| Regulatory and Reporting Developments |
United States
Compliance with California’s AB 1305 Required by January 1, 2024
Earlier this year, California enacted Assembly Bill 1305: Voluntary Carbon Market Disclosures (AB 1305). AB 1305 requires certain public and private companies to make climate disclosures available on their websites by January 1, 2024. Companies that fall into one or more of the following three categories must make climate disclosures in accordance with AB 1305:
- companies that a) make claims regarding the achievement of net zero emissions, claims that the company, a related entity, or a product is “carbon neutral,” or make other claims implying that the company, a related entity, or a product does not add net carbon dioxide or greenhouse gases to the climate or has made significant reductions to its carbon dioxide or greenhouse gas emissions (Climate-Related Claims) and b) operate in California or make Climate-Related Claims in California;
- companies that a) buy or use voluntary carbon offsets (VCOs), b) operate in California or buy or use VCOs sold within California, and c) make Climate-Related Claims; or
- companies that market or sell VCOs in California.
On December 6, 2023, the author of AB 1305 submitted a letter to the Chief Clerk of the California Assembly indicating that his intent was that the first annual disclosures under AB 1305 commence on January 1, 2025. Once the California Assembly reconvenes on January 3, 2024, it may provide further clarification on timing.
Please see our reminder for additional information about AB 1305.
Glass Lewis Issues 2024 ESG Policy Updates
In November 2023, Glass Lewis & Co. (Glass Lewis) published its 2024 U.S. Benchmark Policy Guidelines (the Guidelines) and 2024 Shareholder Proposals & ESG-Related Issues Benchmark Policy Guidelines (the ESG Guidelines), which become effective for shareholder meetings on and after January 1, 2024. The Guidelines update Glass Lewis’s policies regarding several ESG matters, including cyber risk oversight, board oversight of environmental and social (E&S) issues, and board accountability for climate-related issues. The ESG Guidelines update Glass Lewis’s overall approach to E&S issues, adding a new discussion relating to engagement between shareholders and companies.
In the Guidelines, Glass Lewis states its belief that insufficient oversight of material E&S issues can present direct financial and legal risks that could harm shareholder interests. The Guidelines and ESG Guidelines note that Glass Lewis reviews a company’s governing documents, including committee charters, when evaluating the board’s role in oversight of E&S issues.
Please see our post on Known Trends, Wilson Sonsini’s public company blog, for additional information related to the Guidelines and ESG Guidelines.
SEC Publishes Fall 2023 Regulatory Agenda
On December 6, 2023, Chair of the U.S. Securities and Exchange Commission (SEC) Gary Gensler announced the SEC’s Fall 2023 Regulatory Agenda (Regulatory Agenda), detailing the SEC’s planned regulatory actions for the next 12 months. The SEC has changed the target dates for finalizing or proposing key ESG-related rules, including the following:
The SEC also continues to contemplate potential action relating to Conflict Minerals Amendments in its long-term agenda, which does not include any anticipated timing.
Please see our post on Known Trends for additional information related to the Regulatory Agenda.
Department of the Treasury (Treasury) and Department of Energy (DOE) Propose Regulations to Clarify “Foreign Entity of Concern” Compliance
On December 4, 2023, the Treasury and the DOE concurrently released proposed regulations (the Treasury Regulations) and other guidance (the Proposed Guidance) to clarify the prohibition in Internal Revenue Code Section 30D(d)(7) on sourcing applicable materials in electric vehicle (EV) batteries from an FEOC, as defined in Section 40207(a)(5) of the Infrastructure Investment and Jobs Act. Under the Proposed Guidance, FEOC designation includes foreign entities “owned by, controlled by, or subject to the jurisdiction or direction of a government of a covered nation.” Further, an FEOC includes a foreign entity that is engaged in unauthorized conduct that is detrimental to the national security or foreign policy of the United States. The Proposed Guidance provides specific rules for determining whether an entity is owned by or affiliated with the government of a covered nation, using several functional tests. In addition, the Treasury Regulations provide specific rules for how qualified EV manufacturers must demonstrate compliance with the FEOC rules. Public comments on both the Proposed Guidance and Treasury Regulations are requested by January 2, 2024, and January 18, 2024, respectively.
Commodity Futures Trading Commission’s (CFTC) Proposed Guidance Regarding the Listing of Voluntary Carbon Credit Derivative Contracts
On December 4, 2023, the CFTC issued proposed guidance setting forth a framework for CFTC-regulated exchanges (or designated contract markets (DCMs)) and swap execution facilities (SEFs) to ensure compliance with existing requirements under the Commodity Exchange Act (CEA) and CFTC regulations as they relate to the listing or trading of voluntary carbon credit (VCC) derivative contracts on DCMs or SEFs. The proposed guidance includes the following:
- terms and conditions for VCC derivative contracts listed on DCMs and SEFs;
- clarification that DCMs have an obligation to perform ongoing, active monitoring of the terms and conditions of VCC derivative contracts, and a reminder that CFTC regulations require DCMs to have rules requiring their market participants to keep records of their trading, including activity in the underlying spot market; and
- a summary of requirements for DCMs submitting VCC derivative contract terms and conditions and any contract amendments as part of the CFTC’s standard product review process.
Public comments on the proposed guidance are requested by February 16, 2024.
Europe
Provisional Political Agreement on European Union (EU) Supply Chain Due Diligence
On December 14, 2023, the European Parliament (the Parliament) and European Council (the Council) provisionally agreed on the Corporate Sustainability Due Diligence Directive (CSDDD). As proposed, the CSDDD would apply to EU companies with more than 500 employees and net turnover above €150 million (approximately $164 million) and non-EU companies with equivalent EU turnover. Lower thresholds would apply to companies in high-risk sectors such as manufacturing of textiles or extraction and trade of minerals. The proposed CSDDD would require covered companies to identify, mitigate, and remedy adverse impacts upstream and downstream in their global value chains. Covered adverse impacts range widely, including labor exploitation, environmental pollution, and climate change. The financial sector is mostly exempted under the proposed CSDDD, with financial sector companies only required to perform diligence on their upstream suppliers, but not clients.
As proposed, the CSDDD includes potential fines of up to five percent of net worldwide turnover for violations of the CSDDD and requires that management compensation be tied to compliance with the law. The proposed CSDDD still needs to be formally passed by both the Parliament and the Council, which is expected to occur in the first half of 2024.
EU Agrees on Political Deal for Product Sustainability
On December 5, 2023, the Parliament and the Council provisionally agreed to replace the Ecodesign Directive (the Directive), greatly enlarging its scope with a new Ecodesign Regulation (the Proposed Ecodesign Regulation). While the Directive only applied to energy-related products, the Proposed Ecodesign Regulation would apply to almost all products excluding motor vehicles, making them not only more energy efficient, but also more durable, reparable, and recyclable.
The Proposed Ecodesign Regulation would: a) require every product to have a digital “product passport,” enabling consumers to easily compare product characteristics; b) empower the European Commission (the Commission) to adopt product-specific eco-design standards; c) address practices associated with planned obsolescence; d) require companies to annually report how many unsold consumer products they destroy; and e) prohibit the destruction of unsold textiles and shoes. The Proposed Ecodesign Regulation still needs to be formally passed by both the Parliament and the Council.
EU Strikes Provisional Deal to Decarbonize Gas Markets and Promote Hydrogen
On December 8, 2023, the Parliament and the Council provisionally agreed on new rules to decarbonize the gas market and establish a market design for hydrogen (the Proposed Gas Market Rules). A new entity called the European Network of Network Operators for Hydrogen would promote dedicated hydrogen infrastructure, enable cross-border coordination, and interconnector construction.
The Proposed Gas Market Rules would limit the duration of long-term contracts for the import of unabated fossil fuels to the year 2049 to avoid locking in carbon-intensive energy sources. EU Member States would be allowed to limit bidding for capacity to access the network and liquid natural gas (LNG) import terminals from Russian natural gas or LNG. Finally, the Proposed Gas Market Rules address crisis management procedures for the cross-border flow of gas in emergencies, reducing nonessential consumption in such cases, and emerging cybersecurity risks. The Proposed Gas Market Rules still need to be formally adopted by both the Parliament and the Council.
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