GROWING THE GREEN ECONOMY ADDRESSING THE SUSTAINABILITY CHALLENGES AND OPPORTUNITIES GROWING THE GREEN ECONOMY INTRODUCTION The severe warnings on climate change are starkly documented. The Report by the Intergovernmental Panel on Climate Change (IPCC), and other reports demonstrate why urgent action to meet the goals of the Paris Agreement is needed. Almost every day new stories appear on how climate change is affecting our planet, from huskies swimming in arctic meltwater to wild fires in California. The public are taking notice and taking action, as exemplified in the protests by global school children started by Greta Thunberg and the Extinction Rebellion. Indeed, the term Climate Emergency has entered the common lexicon. However, while environmental risks have taken centre stage there is a growing recognition and understanding that the net must be cast wider – action to protect the planet and facilitate the transition to the low/zero carbon economy must take into consideration social goals, such as access to education, housing, and jobs, and must be sustainable and “just” in the broadest sense. Governments, legislators and regulators understand this and are beginning to respond accordingly. Not surprisingly much of the legislative effort to date has been focused on the financial system and facilitating at pace the transition to a low carbon and sustainable economy. The European Union has taken the lead on this, and review and analysis of its Sustainable Finance Action Plan is included in a number of articles in this publication. The creation of a sustainable “taxonomy” forms the centrepiece of this plan. However, there is an increasing emphasis on non-financial entities and the requirements that are beginning to be expected of them; in particular, much more detailed disclosure on how environmental, social and governance (ESG) factors are monitored, how these are incorporated into corporate strategies and how they impact on financial performance. These expectations are being placed on corporates both by legislation, such as the EU Non-Financial Reporting Directive, and by shareholder activism and non-legal recommendations, such as those published by the Task Force for Climate related Financial Disclosures. Financials and corporates alike are also likely to be spurred to action by the increasing risks that flow from an inadequate response to ESG issues, demonstrated by a growing number of claims being brought against different entities across the globe. Consequently, the scope of this publication is much wider than our earlier publication, Greening the Financial System, which primarily discussed trends in green financing. It reflects the breadth and depth of the impact of these environmental and sustainable factors. We look at the impact of regulatory and legislative sustainability changes on, amongst others, corporates, banks and asset managers. We look at the rise of climate change litigation and consider how potential claims are likely to increase. And we examine again the developments in “green” and sustainable financial products across the world. In short, what we are seeing now means no one can be complacent that it remains ‘business as usual’. We are not complacent. Clifford Chance is committed to the UN’s 2030 Agenda for Sustainable Development, managing our own footprint and contributing to the development of a more sustainable world. The ESG and sustainability agenda must be embraced and shaped. And while we recognise that there are risks we also see opportunities for our clients. We look forward to discussing these with you. Jeroen Ouwehand Senior Partner CONTENTS SECTION 1 SECTION 2 THE EU SUSTAINABLE SPOTLIGHT ON FINANCE ACTION PLAN AP 1. STATUS TABLE 3. CLIMATE CHANGE LITIGATION PROGRESS AND NEXT STEPS ............... 7 TACKLING CLIMATE CHANGE THROUGH THE COURTS ........................ 27 2. SUSTAINABILITY TAXONOMY USAGE, ISSUES AND CHALLENGES ...... 12 4. ESG ISSUES FOR CORPORATES RISKS AND OPPORTUNITIES ................. 35 5. SUSTAINABLE FINANCE SNAPSHOT THE IMPACT FOR BANKS AND GUIDELINES FOR CLIMATE REPORTING INVESTMENT FIRMS ............................... 54 ACTION POINT 9 .......................................... 74 6. CLARIFYING DUTIES WHAT ASSET MANAGERS LOW CARBON BENCHMARKS REGULATION NEED TO KNOW...................................... 59 ACTION POINT 5 .......................................... 76 7. ESMA CONSULTATION ON SHORT- TERMISM IN FINANCIAL MARKETS WHAT ARE THE ISSUES FOR ASSET MANAGERS? ....................... 66 8. CREDIT RATING AGENCIES NEW GUIDANCE ON DISCLOSURE FROM ESMA ............................................ 71 Use the icons to navigate the document sections AP SECTION 3 SECTION 4 PRODUCTS GLOBAL PERSPECTIVES 9. THE NEW EU GREEN BOND STANDARD 15. US TIGHTENING THE GUIDELINES TO GREEN BONDS: BRIDGING THE GAP .... 105 WIDEN THE MARKET .............................. 79 16. ASEAN 10. FROM JUNK BONDS TO JUST BONDS GREEN BOND STANDARDS AND THE INCREASING IMPORTANCE OF SOCIAL SUSTAINABILITY BONDS .......... 107 ESG FINANCING IN EUROPEAN 17. GREATER CHINA REGION HIGH-YIELD MARKETS ............................ 82 THE DEVELOPMENT OF THE 11. THE RISE OF SUSTAINABILITY- GREEN BOND MARKET ......................... 112 LINKED LOANS 18. JAPAN MARKET DEVELOPMENTS GROWTH OF GREEN FINANCING ......... 118 AND OPPORTUNITIES ............................ 89 19. FRANCE 12. BLUE BONDS INCREASED DISCLOSURE IN EXPANDING TO THE OCEANS ................ 92 THE GREEN BOND MARKET ................. 119 13. CLEAN, GREEN ENERGY 20. LUXEMBOURG THE EVOLUTION IN THE A EUROPEAN SUSTAINABLE RENEWABLES INDUSTRY ....................... 94 FINANCE HUB ......................................... 126 14. CLIMATE CHANGE AND THE 21. MIDDLE EAST PRESSURE ON COAL THE EVOLUTION OF SUSTAINABLE LATEST DEVELOPMENTS ...................... 99 CAPITAL MARKETS ................................ 129 Use the icons to navigate the document sections AP GROWING THE GREEN ECONOMY ADDRESSING THE SUSTAINABILITY CHALLENGES AND OPPORTUNITIES AP July 2019 5 THE EU SUSTAINABLE FINANCE ACTION PLAN GROWING THE GREEN ECONOMY ADDRESSING THE SUSTAINABILITY CHALLENGES AND OPPORTUNITIES AP 1. STATUS TABLE PROGRESS AND NEXT STEPS The European Commission launched its Action Plan on Financing Sustainable Growth (the Action Plan) in March 2018. This plan is comprehensive and ambitious, with three broad aims: 1 TO REORIENT CAPITAL FLOWS TOWARDS A MORE SUSTAINABLE ECONOMY 2 TO MAINSTREAM SUSTAINABILITY IN RISK MANAGEMENT 3 TO FOSTER TRANSPARENCY AND LONG-TERMISM These aims are scoped in further detail in 10 separate action points. Some of the action points have been more fully realised than others, but the progress made since the publication of the Action Plan is impressive and reflects the EU’s commitment to the sustainability and low carbon transition agenda. This continuing commitment is reflected in the European Council’s New Strategic Agenda 2019 – 2024, which lists “building a climate-neutral, green, fair and social Europe” as one of its four main priorities. Status table The breadth of the Action Plan and the pace of development can make tracking progress on specific points challenging. The status table aims to draw together the different strands of the Action Plan and reflects progress made to date on each of the 10 action points; however, given the scale of the Action Plan, it is not a fully comprehensive overview of all the work undertaken by the EU in this area. The status table signposts where particular topics are discussed in greater depth in individual articles in this publication. AP July 2019 7 GROWING THE GREEN ECONOMY ADDRESSING THE SUSTAINABILITY CHALLENGES AND OPPORTUNITIES ACTIONS AIMED AT REORIENTING CAPITAL FLOWS TOWARDS A MORE SUSTAINABLE ECONOMY 1. Establishing an EU classification system for sustainable activities See also page 12 Status Next steps The Commission published its proposal in May 2018. The Parliament Q3/4 2019: the Council to publish its position published its proposal on 28 March 2019. The Council has not yet followed by triologue discussions between the published its position. Parliament and the Council. The Commission requested the Technical Expert Group on sustainable The TEG launched a further call for feedback on its finance (TEG) to assist in developing its legislative proposals on the Taxonomy Technical Report on 4 July 2019, which will taxonomy. The TEG published its initial proposals in December 2018 and its be open until 13 September 2019. It will submit a detailed Taxonomy Technical Report on climate change mitigation and further report to the Commission in December 2019. adaptation activities on 18 June 2019. The TEG reports will form the basis of the delegated acts needed to implement the taxonomy. The Commission’s draft regulation indicated that the delegated act on climate change mitigation and adaptation will be effective in Q2 2020. 2. Creating standards and labels for green financial products See also page 79 Status Next steps The Commission requested the TEG to assist in developing an EU Green No further feedback is expected on the Final Bond Standard. The TEG published its Interim Report in March 2019 and its Report. The TEG will continue to work on its Final Report on 18 June 2019. proposal for accreditation of external verifiers. The EU Joint Research Centre published a technical report in relation to the Q3 2019: next Ad-hoc Working Group meeting. development of the EU Ecolabel criteria for Retail Financial Products in March 2019. A first Ad-hoc Working Group meeting was held in April 2019,