Overview

ESG and sustainability issues continue to be a priority for policy makers and regulators globally. The impact of the Ukraine conflict on energy policy and the recent publication of the IPCC's (Intergovernmental Panel on Climate Change) "state of the union" report on the slender window we have to take action in order to meet our climate targets both highlight the scale of the global challenge we face on climate issues.

Dealing with the resulting wave of new regulation and the associated legal and reputational risks therefore remains at the top of the agenda for many businesses. 

As regards the wider ethical business issues which contribute to the ESG agenda, trends in societal expectations of high standards of business behaviour towards staff, customers and suppliers and wider society as well as the environment have also resulted in regulation but impose a moral as well as a legal duty on businesses to do the right thing. So, it is also important for business to keep abreast of market practice in adopting voluntary initiatives and have the governance structures and processes in place to avoid reputational damage as well as legal liability arising.

We hope our regular newsletter and our wider collection of guidance and thought leadership on ESG and sustainability issues will help you and your business to meet these challenges.

ESG timeline

We have recently launched a timeline of UK and EU regulatory and legislative developments in the ESG space, which covers new requirements coming down the line as well as those implemented in the last 12 months.

We recognise that the breadth of ESG considerations, coupled with the volume and pace of change in the legal and regulatory landscape, presents an immense challenge to businesses, particularly at a time when the geopolitical and economic environment continues to be so uncertain. Equally, we know that many businesses are keen to take a proactive stance on ESG compliance, staying ahead of the regulatory curve as well as anticipating changes in public sentiment.

We hope our ESG timeline will help you to anticipate new requirements and put in place the policies and processes needed to manage compliance. The timeline will be updated quarterly, but as ESG is such a fast-moving area, our ESG and Knowledge teams are also publishing regular updates on developments which are available on our Sustainable Business site or via our Spotlight on ESG LinkedIn site.

Sustainable finance
Comment

In recent months, our alternative asset manager clients have worked harder than ever to ensure that their investment approach was equipped to meet one of the defining challenges of our time. While legal and compliance teams struggled to keep up with new and emerging sustainability regulation, senior-decision makers re-focused on the opportunity. Increasing investor demand for investment funds that are part of the solution to societal problems – and increasingly those that actively avoid harm (as discussed in the next article) – requires a strategic response.  But the active ownership model that is an integral part of private capital's heritage means alternative asset managers are very well-placed to respond.

Climate change and sustainability therefore remains close to the top – if not at the top – of the agenda for many firms. The UK sustainability regime for asset managers and owners is starting to take shape: as noted above, TCFD-aligned disclosure rules, both at the entity and product levels, are now in force for the largest asset managers and will apply to others from next year. High level proposals for a Sustainability Disclosure Regime that will "overlay" those rules, together with plans for a new UK Green Taxonomy, emerged towards the end of last year. These will evolve and crystallise into detailed requirements throughout the course of 2022 and beyond.

By contrast, the EU regime is more evolved in terms of application and detail, though even then delays to technical standards have contributed to considerable uncertainty. To a greater or lesser extent, divergence between the UK and EU seems inevitable.

Our New Year briefing on financial services regulation for asset managers and asset owners discussed these topics in more detail (see Part 1: ESG and Sustainability) along with the UK perspective on a range of other EU and UK regulatory measures.

Sustainability insights

Over the past year or so, we have also published a regular newsletter for the asset management community, Sustainability Insights, commenting on relevant developments in ESG regulation. In recent weeks, topics have included:

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SFDR - Final regulatory technical standards now available 

In early April 2022, the European Commission published the long-awaited final version of the detailed rules – the Regulatory Technical Standards (RTS) – under the EU Sustainable Finance Disclosure Regulation (SFDR). Crucially, annexed to the RTS are the final prescribed-form templates for:

"Final" almost certainly does now mean final – it is highly unlikely that further changes will be made before the RTS come into effect on 1 January 2023. For more on this, see our recent briefing.

Mandatory climate-related disclosures 

The roll-out in the UK of mandatory climate-related disclosure requirements in line with the recommendations of TCFD (Taskforce on Climate-related Financial Disclosures) continues, with smaller entities beginning to be brought into scope, as summarised below.

The UK is not alone in pursuing this path. The International Sustainability Standards Board (ISSB), established at COP26 last November, has just published for consultation two draft Standards on (i) general sustainability-related disclosures and (ii) climate-related disclosures which build on TCFD and will eventually form the baseline for sustainability disclosures globally. The ISSB aims to issue the new Standards by the end of 2022 and is working with regulators across the world to ensure its Standards are adopted consistently.

Meanwhile, in the US, the SEC has recently published proposed rules requiring enhanced and standardised climate-related disclosures of public companies (both domestic and foreign private issuers) under the Securities and Exchange Act of 1934, as outlined in this comprehensive briefing from Cravath, Swaine & Moore.

UK corporates

Mandatory climate-related disclosures will be required of a wider range of corporate entities, namely UK companies with more than 500 employees and which have either transferable securities admitted to trading on a UK regulated market (such as the LSE's main market), or are banking companies or insurance companies); UK AIM companies with more than 500 employees; and any other UK companies or LLPs which have more than 500 employees and a turnover of more than £500m. Under the new rules, as set out in set out in the Companies (Strategic Report) (Climate-related Financial Disclosures) Regulations 2022 and the Limited Liability Partnerships (Climate-related Financial Disclosure) Regulations 2022, in-scope entities will be required to disclose climate-related financial information in line with TCFD for financial periods beginning on or after 6 April 2022.

In late February 2022, BEIS published non-binding guidance, which contains useful FAQs on how the new requirement will apply to group companies and companies with global operations. It also contains information on the disclosures which need to be made and the level of disclosure required – see our client note for further details.

Premium listed companies are already required to make TCFD disclosures on a "comply or explain" basis. This requirement will apply to standard listed companies, with effect for financial periods starting on or after 1 January 2022. In late February 2022, the FCA published the final text of its technical note, TCFD aligned climate-related disclosure requirements for listed companies, which contains some useful clarifications – please see our client note for further details. Whilst the two regimes are slightly different, assumption is that if a UK-incorporated listed company complies with the FCA's Listing Rules requirements, it will also be complying with the Regulations.

Asset managers

For asset managers and certain advisers with more than £50 billion AUM or advice, the UK TCFD disclosure requirements came into force on 1 January 2022, with the first public disclosures required by 30 June 2023; for other asset managers and certain advisers with more than £5 billion AUM or advice, the rules will apply on 1 January 2023, with the first public disclosures required by 30 June 2024.

For further details, please see our New Year briefing.

Pension schemes

Legislation also requires greater disclosure by pension scheme trustees, including some online public disclosure, about their investment policies and implementation of them. This includes the account taken of ESG factors, including climate change, and information about stewardship policies and engagement activities. Schemes are also required to incorporate climate change risks and opportunities into their governance systems and make specific additional public disclosures about climate change targets and policies. This is closely based on the requirements of TCFD.

These requirements are being phased in, with the very largest schemes (£5 billion or more in relevant assets) and authorised master trusts in scope since October 2021. Schemes with relevant assets of £1 billion or more will become subject to the same requirements from 1 October 2022. Smaller schemes might be affected from 2024

We wrote an article on this topic for the International Comparative Legal Guide on Environmental, Social & Governance Law 2022 and presented a session at the PLSA's inaugural ESG Conference last year.

The Government has proposed that, from 1 October 2022, these requirements will be expanded to require schemes to calculate four, rather than three, climate-related metrics on their investments. This would make a portfolio alignment metric, on the extent to which scheme investments are aligned with the Paris Agreement goal of limiting the increase in the global average temperature to 1.5 degrees Celsius above pre-industrial levels, mandatory alongside absolute emissions and emissions intensity metrics.  There will also be corresponding reporting requirements. 

There are further proposals, under the Government's Greening Finance roadmap, for the pensions ESG reporting regime to be broadened to cover other sustainability-related risks and opportunities beyond climate change, with staging based on schemes' relevant asset sizes in the same way as noted above. A consultation is awaited. We wrote about this in a recent briefing and in an article for the FT's Pensions Expert.

The growing focus on these matters may have an impact on trustees' investment decisions. Employers might wish to engage with trustees on this topic, especially where ESG and sustainability are also a business priority.  

Our Sustainable Business Hub includes further content on ESG considerations for pension schemes.

Impact investing goes mainstream

For many of our private equity clients, the importance of, and opportunities presented by, impact investing are becoming a key focus. Private investment in renewable energy, innovative climate technologies and natural capital can all play a key role in meeting the accelerated need for progress and are increasingly recognised as being aligned with financial return.

For a closer look on trends in impact investing and specifically, how mainstream private equity players are increasingly showing interest in the impact investing market, please see our recently published briefing.

Dispute risks in sustainability-linked finance

Please see our article below and in our recent Dispute Resolution Yearbook 2022 on this topic.

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Business human rights and supply chain
Comment

As we note above, sustainability and climate change remain at the forefront of most clients' minds, but as they get to grips with these challenges, they must swiftly turn their attention from the "E" to the "S" and "G" in "ESG". The EU is issuing proposals for tighter regulation of social and governance matters, in addition to the S and G aspects of existing regulation such as SFDR. The current landscape is piecemeal, without any real consistency and a good deal of discretion left to organisations in working out how to comply.

In some respects, the UK remains a leader in the business human rights and governance space by virtue of its Modern Slavery and Bribery Acts, but presently appears to be watching and waiting to see the shape of the new EU regimes before introducing any new requirements. There is a good chance that the "Brussels Effect" will operate – entities active in the EU are likely to align their operations with the EU rules rather than isolating the UK operations – unless the UK chooses a different path.

Proposals for a social taxonomy under EU sustainability legislation 

In February 2022, the EU Platform on Sustainable Finance (the Platform) published its Final Report on a potential Social Taxonomy. This sets out the Platform's proposals for a structure for a social taxonomy under EU sustainability legislation.

The purpose of the proposed social taxonomy (Social Taxonomy) would be broadly to direct capital flows to activities that operate with respect for human rights and support capital flows to investments that improve living and working conditions, especially for the disadvantaged.  The Social Taxonomy will be largely based on internationally agreed norms and principles such as those under the Universal Declaration of Human Rights and European Social Charter.

How does the Social Taxonomy work?

The Social Taxonomy would largely follow the structure of the Environmental Taxonomy under the EU Taxonomy Regulation and would be based on three main social objectives; detailed substantial contribution criteria; "do no significant harm" (DNSH) criteria, and minimum safeguards.   

To be aligned with the Social Taxonomy, an economic activity would need to make a substantial contribution to one of the social objectives while also ensuring that it does no significant harm to the other objectives and complies with the minimum safeguards. Unlike the Environmental Taxonomy, the three social objectives would also contain specific sub-objectives.

We discuss the Platform's proposals in further detail in our briefing. Further work on a Social Taxonomy is expected in due course but no timings are provided in the Final Report.

Concurrently, the EU Commission is also considering an extension to the existing environmental taxonomy; look out for our update on this development in future newsletters.

Corporate sustainability due diligence

In February 2022, the EU Commission released its revised proposal for a directive on corporate sustainability due diligence, more than a year since the European Parliament proposed a draft directive that would have required a wide range of entities to conduct due diligence within their value chains in order to identify and manage risks relating to human rights, the environment and good governance (previously the "mHRDD").

The revised and renamed proposal is significantly decreased in terms of covered entities – the EU Commission suggests that around 9400 EU companies will meet the threshold of 500+ employees and at least EUR 150 million net turnover worldwide. A further approximately 3400 EU companies operating in high impact sectors with 250+ employees and at least EUR 40 million will be in scope at a later stage. Certain non-EU companies with significant business in the EU and meeting the above thresholds are also expected to be covered.

What will the Directive require?

The Directive will require entities to conduct due diligence on "established relationships" within their supply chain, integrating it into their policies, and identifying, preventing and mitigating adverse impacts. The due diligence should cover human rights and environmental impacts, both of which are defined by references to lists of international conventions in the Annex to the directive. In respect of human rights, Part 1 of the Annex references matters such as the right to life and the prohibition of torture under the Universal Declaration of Human Rights, to prohibition of child labour under the ILO Conventions, to violation of land rights under the UN Declaration on the Rights of Indigenous Peoples.

On the environmental side, Part 2 of the Annex references international norms on hazardous substances, waste and biodiversity. Companies would be expected to monitor supply chains for potential and actual adverse impacts, and certain companies would need only to diligence against "severe adverse impacts".

The planned timeline for implementation of the draft directive is quite long; member states' national implementing laws must be applied from two years after the entry into force of the directive for larger organisations and 4 years for smaller organisations. Given that the legislative process may itself take 18 months or more, we would expect that the due diligence obligations may apply from 2025 or perhaps even later.

For further details, please see our briefing and our commentary in Sustainability Insights.

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ESG risk – key drivers and trends
Comment

As organisations rightly focus on the positive ESG impacts they wish to achieve, they are also increasingly aware of associated ESG-related risks. An important part of Travers Smith's ESG offering is our ability to counsel clients on how to identify, manage and navigate such risks, whether in terms of corporate reporting and governance, ESG-related due diligence, crisis response or litigation support.

In our recently published Dispute Resolution Yearbook 2022, we mapped the ESG risk landscape in the UK and globally, including: (i) core corporate ESG reporting requirements and their relationship to ESG risk; (ii) key tools for managing ESG risk when it eventuates; and (iii) emerging ESG risk trends in the UK and globally, many of which are highly interconnected. View our ESG risk infographic.

Dispute risks in sustainability-linked finance

Recent years have seen a notable surge in the breadth and number of financial instruments offered and executed in the market that carry a sustainability-linked component. No doubt this trend forms part of concerted global efforts to meet sustainability-related objectives, with the growth curve expected to continue.

This article, which appears in our Dispute Resolution Yearbook 2022, focuses on sustainability-linked loans ("SLLs"), sustainability-linked bonds ("SLBs") and sustainability-linked derivatives ("SLDs") (collectively "sustainability-linked financial instruments"), which are fast becoming a mainstay of the global financial marketplace. Investors are increasingly attracted to this asset class: between September 2019 and April 2021, approximately US$27.9 billion of SLBs alone were issued.

Climate change litigation

Litigants continue to push the boundaries of liability in bringing novel climate-related claims in jurisdictions across the globe. Last year, we commented on these trends in our briefing on a Dutch case brought by a group of activists, Milieudefensie v Royal Dutch Shell, that imposed carbon emission limits on the oil-producing multinational and an Australian case that found the Minister for the Environment had a duty to protect young people from the effects of climate change.

Towards the end of last year, in Smith v Fonterra [2021] NZCA 552 ("Fonterra"), New Zealand's Court of Appeal provided a counterweight ruling to the Dutch Milieudefensie claim discussed in our earlier briefing above.

Key points in the Fonterra case

The claimant in Fonterra brought a novel climate-related claim against several significant greenhouse gas emitters in (i) public nuisance, (ii) negligence and (iii) a new climate change duty. The New Zealand High Court declined to strike the claim out on the basis that the defendants may have breached an "inchoate" climate change duty of care. The New Zealand Court of Appeal subsequently struck out the claim on the basis that it was inconsistent with fundamental principles of New Zealand (and English) common law. The Court's approach can be contrasted with Milieudefensie and may give an indication of how an English court would approach a similar claim in this jurisdiction, given the close jurisprudential connections between the two jurisdictions.

For more commentary on the Fonterra case, please refer to our briefing.

The developing role of the Courts in climate change cases

Claimants around the globe are continuing to bring novel and ambitious climate change-related cases before common law Courts. Several of these claims have achieved initial success, only for appellate courts to pushback and reject the idea that specific climate change-related duties exist.  In this article we review two recent decisions from Australia and the UK and comment on how these decisions might impact on businesses operating in the UK going forward.

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Environment and climate
Comment

The enactment of the Environment Act at the end of last year was a landmark moment in environmental protection in the UK, coming some 30 years after the last major environmental law.  That said, for the time being its effects are rather conceptual and its immediate impacts on businesses limited. The Government has wide-ranging new powers to enact secondary legislation (which is already starting to trickle through), and many areas where it is required to act, for example, to define environmental targets. Monitoring the development of implementing regulations and having a general awareness of the new constraints that the Government is working under (eg. having to have regard to the environmental principles in all its policy making) will both be important.

We expect an increasing focus in the coming months on nature and biodiversity and steps organisations are taking to preserve them. The Environment Act addresses these matters in detail, and they will now be an important element in almost all real estate transactions.

The Environment Act 2021

The long-awaited Environment Act 2021 was finally passed into law in November 2021, nearly three years after a bill was first proposed to govern environmental matters post-Brexit. The Government has described it as "the most ambitious environmental programme of any country on earth". Although many of the detailed rules are yet to be developed, the Act will have wide-ranging consequences for environmental management and governance arrangements as well as operational implications. Here is a brief overview.

Environmental principles: The Act will enshrine into law 5 environmental principles which will underpin future Government policy, contributing to the improvement of environmental protection and sustainable development.

Environmental targets: The Government must set at least one legally binding, environmental target lasting at least 15 years in each of four priority areas (being water, air quality, biodiversity and waste/resource efficiency), as well as on species abundance and fine particulate matter.

Waste and water resource efficiency: The Act increases the Government's powers to manage the impact of products throughout their lifecycle, moving towards "extended producer responsibility" ("EPR"), with producers bearing the full financial cost of managing products at the end of their life, incentivising durability, repairability and recyclability of materials. There is already a consultation underway on an EPR scheme for packaging.

Forest risk commodities: The Act aims to ensure that UK businesses are not contributing to illegal deforestation via imported products, introducing a ban on the use of "forest risk commodities" produced on land which is occupied or used illegally, alongside new due diligence and corporate reporting requirements. An outline of future requirements is set out in a separate consultation, also summarised in more detail in our briefing.

Real estate developments: -The Environment Act contains measures designed to protect the environment whilst facilitating sustainable real estate development. For a summary, see the textbox, and for more detail, see our briefing.

Real estate measures in the Environment Act 2021

The Act:

  • introduces Local Nature Recovery Strategies, a new, England-wide system to establish priorities and map proposals for actions to drive nature’s recovery and provide wider environmental benefits.

  • provides that all planning permissions will require biodiversity net gain to be met before the development commences.

  • introduces conservation covenants, agreements with a landowner which have a "conservation purpose". For example they may be used:
    • where owners of land bequeath it to their children but want to ensure it is not used in the future for building;
    • where a heritage group has invested in buying and restoring a historic property, and wants to sell it while ensuring its preservation;
    • as a condition of funding for a development;
    • as a planning tool, to target the preservation of part of a development site, or ensure that biodiversity loss is offset by long-term biodiversity gains at another site; and/or
    • as part of a biodiversity offsetting scheme.

The Government has set itself an ambitious timetable to conduct the multiple workstreams needed to implement the Act, some of which were underway before the Act became law. Organisations looking to translate these framework provisions into actionable requirements must await further consultations and draft legislation.

CMA investigation into greenwashing: an update

Following its investigation into greenwashing (which we reported on last year), the Competition and Markets Authority has published a "Green Claims Code" which aims to provide guidance to businesses on environmental claims. This was accompanied by a warning that the CMA intends to carry out a review of such claims (both online and offline) in early 2022 and that businesses which have failed to comply with consumer law may face enforcement action.

Sustainability and competition law

On 14 March 2022, the UK Competition & Markets Authority (CMA) published advice to the Secretary of State for Business, Energy and Industrial Strategy (BEIS), detailing its view on the role of competition law in furthering environmental sustainability goals (although we await the final outcome of BEIS and the CMA's proposals). This came hot on the heels of the European Commission's new draft Horizontal Guidelines, published on 1 March 2022, which dedicate an entire chapter to 'Sustainability Agreements' and shed light on the EU's proposed approach to the interaction between competition law and sustainability.

Achieving ESG ambitions will unavoidably require industry collaboration, and ESG purposes do not automatically immunise conduct from competition law scrutiny. Industry players have therefore long been calling for practical and reliable solutions to be developed in the competition law field so that businesses can confidently promote ESG considerations in their decision-making. Please see our briefing in which we discuss how far these latest updates from the Commission and CMA go towards providing those solutions.

Sustainability and consumer law

As part of its advice to Government on sustainability issues from March 2022 (see above under "Sustainability and competition law"), the UK Competition and Markets Authority (CMA) has also recommended a number of changes to UK consumer law, including:

  • Imposing an express positive obligation on businesses to disclose information about the environmental impact of their products; in support of this, it proposes developing standardised definitions of terms such as "recyclable" or "carbon-neutral"; and

  • Changes designed to make it easier to enforce consumer law against companies making misleading environmental claims and to allow orders to be made requiring businesses to make redress payments for environmental harm. 

The Government has yet to respond and most of these changes would require legislation, which would take time to implement;  but if enacted in full, they would be likely to have a significant impact on B2C businesses.

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Workplace investigations and ethical workplace issues

Comment

Organisations are coming under heightened scrutiny from investors, regulators and the media when they fail to adequately deal with workforce issues as they arise, particularly as regards allegations sexual harassment in the workplace. In the last few months alone, we have seen several global organisations publicly criticised for failing to investigate and properly address allegations of harassment at the time they were made. These failures have resulted in public litigation, media interest and staff backlash.

We are regularly advising clients on the importance of encouraging a culture where employees feel comfortable "speaking up" about concerns within the workplace and then carrying out fair and thorough investigations when concerns are raised. Not only is this the "right thing to do" from a duty of care perspective, but it allows employers to get to the root of issues efficiently, prevent them recurring and, ultimately, minimise the risk to the business.

Workforce issues are increasingly being seen as a matter of corporate governance for which boards (and, in some cases, individual directors) are directly responsible and this looks set to continue. We are frequently supporting our clients by delivering management training, drafting and tailoring policies and carrying out investigations on behalf of clients as and when concerns are raised.

On the regulatory front, the "S" in ESG continues to manifest in various measures to promote ethical practices in the workplace, including, as we summarise below, the prospect of a new Code of Practice on fire and rehire in the wake of P&O's recent actions, possible reforms to the law on workplace sexual harassment and the moves to introduce ethnicity pay gap reporting.

Fire and rehire

The practice of "fire and rehire", which refers to an employer changing employees' terms by dismissing them and offering to re-engage them on new contracts, has come under the spotlight in recent months. Employers who have sought to change terms in this way have been criticised by trade unions, and there have been calls for the practice to be banned altogether, most recently in the wake of P&O's mass dismissal of ferry workers. There have been several recent developments in this area. Last year, Acas published guidance on changing employment contracts  which states that "fire and rehire" should only be considered as a last resort.

The Government so far has indicated that it does not plan to legislate against the practice but has committed to producing a new statutory Code of Practice to detail how businesses should consult on proposed changes to employment terms.

Recent case law

In the recent case of USDAW v Tesco, the union obtained an injunction preventing Tesco from dismissing staff in order to reduce pay, but it should be noted that this arose due to a particular, and unusual, factual background (involving a previous contractual commitment to a permanent uplift in pay). In most cases an injunction is unlikely to be available and the dismissals would be effective, with the employees having potential claims of unfair dismissal and breach of collective consultation rules.

Although the legal position relating to "fire and rehire" has not changed so far, the process that employers should follow when seeking to change employees' terms may become more prescriptive once the Code of Practice is produced. But regardless of what the law requires, the reputational risks are likely to be an equally important consideration given the increased focus on this area, and employers may be reluctant to use this route unless they have no other choice.

Workplace sexual harassment

The Government ran a consultation in 2019 on possible reforms to the law on workplace sexual harassment. It has now published its response to that consultation, saying that it intends to introduce a new positive duty on employers to prevent sexual harassment in the workplace, along with a statutory code of practice on what the duty means in practice. The Government will also introduce explicit protections from workplace harassment by third parties (such as clients, customers and suppliers) and will consider extending the time limit for bringing discrimination and harassment claims in employment tribunals from 3 to 6 months. The Government has not yet set out a timetable but has said the changes will be introduced as soon as parliamentary time allows.

Ethnicity pay gap reporting

In 2018/2019, the Government consulted on introducing a mandatory requirement for large organisations to report publicly on the ethnicity pay gap within their organisation. The Government has not yet formally responded to the consultation and has come under mounting pressure to act in this area.  However, in its recent response to a report by the Commission on Race and Ethnic Disparities, the Government said that it would not be legislating for mandatory reporting at this stage, as it wants to avoid burdens on businesses as they recover from the pandemic. Instead, the Government will encourage more voluntary reporting. A number of employers already publish their data on a voluntary basis or are considering doing so as part of wider efforts to promote diversity and inclusion. The Government has not ruled out introducing a mandatory requirement for ethnicity pay gap reporting in the future.

Taxation of workers

There have been recent changes to the UK anti-avoidance rules which are designed to ensure that only workers who are genuinely self-employed can benefit from the tax advantages in self-employed status. Please see our article in Insights for In-house Counsel on this topic.

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Responsible taxation
Comment

There have been a number of recent developments – both international and domestic – which point towards the development of a new culture of responsible taxation. From OECD rules introducing a minimum level of corporate taxation to a draft EU directive scrutinising the amount of taxpayer substance to a new UK regime requiring notification of uncertain tax positions, these measures limit the ability of entities to engage in aggressive tax avoidance and incentivise responsible tax behaviour by corporate taxpayers. Whilst the measures highlighted below are mostly targeted at larger businesses, they are indicative of changing attitudes to tax administration and policy.

Developing an ethical tax policy - podcast

In the latest episode of our Talking.Sustainability. podcast series, Tax Partner Madeline Gowlett and Associate Rob Smith discuss the concept of "ethical taxation" and the key issues for businesses to consider.


Listen on Apple Podcasts

International tax reform - OECD's BEPS pillar one and pillar two proposals

International agreement has been reached on a two-pillar solution to address the tax challenges arising from the digitalisation of the economy. The two-pillar corporate tax reform plan forms part of the OECD's project tackling base erosion and profit shifting (or BEPS). For more detail, please see our article in our recent Insights for In-house Counsel publication.

EU directive on shell entities (ATAD 3)

The EU Commission has published a draft directive (ATAD 3) designed to tackle misuse of entities resident in EU member states that do not have sufficient substance.

Entities within the scope of the directive are subject to adverse tax consequences. There are also increased information reporting requirements which extend to entities at risk of being within scope as well as those that actually are.

For more detail please see our recent briefing on the shell entity directive which includes a flowchart to help businesses navigate the new rules and assess whether the directive is likely to apply to them.

Notification of uncertain tax treatment

A new set of rules has been introduced from 1 April 2022 which require large businesses (those with a UK turnover exceeding £200m and/or a UK balance sheet exceeding £2bn) to notify HM Revenue & Customs (HMRC) if they have adopted a tax treatment which is "uncertain". A notification will be required if either of the following two triggers arise:

  • The taxpayer adopts a tax treatment that differs from HMRC's known position; or

  • A provision has been recognised in the accounts of the taxpayer to reflect the probability that a different tax treatment will apply to the transaction to that adopted.

A third trigger (substantial possibility that a court or tribunal would find the treatment adopted to be incorrect) was not included in the current rules but remains under review by the Government.

The threshold for notifications is £5m.

Update to EU list of non-cooperative jurisdictions for tax purposes

In February 2022, the EU published the latest update to its list of non-cooperative jurisdictions for tax purposes (sometimes referred to as the EU 'blacklist').

The EU blacklist

The EU list forms part of its efforts to tackle harmful tax practices. To be considered cooperative, the EU screens international jurisdictions according to three criteria: tax transparency, fair taxation and anti-Base Erosion and Profit Shifting (BEPS) measures. Jurisdictions that fail the screening process and do not make sufficient commitments to update their domestic tax rules to satisfy the EU's concerns are added to the blacklist. In order to make the EU list effective, the EU encourages member states to take certain tax and non-tax 'defensive measures' against jurisdictions included on the EU list, which can include the imposition of withholding taxes (amongst others). There are also significant reputational risks for blacklisted jurisdictions and businesses operating there. The list is updated biannually: typically in February and October.

No changes were made to the main blacklist in the February update. As a result, the blacklist continues to comprise 9 jurisdictions, being: American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu.

Perhaps of more interest were the changes made to the so-called 'grey list' of jurisdictions that are not yet fully compliant but have made sufficient commitments to satisfy the EU's concerns. The following 10 jurisdictions were added to the grey list: the Bahamas, Belize, Bermuda, the British Virgin Islands, Israel, Monserrat, Russia, Tunisia, Turks and Caicos Islands and Vietnam. In addition to the jurisdictions added in February, the grey list also includes the following jurisdictions: Anguilla, Barbados, Botswana, Costa Rica, Dominica, Hong Kong, Israel, Jamaica, Jordan, Malaysia, Montserrat, North Macedonia, Qatar, Seychelles, Thailand, Turkey and Uruguay.

Any businesses with entities or operations in grey-listed countries should pay particular attention to future updates of the EU list to ensure that jurisdictions currently on the grey list are not moved to the blacklist.

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Green taxation

New tax on non-recycled plastic packaging

In pursuit of its commitment to prevent all avoidable plastic waste by the end of 2042, the UK Government has recently begun to impose a tax on the manufacture and import of significant volumes of plastic packaging which does not contain a minimum amount of recycled content. The aim of the tax, which came into effect on 1 April 2022, is to increase demand for recycled plastics, creating an incentive to collect and recycle plastic waste and divert it away from landfill and incineration.

For more information on the Plastic Packaging Tax, please read our briefing.

Enhanced VAT relief on energy saving materials

In the Spring Statement it was announced that VAT relief on the installation of energy saving materials (ESMs) would be expanded.

VAT relief is available on the installation of ESMs such as heat pumps and solar panels in residential properties. Following a CJEU decision in infraction proceedings against the UK in 2019, the UK was required to restrict the availability of such relief. Now that the Brexit transitional period has ended, the UK has the freedom to depart from the results of the infraction proceedings.  The measures unwind the effect of the CJEU decision and mean that complex eligibility criteria no longer need to be satisfied.  Wind and water turbines have also been added back to the list of ESMs.

In addition, the applicable VAT rate has been reduced from 5% to 0% for a five-year period from 1 April 2022 to 31 March 2027.

The changes took effect from 1 April 2022. Different rules apply to Northern Ireland, which is required to harmonise with EU VAT rules on goods under the Northern Ireland Protocol. The measure is intended to incentivise the take-up of ESMs in line with the Government’s net zero objectives.

Key contacts

ESG and sustainability at Travers Smith

Recent events

Spotlight on ESG Spring Social –we recently hosted a networking drinks evening for clients and contacts of the associates in our ESG team from across the firm. We were delighted to welcome representatives from two of our pro-bono clients, the Chancery Lane Project and WWF UK, who delivered excellent talks on their inspiring work and which provoked much discussion during the evening. If you would like to be invited to similar events in future, please register your interest.

BVCA course – "Developing an ESG strategy for your portfolio" - Travers Smith Senior Consultant Simon Witney recently spoke at the British Private Equity & Venture Capital Association (BVCA)'s exciting new course on 'Developing an ESG Strategy for your Portfolio'. In his session, Simon covered the regulatory context for sustainability strategies in private equity and venture capital firms, looking at the current priorities of EU and UK regulators.

"Recent developments in ESG regulation" – the most recent webinar in our series for Alternative Asset Managers looked at:

  • the latest on SFDR, including reporting requirements for Article 6, Article 8 and Article 9 products

  • status of the EU Taxonomy and its application to private funds

  • the FCA's final rules on TCFD reporting for UK regulated asset managers and PE adviser/arrangers

  • the UK's SDR and Green Taxonomy and

  • recent ESG developments in the United States

Details of the next webinar in the series are set out in the Planned activities section below.

Cambridge Institute for Sustainability Leadership - to deepen our collective expertise on sustainable finance, Travers Smith Senior Consultant Simon Witney and Knowledge Counsel Carys Clipper recently completed an 8-week course on sustainable finance with the Cambridge Institute for Sustainability Leadership (CISL) gaining fascinating insight into sustainable finance trends and strategies, innovation and disruption and leadership skills that help to create impact.  

Planned activities

ESG risk at London International Disputes Week (11 May 2022)- Heather Gagen, one of our Dispute Resolution partners, will be chairing a panel at this event on 11 May 2022 which will explore the contours of the ESG risk landscape globally and highlight key ESG risk trends, including:

  • Corporate liability frameworks – what are the global litigation trends and key risk areas, including parent company and value chain liability?

  • Business ethics and human rights – what is the right balance between soft law frameworks, regulatory intervention and litigation?

  • The role of the Courts – are they becoming legitimate guardians of business ethics or unelected quasi-regulators?

  • ESG activist litigation – could it create a chilling effect and hinder the pursuit of innovative corporate ESG agendas, or will it ensure corporate good behaviour and robust policy response?

The panel will share their own experiences of effective strategies for navigating this developing risk landscape. It will also debate whether increasing regulatory and litigation activism on business ethics and corporate accountability is proving effective in driving better ESG outcomes.

Speakers: Heather Gagen – Chair, Partner, Travers Smith; Kathryn Britten, Managing Director, Alix Partners; Adam Heppinstall QC, Barrister, Henderson Chambers; Dan Lambeth, Partner, ESG, Brunswick

To find out more about LIDW22 and to register for the event, please visit the LIDW website here. The event is available to attend virtually and in-person. Registration is free for in-house and government lawyers.

The Lawyer General Counsel Strategy Summit – (11-13 May 2022) – Head of Risk & Operational Regulatory Doug Bryden, Disputes Resolution partner Stephanie Lee and Employment Partner Adam Wyman will be hosting a roundtable session at this event on the role of the GC in addressing governance risks in a "purposeful" business. The session will explore what "good" looks like as regards to the "G" in ESG and how GCs should respond to the pressure on the business to do the 'right' thing

The Regulation of Impact Funds in the UK (16 June 2022) - The next in our series of webinars aimed primarily at the Alternative Asset Management community will address some of the challenges in the EU and future UK regulation of impact funds, especially for private funds, and will look at the proposals for the establishment of minimum standards for SFDR Article 8 and 9 products. The webinar will feature a panel discussion with a range of experts from Travers Smith as well as external speakers. Sign up via our website to ensure you receive all future communications about this event.

ESG resources

ESG timeline – visit our ESG timeline.

ESG Healthcheck – as pressure increases to manage regulatory compliance and social and environmental impact, due diligence processes are becoming more sophisticated – not just focused on downside risk, but also aimed at spotting opportunities. Our tailored legal and regulatory ESG due diligence processes and post-acquisition ESG healthcheck are designed to help companies and their investors take a considered and proactive approach to ensure reputational and commercial demands are balanced against compliance and legal liabilities. For more information on our ESG healthcheck, please contact either Doug Bryden or George Weavil.

Sustainable Business hubour portal contains an overview of the legal and regulatory issues relevant to the ESG agenda, including specialist guidance, commentary and thought leadership on ESG and Sustainable Finance, Corporate Governance and Stewardship, People, D&I and Health and Safety, Business Ethics. Climate Change Environment and Resources and ESG Litigation Risk.

ESG video series – we are currently recording a series of short videos on a range of ESG topics. The videos will be available on our Sustainable Business hub and our Spotlight on ESG LinkedIn page.

Spotlight on ESG LinkedIn page – you can sign up to our ESG LinkedIn community for our latest news and views on ESG.

ESG timeline

Our interactive ESG timeline sets out recent and expected UK and EU legal and regulatory developments relating to ESG and wider sustainable business topics.

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