EU: Taxonomy Advisers Recommend Minimum Safeguards for the “S” in ESG

On July 11, 2022, the EU Platform on Sustainable Finance, the European Commission’s independent advisory body, published a draft report on minimum safeguards on human rights and labor rights.

Pursuant to Article 18 of the EU Taxonomy Regulation, companies must comply with the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights. The minimum safeguards provide guidance on how to assess companies’ compliance with these standards by reference to four core topics: human rights (including workers’ rights); bribery and corruption; taxation; and fair competition. The purpose of these recommendations is to fill the gap until the Corporate Sustainability Due Diligence Directive and the Corporate Sustainability Reporting Directive are finalized.

The report recommends that companies should be considered noncompliant with the Taxonomy if any of the following is identified: (i) insufficient due diligence processes on human rights; (ii) any final convictions in court related to issues falling in the core topics listed above; (iii) an adverse finding from the National Contact Points (NCPs), a government-backed office established to ensure effectiveness of the OECD Guidelines for Multinational Enterprises, or lack of collaboration with the NCP; or (iv) not responding to allegations raised by the Business and Human Rights Resource Centre.

Links:
Platform on Sustainable Finance’s draft report on minimum safeguards

Japan: Japan Releases First Code of Conduct for ESG Data Providers

Japan’s Financial Services Agency (FSA) has published a draft code of conduct for ESG evaluation and data providers operating in Japan in response to concerns relating to transparency and fairness of evaluation. As institutions and investors are moving towards promoting ESG goals, the increased popularity of ESG initiatives has led to a demand for ESG evaluation. Following consultations with the International Organization of Securities Commissions (IOSCO) and data providers, Japan’s FSA published the draft code to ensure that ESG data can be relied on throughout the investment chain.

The draft code of conduct recommends increased oversight of the data being provided to third parties. It requires data providers to ensure that there are sufficient human resources working at the data providers to fight the shortage of skilled workers in this area. To mitigate the potential inaccuracies, data providers subject to Japan’s draft code will be asked to disclose their information sources in cases where their clients rely on their data by virtue of being subject to ESG ratings. The code also requires providers to implement quality-control processes, for instance to ensure there are no discrepancies between stated methodologies and products. Data providers will be able to opt in to the code on a voluntary basis via a public announcement. The FSA has noted that companies can adopt a comply-or-explain approach to certain matters in the code.

In 2021, IOSCO called for action to tighten policing of ESG evaluation and data providers. The United Kingdom, the EU and India have indicated that they are considering similar measures.

Feedback is expected by September 2022.

Links: 
FSA Code of Conduct

UK: FCA Publishes Guidance on ESG Integration in Debt Capital Markets

On June 29, 2022, the UK Financial Conduct Authority (FCA) published a Feedback Statement on ESG integration in UK capital markets, focusing on ESG-labelled debt instruments and ESG data and ratings providers.

Following a consultation launched last year, the FCA set out a number of key policy actions:

• Where advertisements include inaccurate or misleading information or information inconsistent with a prospectus, the FCA will consider the case for market oversight or enforcement actions.
• Additionally, the FCA encourages issuers and their advisors to consider voluntary adoption of relevant industry standards when issuing ESG-labelled debt instruments.
• Issuers are encouraged to apply industry standards when selecting second-party opinion (SPO) providers and verifiers. Although the FCA has advised SPOs to consider applying such standards themselves, SPOs are not subject to FCA oversight directly. However, the FCA is considering the case, alongside the Treasury, for including SPO providers within its regulatory scope in the future.
• The FCA will continue working with the Treasury to bring ESG data and ratings providers within its regulatory power, in accordance with IOSCO’s recommendations (detailed above).

The Feedback Statement was accompanied by Primary Market Bulletin 41, where the FCA recommended that:

• issuers of ESG-labelled Use of Proceeds debt instruments voluntarily apply standards such as those developed by the International Capital Market Association;
• issuers and other market participants ensure that information in the prospectus or advertisement is not misleading; and
• issuers and their advisors consider the expertise and professional standards of verifiers and assurance providers.

Links:
ESG Integration in UK capital markets: Feedback to CP21/18
Enhancing Climate-Related Disclosures by Standard Listed Companies and Seeking Views on ESG Topics in Capital Markets
Primary Market Bulletin 41