| Regulatory and Reporting Developments |
United States
Roundup of New California Climate Laws
On October 7, 2023, California Governor Gavin Newsom signed Senate Bill 253, the Climate Corporate Data Accountability Act; Senate Bill 261, Greenhouse gases: climate-related financial risk; and Assembly Bill 1305, the Voluntary Carbon Market Disclosures Act (VCMDA). While Senate Bills 253 and 261 require disclosure beginning in 2026, the VCMDA requires disclosure beginning on January 1, 2024. The VCMDA requires:
- Covered businesses that market or sell voluntary carbon offsets in California to disclose enumerated details about the applicable carbon offset projects, details regarding accountability measures if a carbon offset project does not achieve its goals, and information required to independently verify emissions reductions.
- Covered businesses that purchase or use voluntary carbon offsets and make certain climate-related claims like net-zero emissions or carbon neutrality to disclose enumerated details about the carbon offset projects. These disclosures are not required from businesses that do not operate in California (a category that has not been legally defined) or do not purchase or use voluntary carbon offsets sold in California.
- Covered businesses that make certain climate-related claims like net-zero emissions or carbon neutrality to disclose “all information documenting” how such claim “was determined to be accurate or actually accomplished, and how interim progress toward that goal is being measured,” as well as whether there is independent third-party verification of the company data and claims. These disclosures are not required from businesses that do not operate in California or do not make climate-related claims in California.
VCMDA disclosures must be posted on a covered business' website. Violations of the VCMDA can result in fines of up to $2,500 per day per violation, not to exceed $500,000.
U.S. Federal Government Releases the Fifth National Climate Assessment (NCA5)
On November 14, 2023, the U.S. Global Change Research Program (USGCRP) published the NCA5. USGCRP is a federal program that is mandated by the U.S. Congress to develop and coordinate federal research and investments in “understanding the forces shaping the global environment and their impacts on society.” The NCA5 is extensive and “analyzes the effects of global change on the natural environment, agriculture, energy production and use, land and water resources, transportation, human health and welfare, human social systems, and biological diversity; and analyzes current trends in global change, both human-induced and natural, and projects major trends for the subsequent 25 to 100 years.” A few of NCA5’s key messages related to mitigation and adaptation are: 1) successful mitigation means reaching net-zero emissions; 2) we know how to drastically reduce emissions; 3) to reach net-zero emissions, additional mitigation options need to be explored; 4) adaptation is occurring but is insufficient in relation to the pace of climate change; and 6) adaptation investments and financing are difficult to track and may be inadequate.
Final Climate Disclosure Rules from the U.S. Securities and Exchange Commission (SEC) Continue to be Delayed
In his written remarks for the Practicing Law Institute’s 55th Annual Institute on Securities Regulation on November 7, 2023, SEC Commissioner Mark Uyeda focused on the SEC’s proposed climate disclosure rules (the Climate Proposal), which are described in detail in our client alert. Commissioner Uyeda noted that the Climate Proposal received over 16,000 comments and he expressed the view that the SEC should seriously consider re-proposing the Climate Proposal before adopting any final rule that deviates from the Climate Proposal. At a different speaking engagement on November 7, 2023, news reports state that SEC Chair Gary Gensler was asked about Commissioner Uyeda’s statements regarding the Climate Proposal. Chair Gensler noted that investors are making investment decisions around climate risk and stated that climate disclosure would be a “fragmented space” if the SEC does not take action.
Changes to Investment Duties Rule
Late last year, the U.S. Department of Labor (DOL) finalized the 2022 Investment Duties Rule (2022 Rule), which has been characterized as an ESG-favorable retirement plan investing rule because the 2022 Rule removed the Trump-era mandate that fiduciaries distinguish among investments based on pecuniary factors alone and clarified that fiduciaries’ investment decisions may include ESG factors. Since its adoption, the 2022 Rule has been challenged in several Republican-led lawsuits, including one filed in the U.S. District Court for the Northern District of Texas by Attorneys General from several states. This lawsuit asserted that the 2022 Rule is an attempt by the DOL to steer private-sector investments into “woke” investment funds. In a recent opinion, Judge Matthew Kacsmaryk granted the DOL’s cross-motion for summary judgment and ruled that the DOL did not exceed its regulatory authority or violate the Employment Retirement Income Security Act of 1974 in adopting the 2022 Rule. The plaintiffs have filed a notice of appeal with the U.S. Fifth Circuit Court of Appeals. Meanwhile, Republican members of the U.S. House of Representatives continue to propose various bills, such as the Roll Back ESG to Increase Retirement Earnings Act, or RETIRE Act, and the Ensuring Sound Guidance Act, that would revise the retirement plan investing rules to more closely aligned with the Trump-era “pecuniary factors” policy.
Inflation Reduction Act of 2022 (IRA) Implementation Update: Proposed Regulations for the Investment Tax Credit Provide Clarity for Standalone Energy Storage, Offshore Wind, Repowered Projects, and More
On November 17, 2023, the Treasury Department (Treasury) and the Internal Revenue Service (IRS) issued proposed regulations to update the investment tax credit under Internal Revenue Code Section 48 pursuant to changes authorized by the IRA. These proposed regulations provide the first amendment to current Treasury Regulation §1.48-9 since 1987 and also serve to modify proposed regulations issued in August 2023.
- The proposed regulations revise multiple definitions of energy property, including, for example, solar energy property, solar process heat, geothermal energy property, combined heat and power systems, and biogas property.
- The definition of energy property is also modified to incorporate future capabilities as opposed to specific technologies. To that end, the proposed regulations apply the "functional interdependence test" and the "integral part test" for qualified energy property and qualified investment credit facilities.
- The proposed regulations clarify prevailing wage and apprenticeship requirements and the subsequent recapture event provisions for failure to satisfy those requirements.
- The "80/20" Rule, which addresses re-powering of clean energy projects, is adopted under Section 48, following previous IRS guidance.
- The "Dual Use" Rule, which currently allows for energy property to derive a maximum of 25 percent of its total energy from non-qualifying energy sources during its annual measuring period, is revised to reduce the qualifying energy source requirements to only 50 percent. This change applies to property that is placed in service after December 31, 2022.
- Clarification is provided for qualified interconnection property with respect to domestic content bonus and energy community increased credit amounts; in short because interconnection property is not energy property, it will not be taken into account in determining whether these adders apply.
The Treasury and the IRS are seeking comments with respect to these proposed changes. A hearing on the proposed regulations is scheduled for February 20, 2024, with a deadline for public comments of January 21, 2024.
Europe
European Green Bond (EuGB) Regulation Approved
On October 23, 2023, a regulation providing for a new voluntary standard for the use of the EuGB label by bond issuers received final approval. The standard, which applies beginning in the fourth quarter of 2024, sets forth requirements for bond issuers who wish to use the EuGB label for bonds they make available to investors in the European Union (EU). Notably, at least 85 percent of the proceeds (minus the issuance costs) must be allocated to environmentally sustainable activities, i.e., activities in line with the EU Taxonomy Regulation.
Additionally, in order to tackle greenwashing, bond issuers relying on the EuGB label are required to provide specific information to enable investors to evaluate the sustainability of the bond and to benchmark between EuGBs. The regulation also provides for voluntary sustainability disclosure requirements for bonds marketed as environmentally sustainable or sustainability-linked bonds but which do not yet satisfy all the requirements of the EuGB label. In case of non-compliance, the competent agency in the EU Member State will have powers to, amongst others, suspend or prohibit advertisements for the bond, withdraw the EuGB label, and/or impose a fine.
European Financial Regulator Publishes Reports on Enforcement Priorities, Climate-Related Disclosure Matters
On October 25, 2023, the European Securities and Markets Authority (ESMA) published a statement on its European common enforcement priorities (ECEP) for 2023 annual financial and non-financial reports and a report providing guidance on how to disclose climate-related matters in international financial reporting standards (IFRS) annual financial statements. In its guidance report, ESMA focused on the need to maintain consistency between financial and non-financial statements in order to mitigate the risk of greenwashing. The practical examples in the report that outline how to disclose climate-related matters in IFRS financial statements are instructive for companies preparing for disclosure. The ESMA has stated that it expects close engagement with these guidelines.
Latin America
Brazil Becomes First Country to Adopt Mandatory ISSB-Linked Reporting Rules
On November 1, 2023, Resolution 193 from Brazil’s Securities and Exchange Commission entered into force. The law requires certain Brazilian businesses to disclose sustainability-related financial information in compliance with the new International Sustainability Standards Board (ISSB) standards beginning January 1, 2026. According to the Brazilian government, Brazil is the first country in the world to formally adopt requirements to disclose sustainability-related financial information in compliance with ISSB standards. |
