuit recently was the ruling on ClientEarth versus the Board of Shell, which is basically angling the personal liability issue in courts, which will be something we will keep following as well. The NGO ClientEarth was unsuccessful to hold directors of the board directly responsible for the company's contribution to climate change, but nonetheless, it's seen as very, very influential by the wider legal community and will definitely further agitate the waters when it comes to courts actually having to take a closer look at boards' decision-making.

Of course, because a big part of this is not just the whole legal machine and the due diligence machine, but it's also very much corporate governance and individual responsibilities towards the ultimate goal of mitigating and adapting to climate change. To global warming. And so that's definitely something that we'll continue to monitor. And I don't think we found anyone that told us that climate litigation was going to go down in the near future. Right. So very likely, very likely, if not staying the same, it will increase, potentially increase. So another very interesting area. So regulation, capital flows, investment going around, lots of work for the lawyers and the consultants, but also a lot of work, Florence, about technology, because of course, a big chunk of the discussion is around green technology and technology that can help us and can help heavy polluters to take carbon off the atmosphere. And we are recording this as COP28 is wrapping up. So we don't quite know what kind of document is going to come out at the end of it. But what we do know is that there is a lot of emphasis on the use of carbon capture and storage, because of course, if then big polluters can use that kind of technology to compensate for their emissions, their business model pretty much stays intact. But you looked into some really interesting data about the efficacy of CCS technology, Florence. So tell us a little bit about what you found.

Yeah, it's definitely a really interesting topic and one that's been subject of much debate during COP. The first thing to note is that CCS is growing. The Global CCS Institute is a think tank that puts out an annual report. Their report from this year shows a 50% increase in carbon capture capacity compared to 2022. So now total capture capacity is at 361 million tons. However, that does compare to the 57.4 gigatons of CO2 emissions in 2022 according to the UN's Emissions Gap Report, which came out relatively recently. Also, an important thing to note is while we have this figure of 361 million tons, there has been some suggestions that perhaps carbon capture isn't as effective as people are claiming. One prominent example is the Boundary Dam Power Station CCS project, which is a coal retired power plant in Saskatchewan, Canada, with an attached CCS project which has been operating since 2014. The Institute for Energy Economics and Financial Analysis did a study on this CCS project, and they found that it barely achieved 50% of capture capacity on any single day and never over an extended period. So under half the amount of carbon that was being emitted by the plant was actually being captured. So it's important to take these figures with a grain of salt when we're looking at potential capture capacity. And I think that's where the issue has become very polarised. Environmentalists and critics often point out that CCS is largely unproven and are urging for more climate action now rather than waiting on a potential future technology, which we don't quite have the data to show that it's truly effective yet.

So this is definitely one of the many areas that we will continue to cover, the efficacy of these technologies and the use of many other technologies and what else could come out of companies' labs, but also policymakers, regulators, and the courts, of course. So this is just a little sample of the kind of coverage we've been doing, and much more will continue to come, of course, at sustainableviews.com. So thank you so much, everyone, for joining. So Philippa, Alex, Claudia, and Florence, and to anyone listening, we're going to take a little break and we're going to come back in January. With a new episode of Sustainable Views. Until then.