Sustainability Blog #5

From 1 January 2023, the new German "Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains" (Supply Chain Due Diligence Act – German: Lieferkettensorgfaltspflichtengesetz, or “LkSG” for short) came into force. In legal terms, the Act primarily means that companies must make reasonable efforts to ensure that there are no violations of human rights in their own business operations and in their supply chain. The rules of the Supply Chain Act will affect all German companies directly, regardless of their legal form, head office, principal place of business or statutory registered office. The act will be implemented in phases – as of 1 January 2023, companies with 3000 or more employees have to comply with the LkSG if they have their statutory seat, principal place of business or a branch office in Germany. The number of employees includes employees of foreign subsidiaries who are working in Germany. From 1 January 2024 the threshold for the number of employees is lowered to include companies with 1000 or more employees.

You can find a CMS-Law article on Five myths about the German Supply Chain Act here.

The European Securities and Markets Authority (ESMA), has issued an opinion on the first set of draft European Sustainability Reporting Standards (ESRS Set 1) developed by the European Financial Reporting Advisory Group (EFRAG). ESMA stated that ESRS Set 1 broadly meets the objective of encouraging investor protection and of not undermining financial stability. However, in order to “bring Set 1 from broadly capable to fully capable of meeting that objective, the European Commission must address selected technical issues set out in the opinion”. Specifically, there should be “improvements of the level of consistency vis-à-vis the requirements of the CSRD and other pieces of EU legislation, important clarifications of definitions and terminology and further guidance on the materiality assessment process.” The Commission will now consider ESMA’s opinion alongside opinions submitted by the EBA, EIOPA and other public bodies and adopt ESRS Set 1 into delegated acts by 30 June 2023.

Speaking of sustainability standards, The IFRS Foundation’s International Sustainability Standards Board (ISSB) will be releasing the final versions for the first global standards for sustainability and climate-related reporting in June of 2023. This was confirmed by the chair of the IFRS Foundation Trustees Erkki Liikanen at the WEF in Davos.

On 16 January, the European Central Bank (ECB) released its opinion on a proposal for a directive on the energy performance of buildings (EPBD). The ECB broadly supports the proposed directive, however it also suggests some revisions to the proposal. The ECB has concerns regarding the proposed methodology for the definition of the new EPC classes, and calls for an increased degree of harmonisation across the Union. As stated in the opinion, “the proposed directive only defines common criteria for the best and worst EPCs for each Member State, without fully harmonising the underlying definitions and methodologies which are determined at national level.” Moreover, the ECB also proposes full and timely access to EPC databases for credit institutions and financial institutions to manage their climate-related transition risks and transposition of the proposed directive before 2025.

On 20 January, HANFA (Croatian Financial Services Supervisory Authority) joined with the national competent authorities in Malta, Poland, and Romania, in the EU multi-country project Sustainable Finance – Supervisory Capacity Enhancement. HANFA states in their press release that “the EU sustainable finance framework has a crucial role in delivering on the policy objectives under the European Green Deal. (…) This new framework will facilitate these goals by enabling public and private stakeholders to channel finance to investments that reduce exposure to climate and environmental risks.”

Publications

On 26 January, UN Principles for Responsible Investment (PRI) launched its updated Reporting Framework for its 2023 reporting season, which opens in May. PRI issued a number of materials that can be found here. The materials released include an overview and structure guide to the Reporting Framework, the full Reporting Framework modules, and a guide to the logic that determines which questions are applicable to each signatory. It also includes supporting guidance such as the Reporting Framework glossary, high-level assessment methodology, and a diagram showing which modules are relevant to each signatory type (asset owner or investment manager).

European Law Institute (ELI) issued the Guidance on Company Capital and Financial Accounting for Corporate Sustainability. The Guidance includes a set of 20 recommendations on company capital and financial accounting for corporate sustainability which: (i) provide a frame of reference and analysis to understand corporate sustainability in the context of business and law; (ii) point to specific issues which need to be addressed by European and national lawmakers and regulators; and (iii) establish a set of company law instruments recommending possible solutions to cope with these issues.