Regulation is shaping the sustainability agenda and changing the way companies do business in different jurisdictions, but keeping pace with constant regulatory updates has become a mammoth task for businesses and investors. In this recurring series, S&P Global Sustainable1 presents key environmental, social and governance regulatory developments and disclosure standards from around the world.

In this month's update, we look at an agreement on EU sustainability due diligence rules, the UK’s plans to introduce a carbon border levy and Canada’s proposed emissions caps for oil and gas producers.

EUROPE    ASIA-PACIFIC    UNITED STATES AND CANADA

Europe

EU legislators reach agreement on circular economy rules

The European Parliament and the Council of the EU, made up of government ministers of the 27 EU member states, reached an agreement on Dec. 5, 2023, on new regulation aimed at making consumer goods such as clothes and smartphones more durable, more recyclable and more energy efficient. The Ecodesign for Sustainable Products Regulation introduces a ban on destruction of unsold textiles and footwear products that starts two years after the new rules enter into force, the Parliament said. Medium-sized companies will be exempt from the ban for six years after the regulation’s entry into force. Other sectors may be subject to bans in the future, the European Commission said. Large companies will need to disclose annually how many unsold consumer products they discard and why, the commission said. The rules also introduce a new “Digital Product Passport,” which will provide information about products' environmental sustainability to help consumers make informed choices, the council said.

EU legislators strike deal on revised energy efficiency rules in buildings

The European Parliament and the Council of the EU came to an agreement on Dec. 7, 2023, on revised energy efficiency rules in buildings that will require new buildings to be net-zero from 2030. The revised Energy Performance of Buildings Directive will require member states to implement measures to reduce the average primary energy use of residential buildings by at least 16% by 2030 and between 20% and 22% by 2035. EU countries will have to renovate the 16% worst-performing non-residential buildings by 2030 and, by 2033, the worst-performing 26%, through minimum energy performance requirements, the Parliament said. Member states would also have to deploy solar installations progressively in public and non-residential buildings, depending on their size, and in all new residential buildings, by 2030 if feasible from a technical and economic point of view. They will also have to adopt measures to decarbonize heating systems, phaseout fossil fuel boilers by 2040 and stop subsidizing standalone fossil fuel boilers as of 2025, the Parliament added.

EU legislators approve rules to decarbonize gas sector and establish hydrogen market

The European Parliament and the Council of the EU reached an agreement on Dec. 8, 2023, on updated EU rules to decarbonize the gas market and create a hydrogen market. The framework aims to accelerate the use of renewable and low-carbon gas in the EU by making it easier to access the existing gas grid and allowing discounts to cross-border and injection tariffs, the European Commission said. The rules will also establish a market for hydrogen in two phases, before and after 2033, with simplified rules in the first phase covering access to hydrogen infrastructures, separation of hydrogen production and transport activities and tariff setting. The rules also create the European Network of Network Operators for Hydrogen to oversee market governance and promote a dedicated hydrogen infrastructure, cross-border coordination and interconnector network construction.

EU legislators reach agreement on sustainability due diligence rules

The European Parliament and the Council of the EU on Dec. 14, 2023, agreed on the Corporate Sustainability Due Diligence Directive, which will require large companies to scrutinize the social and environmental impacts of their supply chain activities more closely. Large companies will have to identify and prevent, end or mitigate negative impacts of their activities on human rights, such as child labor and exploitation of workers, and on the environment, such as pollution and biodiversity loss, the European Commission said. The directive will apply to EU companies with more than 500 employees and net annual revenues of more than €150 million, and a different size threshold will apply to specific “high-impact sectors,” the Commission said. Some non-EU companies will be subject to the rules three years after they enter into force. The directive also requires companies to adopt a plan ensuring that their business model and strategy are compatible with the Pari” Agreement on climate change, the Council said. The Paris Agreement seeks to limit global warming to 1.5 degrees C relative to preindustrial levels.

EU securities market regulator holds consultation on sustainability reporting guidelines

The European Securities and Market Authority launched on Dec. 15, 2023, a consultation on draft sustainability reporting guidelines for new sustainability-related regulation such as the EU’s Corporate Sustainability Reporting Directive. The regulator said the guidelines aim to ensure that national supervisors and regulators take a consistent approach when enforcing the European Sustainability Reporting Standards and Article 8 of the Taxonomy Regulation, which requires companies to disclose their sustainability-related activities. The guidelines also seek to ensure that national regulators take the same approach to sustainability reporting as they do to financial reporting, the regulator said in the consultation document. The consultation closes on March 15. The regulator expects to publish the final guidelines in the third quarter of 2024.

European bank regulator publishes guidelines on diversity and gender pay gap data collection

The European Banking Authority (EBA), which regulates EU lenders, published on Dec. 18, 2023, guidelines for collecting data on the composition of banks’ and investment firms’ management boards, financial firms’ diversity policies and gender pay gaps at management level. The data collection will enable regulators to monitor diversity trends over time and identify common practices for diversity policies, the EBA said. The data collected will include the diversity policies and the gender, age, education and professional background and geographical provenance of management members. The EBA intends to analyze the data and publish a benchmarking report at an EU level, including country-by-country analysis, every three years. The first data collection will take place in 2025 with a reference date of Dec. 31, 2024.

UK to introduce carbon border adjustment mechanism in 2027

The UK government said on Dec. 18, 2023, it would implement its own carbon border adjustment mechanism (CBAM) by 2027, which will put a carbon charge on imports of iron, steel, aluminum, ceramics and cement into the UK. In 2023, the EU started phasing in its own CBAM, which will become fully applicable from 2026. The charge applied by the UK CBAM will depend on the amount of carbon emitted during a product’s manufacture and the gap between the carbon price applied in the country of origin and the carbon price that applies to UK producers. The government also said it would work with industry to establish voluntary product standards for businesses to sell low-carbon products to customers. It also intends to develop a framework that measures the carbon emission content of goods. The UK CBAM will work alongside the UK Emissions Trading Scheme to mitigate the risk of carbon leakage. The mechanism’s design and delivery will be subject to further consultation in 2024, including the precise list of products in scope, the government said.

UK announces plans to develop carbon capture market

The UK government unveiled on Dec. 20, 2023, plans to develop a carbon capture, usage and storage strategy with the aim of creating a competitive carbon capture market by 2035. Carbon capture works by capturing carbon dioxide before it reaches the atmosphere and storing it underground, and the plan would aim to store 20 to 30 million metric tons of CO2 per year by 2030. Under the strategy, the UK would move to a competitive allocation process for carbon capture projects from 2027 to accelerate the market’s development. It would also establish an industry working group to identify and adopt solutions to reduce the cost of capturing carbon. The UK has the capacity to store up to 78 billion metric tons of CO2 under the North Sea, the government said.

ASIA-PACIFIC

Singapore financial regulator launches sustainable finance taxonomy

The Monetary Authority of Singapore launched on Dec. 3, 2023, the Singapore-Asia Taxonomy for Sustainable Finance, which sets thresholds and criteria for green and transition activities that would mitigate the impacts of climate change. The taxonomy will apply to eight sectors: energy; industry; construction and real estate; waste and the circular economy; carbon capture and sequestration; information and communications technology; agriculture and forestry; and transportation. It uses a traffic light system, in which activities on a net-zero pathway are green and activities transitioning toward green within a certain time frame or enabling significant emissions reductions in the short term are amber. The regulator said it would be the first taxonomy to use a transition category and that the tool would provide criteria to identify and classify green and transition activities relevant specifically to the Asia-Pacific region. Taxonomies have been springing up globally as a way of steering investment into sustainable activities.

Singapore financial regulator publishes code of conduct for ESG ratings and data providers

The Monetary Authority of Singapore published on Dec. 6, 2023, an industry code of conduct for providers of ESG ratings and data in Singapore. The code of conduct establishes minimum industry standards of transparency in methodologies and data sources, governance, and management of conflicts of interest. The regulator said the code of conduct builds on the International Organization of Securities Commissions’ recommendations for ESG ratings and data providers. It also published an accompanying checklist for providers to self-attest compliance to the code of conduct and said users of the code had agreed that providers’ self-attestation on the checklist should, where feasible, undergo third party assurance or audit.

India amends carbon market rules to create a voluntary carbon offset market

India’s Ministry of Power announced on Dec. 19, 2023, amendments to its carbon market rules that would enable the creation of a voluntary carbon offset market. The Central Government and the Bureau of Energy Efficiency made amendments to the country’s Carbon Credit Trading Scheme 2023, now known as the Principal Scheme. India had earlier announced a compliance emission trading mechanism. Under the compliance mechanism, obligated entities will have a target for reducing emissions, but under the offset mechanism non-obligated entities can register their projects for accounting greenhouse gas emissions reduction, removal, or avoidance for issuance of Carbon Credit Certificates. Non-obligated entities can register projects according to the sectoral methodologies published by the Bureau regarding carbon emission reduction, removal or avoidance for issuing credit certifications.

UNITED STATES AND CANADA

Canada proposes cap for oil and gas producers’ carbon emissions

The Canadian government proposed on Dec. 7, 2023, draft regulation that will cap greenhouse gas emissions by oil and gas producers at 35% to 38% by 2030 compared with 2019 levels. The proposed regulation aims to reduce carbon emissions from the oil and gas sector through the establishment of a national emission cap-and-trade system, the government said in the draft framework. The regulation will establish reporting and verification requirements and a legal upper limit on carbon emissions, with a view to phasing in the system between 2026 and 2030, it said. The proposed emissions cap-and-trade regulations would be designed to ensure that emissions from upstream and liquified natural gas subsectors decline over time to reach net-zero by 2050. They also aim to account for “technically achievable” emissions reductions and projected global oil and gas demand. They would also seek to avoid extra administrative burdens for companies and would be subject to ongoing monitoring and reviews. A consultation on the framework is open until Feb. 5.