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ESG Rating on Trial in Germany

Posted on April 7, 2020

Posted in Environmental, Social, and Governance, European Environmental and Public Law

A rating agency accepted a preliminary injunction regarding a disputed corporate sustainability rating.

By Paul A. Davies, Michael D. Green, Joachim Grittmann, and Alexander Wilhelm

As reported by a number of German newspapers and the environmental press, a dispute between the US proxy advisory firm Institutional Shareholder Services (ISS) and the German industrial image processing company Isra Vision came to a rapid conclusion before the Regional Court of Munich when ISS withdrew its objection against a preliminary injunction. As a result, the relevant ESG rating concerning Isra Vision was not published.

Background

ISS provides ratings and analytical services in respect of environmental, social, and governance (ESG) matters. ISS made a request to Isra Vision to participate in a sustainability review. After Isra Vision did not respond, ISS made its assessment on publicly available material. According to publicly available information, Isra Vision was given the worst rating (D-) in the assessment. As such, Isra Vision sought an injunction against the issuing of the rating.

EU Announces Initiative to Improve the Non-Financial Reporting Directive

Posted on February 10, 2020

Posted in Environmental Regulation, European Environmental and Public Law, Green Finance

The Initiative aims to grant investors, consumers, and other stakeholders a clearer picture of companies’ non-financial performance.

By Paul A. Davies and Michael D. Green

On 30 January 2019, the European Commission began a consultation process on a potential initiative to revise and improve the Non-Financial Reporting Directive (NFRD) (the Initiative). The Commission has not yet decided the form that the Initiative will take, but it aims to improve the NFRD’s ability to give investors access to non-financial information (including on environmental, social, and governance (ESG) factors and sustainability) about companies.

What Is the NFRD?

Since 2018, the NFRD has required certain large listed companies, banks, and insurers to publicly report information on a broad range of ESG matters on an annual basis. The Commission supplemented these reporting obligations with two sets of non-binding guidelines: one in 2017, aimed at helping companies report relevant, useful, and comparable information, and one in 2019, aimed at helping companies report climate-related information and integrating the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).

Sustainable Finance and Climate Change Risk in Financial Services

Posted on February 10, 2020

Posted in Air Quality and Climate Change, Environmental Regulation, Environmental, Social, and Governance, Green Finance

Policy makers and regulators seem keen to adopt both a “carrot” and “stick” approach to channelling private finance sustainably.

Financial services regulators have been particularly vocal in the last 12 months, specifically about the impact on the financial services sector as the world experiences, and attempts to respond to, climate change.

Mark Carney, outgoing governor of the Bank of England, highlighted how pressing an issue climate change is for the sector in October 2019, stating that, “ … changes in climate policies, new technologies and growing physical risks will prompt reassessments of the values of virtually every financial asset. Firms that align their business models to the transition to a net zero world will be rewarded handsomely. Those that fail to adapt will cease to exist. The longer that meaningful adjustment is delayed, the greater the disruption will be”.

“50 Shades of Green” – Mark Carney Calls for Accelerated Climate Resilience Action

Posted on September 30, 2019

Posted in Environmental, Social, and Governance, European Environmental and Public Law, Green Finance

Bank of England Governor identifies three areas of improvement in creating a sustainable finance system.

By Paul A. Davies and Michael D. Green

On September 24, 2019, the Bank of England (BoE) published two speeches given by its governor, Mark Carney, in which he calls for climate change-related risks and resilience to be brought into

the heart of financial decision-making. Both speeches — one delivered to the UN General Assembly and the other at an insurance industry event — outline three key areas of improvement that Mr. Carney identifies as being necessary to bring climate change into mainstream financial decision-making: disclosure, risk management, and returns. This blog discusses each of these three areas, as well as the policy options that Mr. Carney views as necessary to implement the required changes.

Comprehensive Climate Disclosure

Mr. Carney first discusses the importance of improving corporate disclosure of climate-related risks and opportunities. He highlights the Task Force on Climate-related Financial Disclosures (TCFD) as an example of a comprehensive, practical, and flexible framework for risk disclosure, and also notes that supporters of the TCFD control balance sheets totalling US$120 trillion (indicating potentially high demand for such a regime).

Companies Must Carefully Consider ESG Disclosures Under UK Non-Financial Reporting Directive

Posted on March 13, 2018

Posted in Environmental, Social, and Governance

Companies should conduct thorough due diligence in light of closer scrutiny from stakeholders and governmental and non-governmental bodies.

By James Inness and Natasha Hamilton-Foyn

Companies are facing increasing pressure to report on environmental, social, and governance (ESG) matters in terms of their legal obligations, stakeholder pressure, and reputational issues. Companies are subject to both mandatory and non-mandatory non-financial reporting obligations. For the first time, in 2018, under the Non-Financial Reporting Directive (NFRD), certain companies must publish in their annual reports information relating to environmental, social, and employee matters, respect for human rights, and anti-corruption and bribery matters. The NFRD therefore bolsters existing mandatory disclosure obligations under the Modern Slavery Act 2015 and the Climate Change Act 2008. The forthcoming Conflicts Minerals Regulation will further strengthen these obligations.

Well-being of Future Generations (Wales) Act 2015 and the Public Trust Doctrine: What Can We Expect?

Posted on June 6, 2017

Posted in European Environmental and Public Law

By Paul Davies and Michael Green

The public trust doctrine is the principle that certain natural and cultural assets are preserved for public use and that it is the government’s obligation to protect and regulate these, both now and for future generations. Although the doctrine is established in English common law, it is not regularly deployed by the English courts. However, a new piece of legislation, the Well-being of Future Generations (Wales) Act 2015 (WFA), geared towards improving the social, economic, environmental and cultural wellbeing of Wales, captures many of the values of the public trust doctrine. In particular, it focuses on the long term impact of public body decisions and how they should promote a good quality of life for both current and future generations.

The public trust doctrine was established in English common law when a form of it reappeared in the 12^th century, along with the onset of a more centralised legal system. One of the earliest cases is that of Juliana the Washerwoman (1299), in relation to a washerwoman who successfully challenged her powerful neighbour from cutting off her use of the watercourse. It was held that water had always been available for use by all, and that it was unlawful to pollute it. However, over time, the UK courts restricted the application of the public trust doctrine and it is now considered to do no more than give rise to a rebuttable presumption that the public has a right to fish, navigate and access the sea and tidal waterways. To date, these presumptions have not caused the state to actively take steps to protect public rights. However, many of the provisions of the WFA in fact impose positive obligations on public bodies so this arguably an effective implementation of the doctrine.

Sustainable Loans – Breaking the Mould for Sustainable Investment

Posted on May 30, 2017

Posted in Environmental, Social, and Governance, European Environmental and Public Law, Green Finance

By Paul Davies and Aaron Franklin

Royal Philips, a health technology company, has recently agreed to an innovative revolving credit facility agreement with a margin linked to the company’s year-on-year sustainability performance improvement. The agreement was entered into by a consortium of 16 international banks (led by ING, as Sustainability Coordinator) and provides for a commitment of €1 billion. Royal Philips’ current sustainability performance was benchmarked by the environmental, social and governance rating agency Sustainalytics: if the sustainability rating increases, the interest rate decreases and vice versa.

ING has monitored the sustainability performance of the companies it lends to since 2015. However, this is, to our knowledge, the first example of a credit facility structured so that sustainability performance is rewarded automatically. ING has flagged that this is a way to “support, motivate and reward” their clients “in their aim to become even more sustainable” and that it represents a “mind shift in corporate financing”.

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