As corporations' ESG-related activities attract increasing attention from regulators across the globe, the EU and the UK continue to lead on regulation
The frequency and complexity of regulatory change remains a top priority now and into the future for in-house lawyers, according to the 2023 State of the Corporate Law Department report. Environmental, social & governance (ESG) remains one of the major areas of focus in the regulatory landscape across the globe, and the European Union and the United Kingdom continue to lead the world in disruptive change with ESG-related regulation.
Thomson Reuters Practical Law UK spoke with outside counsel to learn what is top of mind for their clients in the ESG space. Many outside counsel commented that the onslaught of changing ESG regulations is a “wave washing over all sectors” because there is clear consensus that no sector is being spared from the demands of ESG, with significant needs from clients for advice on both the risks and opportunities presented by ESG. In fact, the two most pressing challenges currently are the “dizzying pace” at which ESG regulation is developing and the fragmented nature of the requirements that companies need to navigate, especially because of divergence between key markets, notably the United States and other markets.
Even within Europe, companies are seeing divergence, with E.U. member states moving ahead with their own legislation as E.U.-wide rules are finalized, such as the German Supply Chain Due Diligence Act that came into force in January. And in the U.K., companies are coming to grips with the different approaches being adopted by Parliament and the local governments, such as the deposit return schemes for drinks containers.
In this complex environment, outside counsel commented that horizon-scanning is a primary area of support requested by clients, with a focus on disclosure and due diligence requirements, litigation and regulatory enforcement, and climate-transition work and the carbon markets.
Disclosure & due diligence — The continually evolving ESG reporting and due diligence requirements faced by clients are a major focus for firms. Two important trends are: i) a growing convergence of ESG disclosure standards with the development of the European sustainability reporting standards alongside the global sustainability disclosure standards of the International Financial Reporting Standards (IFRS); and ii) a broadening scope of disclosure and due diligence beyond climate concerns to focus more strongly on areas such as human rights and biodiversity.
The IFRS sustainability disclosure standards expected at the end of the second quarter 2023 signal efforts to provide a degree of international standardization, with several jurisdictions — including the U.K. — looking at regulatory incorporation.
In addition, companies are preparing for enhanced sustainability and governance obligations, in particular under the Corporate Sustainability Reporting Directive and the proposal for a Corporate Sustainability Due Diligence Directive. Clients are also following anticipated reforms to the U.K. corporate governance framework, as well as the final Taskforce on Nature-related Financial Disclosures framework due to be published in the fall.
Litigation & regulatory enforcement — Several law firm lawyers shared that ESG litigation is evolving rapidly, characterized by novel claims — which, because of their novelty, can be difficult to strike out — and procedural innovation. They also observed that claimants are increasingly bringing derivative claims and using class action procedures in ESG litigation. Greenwashing was cited as a particular litigious hot spot, as well as a focus for regulatory enforcement.
Climate & energy transition — With the deadline for 2030 emissions targets fast approaching, climate and energy transition activities continue to be a major focus. Firms are advising on project financing, regulatory considerations, and M&A in relation to traditional transition technologies, such as renewable and nuclear; and developing areas, such as hydrogen, carbon capture, utilization and storage, and carbon removal.
Companies and their in-house lawyers were increasingly approaching law firms for support on acquisitions of carbon credits, investments in carbon projects, carbon exchanges, and carbon auctions, as well as litigation related to carbon markets.
In addition, companies are also preparing for developments in transition plan reporting, with the U.K. Transition Plan Taskforce expected to publish its final gold standard disclosure framework for climate transition reporting later this year. However, the increased onus on forward-looking disclosures, as opposed to historical, audited information, may expose companies to greater risk of liability from those disclosures.
With the current and proposed framework of ESG regulation across the E.U. and U.K., in-house counsel will continue to lean on their outside law firms to ensure companies are prepared to meet the potential and existing deadlines. This continues to be an opportunity for law firms to demonstrate their value as the need for horizon-scanning is likely to continue for the foreseeable future.
This blog post was based on Practical Law UK Spring/Summer ESG Outlook, and you can download a full copy here (subscription required).
