EU’s Agreement on CSRD
Members of the European Parliament and EU Governments have struck a provisional agreement on the details for compliance with the Corporate Sustainability Reporting Directive (CSRD). For a bit of background, the CSRD is meant to update the 2014 Non-Financial Reporting Directive (NFRD) to include more detailed and accessible reporting requirements on ESG information.
The new requirements will apply to all large companies with over 250 employees and at least €40M turnover, whether listed or not. Companies will be required to report on their impacts to the environment, human rights, and other social and governance impacts using EFRAG’s draft European Sustainability Reporting Standards (ESRS), which are open to public comment until August 8th.
This week’s agreement clarified that reported information on climate and human rights will be independently audited and certified. The EU leaders also agreed that non-EU companies with high activity in the EU market, defined by making €150M in annual turnover in the EU, will also have to follow these rules. Exceptions have been made for small and medium enterprises in the new agreement, with the possibility of these companies not being required to report until 2028.
Before the agreement is final, it is subject to approval by the European Council and the European Parliament. From there, here is the timeline for reporting:
1 January 2024 for companies already subject to the non-financial reporting directive
1 January 2025 for companies that are not presently subject to the non-financial reporting directive
1 January 2026 for listed small and medium enterprises (SMEs), small and non-complex credit institutions and captive insurance undertakings
EU Passes Carbon Border Tax
Along with the CSRD, the European Parliament this week also approved a proposal to implement a carbon border tax within the EU. The Carbon Border Adjustment Mechanism (CBAM) would, for the first time, tax goods being imported into the EU based on their associated greenhouse gas emissions. The tax will be based on the EU’s price of carbon, which is currently around €85 per ton of carbon dioxide. Since EU manufacturers are already charged these carbon prices, the EU sees charging carbon border taxes on foreign manufacturers as critical to keeping the EU competitive. In the words of one European Parliament member: “If you want to sell your products in the EU, you need to pay for your pollution.”
CBAM currently is slated to apply to five major sectors: iron and steel, cement, fertilizers, aluminum, and chemicals. Unsurprisingly, it has been criticized by countries that export carbon-intensive products in these industries, namely Russia and China, where much manufacturing is done with coal-powered energy. Outside the EU, the U.S. and U.K. are considering carbon border tariffs of their own, driven by concerns about their own industries becoming uncompetitive. Earlier this month, Congressional Democrats introduced the Clean Competition Bill, which would replicate CBAM in the U.S. to discourage emissions and protect U.S. industry.
SEC Buried in Comment Letters
The end of last week marked the comment deadline for the SEC’s climate disclosure proposal, and opinions have been coming in from businesses, politicians, and others. More than 10,000 comment letters have been submitted to the SEC–far more than usual for an SEC proposed rule. Some letters fall in favor of the ruling, while others are concerned about costs, liabilities and reporting burdens (the SEC estimates that reporting for an average large filing company will cost ~$640K in the first year, then $530K per year afterwards).
Many sustainable finance groups, policymakers, and large businesses have written in favor of the proposal, with Harvard professor and former SEC general counsel John Coates asserting in this letter that the SEC’s proposal is “well within the Commission’s authority to adopt”, since it’s focused entirely on disclosure. Among the supportive commenters were 40 public companies such as Gap, UPS, and Salesforce, with Gap, for instance, writing in favor of the rule while requesting more clarity on the definition of materiality and other requirements. Other comments added that the rule did not go far enough on matters such as Scope 3 Emissions, like a letter from asset manager Generation Investment Management that contended it was “overdue for the SEC to require … the disclosure of Scope 1, 2, and 3 GHG emissions.”
Not all comments were so positive. The Financial Services Forum, a consortium of some of the largest American banks, wrote a letter saying the SEC should pare down its rules to be more “qualitative and principles-based, rooted in traditional materiality,” arguing that the current rules go beyond what’s material for investors to know. The Forum’s full comments also asked the SEC to nix its recommendations on the impacts of climate-related risks on financial statements, cut down its Scope 3 and scenario analysis recommendations, and delay the rule’s implementation by 2 years. Separately, BlackRock–one of the financial industry’s biggest outward proponents of climate-friendly business practices–asked the SEC in its comment letter to relax Scope 3 recommendations and reduce the number of required disclosures.
Why do all these comments matter? The 10,000+ comments the SEC is currently sifting through will help the SEC modify and fine-tune the requirements before rolling out the final rule as well as providing a window into the legal challenges the agency will face down the road.
Supply Chains in the News
Social issues in supply chain issues were in the news this week: The Uyghur Forced Labor Prevention Act came into force in the U.S. this week, impacting various industries’ supply chains. The Act bans goods from the Xinjiang region of China in opposition to Beijing’s treatment of the Uyghur Muslim population, including human rights abuses and forced labor. Since 2017, as many as one million Uyghur and Turkic Muslim people have been detained in Xinjiang, as Chinese religious affairs officials seek to “break their lineage, break their roots, break their connections, and break their origins.”
This ban has serious implications for U.S. supply chains. With the Act in place, the U.S. has taken a “rebuttable presumption” that assumes all goods from Xinjiang were produced using forced labor, preventing any imports from the Xinjiang region. This goes beyond the previous ban on certain goods like tomatoes and cotton grown in the region, and has left China angrily denying all accusations. Polysilicon (used in solar panel production), plastics, apparel, footwear, electrical machinery and equipment, toys and sports equipment and vehicle exports are included in the ban.
Unionization at Apple
Workers at a Maryland Apple Store become the first for the company to unionize in the U.S. With a vote of almost 2 to 1 the employees at an Apple store in Baltimore join a growing number of labor movements across the country. The employees will now join the International Association of Machinists and Aerospace Workers (IAM), the international president of IAM Robert Martinez Jr. said “This victory shows the growing demand for unions at Apple stores and different industries across our nation.”
Unionization at Apple is part of a swathe of unionization happening across the US. At Starbucks, Amazon, REI, and Microsoft workers are coming together to fight for better pay and working conditions. While some companies like Microsoft have respected workers' right to band together, others like Starbucks and Amazon have taken retaliatory action.
Missed last week's ESG & Climate News? Check it out now and stay in the know: June 17, 2022.
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