As rhetoric pertaining to the effects of climate change has intensified in the public sphere, scrutiny has increased toward present and future climate regulations, and calls for more transparent corporate disclosures have never been louder. Whether in North America, the United Kingdom, European Union (EU), APAC or elsewhere, this topic headlined many of Silver’s first half ESG highlights and that theme continued in the third quarter. Over the past several months, noteworthy changes in policy, sentiment and pressure have occurred in the realm of climate-related financial regulations; environmental, social and governance (ESG) transparency; emission reduction targets and corporate sustainability.
Silver’s Analysis
Despite important efforts to standardize and increase uniformity within climate and sustainability regulations, private fund managers still face a dizzying array of regulatory uncertainty. In the last quarter there were major developments for current and future reporting requirements, including: the disbanding of the SEC’s Climate and ESG Taskforce; Science Based Targets initiative (SBTi) target changes and the potential use of carbon credits to hit climate goals; increases in the number of companies aligning to 1.5°C transition plans; standardization of frameworks; adoption of sustainability disclosure legislation by EU member states; and the use of influence by individual funds and lawmakers to push both for and against climate policies within the U.S.
However, most impactful in the near-term are state-specific climate laws that were passed and upheld, including critical California climate disclosure laws will go into effect in 2025. As we look ahead to the end of the year and what is likely to be a contentious election in the U.S., with arguments over ESG playing an outsized role, we advise our clients to remain vigilant by staying abreast of regulatory changes to know their overall and portfolio’s exposure to the rapidly evolving landscape.
To help keep private fund managers aware of the current landscape, we will delve into various global regulatory and standard-setter changes and provide a comprehensive overview of key third quarter updates, highlighting how governments, organizations and institutions are responding to the growing question of climate-related regulations and disclosures. Furthermore, as we head into Climate Week in New York City and the United Nations General Assembly in September, as well as COP29 in November, climate issues are particularly front of mind. Silver is closely monitoring these, and other industry matters to ensure that we stay ahead of key ESG issues and legislation affecting, and potentially affecting, private fund managers.
KEY TOPICS
SEC Disbands Climate and ESG Taskforce, yet Enforcement Actions Continue
Over the last few months, the SEC has discretely disbanded its Climate and ESG Taskforce. Originally established within the Division of Enforcement in 2021, the taskforce was charged with identifying ESG-related misconduct, including material gaps or misstatements in the disclosure of climate risks. Though the taskforce is no longer a separate group, its expertise is now integrated across the Division of Enforcement. And registrants should not assume the SEC will turn a blind eye to these topics! Earlier this month, the SEC charged Keurig Dr Pepper Inc. with making inaccurate statements related to the recyclability of its K-Cup products, and the company has agreed to pay $1.5 million in civil penalties to settle the charges.
SBTi Strengthens Financial Institutions’ Climate Goals to 1.5°C
In a landmark move, the SBTi revised its criteria for financial institutions, standardizing near-term emission reduction targets with other benchmarks. Effective from November 30, 2024, the Financial Institutions’ Near-Term Criteria Version 2.0 aligns targets to a 1.5°C pathway, a significant shift from the previous target of “well below 2°C” and in agreement with Paris-Aligned Benchmarks which may also be relevant for SFDR Article 9 compliance.
Key changes also include reducing the time frame for achieving targets, increasing the ambition of targets, adding coverage requirements and providing detailed guidelines on fossil fuel finance targets. Institutions with existing SBTi-validated targets will be required to update them within five years of validation, ensuring targets continue to align with the latest scientific guidance.
These revisions underscore the growing commitment to limit the adverse effects of climate change and reflect a broader trend of increasing climate ambition among financial institutions. In the near-term, institutions have the option to be assessed against either the previous or amended version of the criteria until the effective date, ensuring a smoother transition.
Do Carbon Credits Really Work?
SBTi, the world’s “leading referee” on corporate net-zero targets, left open the possibility of allowing companies to use carbon credits in their efforts to reduce emissions, but said more research was needed after a review of evidence found that many credits are largely ineffective.
In July, the SBTi published a discussion paper exploring the potential uses of carbon credits in corporate climate strategies, such as managing supply chain emissions or residual emissions (10 percent of emissions that remain unabated), but SBTi did not commit to incorporating carbon credits into a forthcoming policy update.
The debate around carbon credits remains contentious, with critics questioning their effectiveness in achieving real emission reductions. Nevertheless, the exploration of carbon credits by the SBTi indicates a willingness to consider a broader range of tools for achieving climate goals.
Companies with 1.5°C Aligned Climate Transition Plans on the Rise
The number of companies developing climate transition plans aligned with the 1.5°C target has seen a significant increase. According to a June 2024 questionnaire administered by CDP, more than 5,900 companies reported having such a plan in place, marking a 44 percent increase over the previous year. In addition, 36 percent of total respondents either had a plan in place or are planning to create one in 2025. This increase reflects growing importance in the decision-making process to align corporate strategies with global climate goals. With increased pressure from investors, regulators, and consumers, more companies can be expected to follow suit.
ISSB Moves to Standardized Reporting on Climate Transition Plans & GHG Emissions
The International Sustainability Standards Board (ISSB) has taken significant steps to standardize climate-related reporting, particularly concerning climate transition plans and emissions. The organization signed an agreement with the Greenhouse Gas (GHG) Protocol to ensure compatibility between their respective reporting standards. This collaboration aims to create a standardized framework for companies to develop and report on their climate transition plans.
Additionally, the ISSB assumed responsibility for the United Kingdom’s Transition Plan Taskforce (TPT), which is widely regarded as the “gold standard” for corporate climate transition planning. By aligning with the GHG Protocol, the ISSB is working to streamline and enhance the quality of climate-related disclosures, making it easier for stakeholders to assess a company’s climate performance.
CSRD Transposition Challenges Continue
EU member states continue to face challenges in transposing the Corporate Sustainability Reporting Directive (CSRD) into national legislation. As of September, only 12 of 30 states (27 member states and three free-trade association states) have fully adopted the directive into national law, despite the deadline for transposition passing on July 6. Additionally, two countries are in the consultation phase and ten countries have introduced legislation. Initially, this slow progress had raised concerns about the EU’s interest in enforcing uniform sustainability reporting standards across the bloc, though recent advancements have been noted following the national elections of several member states and the re-election of EU President von der Leyen. The CSRD remains a critical component of the EU’s broader sustainability agenda, and has officially gone into effect, with some businesses required to submit their first reports in 2025.
CalSTRS Enhances Focus on Climate Disclosure
The California State Teachers’ Retirement System (CalSTRS), one of the largest pension funds in the United States, has intensified its efforts to hold companies accountable for climate-related risks. In the 2024 proxy season, CalSTRS voted against the boards of directors at 2,258 companies, a significant increase from the companies it targeted the previous year. This move is part of CalSTRS’ broader strategy to push for greater transparency and action on climate risks among its portfolio companies.
CalSTRS has outlined clear expectations for investee companies, including the public reporting of sustainability-related disclosures that align with the International Financial Reporting Standards (IFRS) and the setting of appropriate targets to reduce GHG emissions. Additionally, CalSTRS has successfully advocated for major oil companies within its portfolio, such as Exxon and Chevron, to join the Oil and Gas Methane Partnership 2.0, an initiative focused on measuring, reporting and mitigating methane emissions.
Congressional Pressure For and Against Climate Actions and Disclosures in the U.S.
A group of Congressional Democrats sent a letter to SEC Chair Gary Gensler, urging the agency to enforce existing climate disclosure guidance more rigorously. The letter called for action on the SEC’s 2010 guidance on climate change developments, which outlines various key areas where climate risks may trigger disclosure requirements. The lawmakers also emphasized that U.S. companies are still subject to climate-related disclosures through exposure to California and the EU’s regulations and will be required to disclose climate-related factors regardless of less stringent SEC requirements and delays.
Conversely, anti-ESG sentiment amongst Republican lawmakers came to a head when the chairman of the House Judiciary Committee, Jim Jordan, sent letters to money managers warning that collective pledges to drive down GHG emissions, like those expressed by members of the Climate Action 100+ group, may be subject to antitrust laws. While no antitrust lawsuits have been filed to-date, this, and building anti-ESG sentiment from Republican lawmakers at both the Federal and state-level, have led to the departure of more firms from Climate Action 100+.
State-Level Climate Reporting in the U.S. Gains Momentum
With the implementation of federal climate disclosure rules still temporarily halted pending litigation, state governments in the U.S. are stepping up to fill the regulatory void. A July 2024 report by Sustainable Fitch predicts a rise in state-level climate-related regulations, particularly in New York and Illinois. These states are poised to expand climate disclosure requirements to thousands of entities, far beyond those currently covered by existing regulations.
The push for state-level regulations comes amid growing frustration with the slow pace of federal action. The Federal Supplier Climate Risks and Resilience Rule, which would require large federal contractors to disclose their GHG emissions and climate-related risks, as well as set emissions reduction targets, has been delayed until April 2025, further fueling the momentum for state-led initiatives.
New York’s Climate Superfund Bill: A Bold Step in Climate Accountability
New York legislators passed the Climate Superfund Bill, a groundbreaking piece of legislation that would impose significant financial responsibilities on fossil fuel companies. If signed into law by Governor Hochul, the bill will require companies that have released more than one billion metric tons of CO2-equivalent emissions between 2000 and 2018 to pay a total of $3 billion annually for the next 25 years. The revenue generated would be allocated to infrastructure upgrades and disaster recovery efforts, making New York the second state in the U.S. to enforce such climate damage accountability, following Vermont’s similar law passed earlier this year.
California Does Not Delay Climate Disclosure and Accountability Laws
The California State Legislature formally rejected a proposal from Governor Newsom to delay the implementation of the state’s recently enacted Climate Corporate Accountability Act (SB 253) and Climate-related Financial Risk Act (SB 261) by two years, instead going into effect in January 2025. These laws represent a sea change for state climate regulations, bringing into effect the first broad-scope mandatory emissions and climate disclosures in the US, with reporting requirements extending beyond the recently finalized SEC regulations.
SB 253 will require businesses doing business in CA with over $1B in annual revenue to conform to the GHG Protocol and prepare third party-assured and public disclosures of their Scope 1 and 2 emissions beginning in 2025, with Scope 3 reporting required the following year. SB 261 will require businesses doing business in CA with annual revenues at or above $500M to disclose a Task Force on Climate-related Financial Disclosures (TCFD)-aligned climate and financial risk report no later than January 1, 2026, and biennially afterward. Both laws aim to bring California’s regulations more in line with the EU’s CSRD and other global regulations. The reverberation of the California Legislature’s decision this week to implement the laws without delay will likely impact future policy elsewhere in the US and the world.
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