In this month’s ESG Market Alert, we cover:

• Corporate governance in Europe 2023: Preparing for new regulations and evolving activism;
• Impacts of climate litigation on firm value;
• New guidance on legal considerations involving climate change; and
• UK FRC consults on corporate governance code changes.

Corporate governance in Europe 2023: Preparing for new regulations and evolving activism

Businesses globally are under mounting pressure to maximise shareholder value creation while actively focusing on ESG initiatives. In Europe, shareholders have become “increasingly vocal about the financial sector’s continued financing of fossil fuels” according to a report from Insightia, particularly as emissions reporting is becoming mandatory for large companies subject to EU reporting standards under the Non-Financial Reporting Directive (NFRD). Compliance is required by 2025 and the first reports are due in 2026. Recently, shareholders’ proposals showed that investors are ever more attentive to ESG agendas, specifically those proposals that address human rights and employee welfare, such as demands for a Real Living Wage (a UK wage level based on the cost of living). The report also states that European activism tends to be confined “behind-closed-doors”. Yet, European directors should prepare for such activism, as such campaigns might become public board battles, particularly where the market allows shareholder meetings outside of the proxy season.

Impacts of climate litigation on firm value

The Grantham Research Institute on Climate Change and the Environment published a working paper on 23 May 2023 which flagged that climate change litigation is becoming increasingly common, and more successful. There is indeed a growing trend of cases being brought by individuals and communities against both governments and high emitting corporations. The paper has analysed 108 climate lawsuits against US- and European-listed corporations between 2005-2021. Notably, the paper reports that there is a direct causal link between climate litigation and stock prices: filings or unfavourable decisions in climate litigation reduce firm value by -0.41% on average. If the corporate offender in question is considered to be a "Carbon Major" (the largest emitters operating in Energy, Utilities and Materials) then this impact increases to a -0.57% reduction in stock prices in respect of a court filing and -1.50% reduction following an unfavourable judgment. In monetary terms, the paper revealed that the average economic cost resulting from such unfavourable decisions is US$360 million. In addition, the findings suggest that lenders, financial regulators and governments should consider climate litigation risk as a relevant financial risk.

New guidance on legal considerations involving climate change

The Law Society has published new guidance on legal considerations surrounding climate change. This two-part guidance (i) advises solicitors on how clients can manage their business in a manner which is consistent with the transition to net zero and (ii) clarifies how climate change risks may be relevant to client advice and the issues which solicitors should consider in the context of climate change. The guidance offers practical ways in which clients and law firms can integrate sustainability measures into their practices, covering topics such as emissions targets, climate risk disclosure frameworks, greenwashing and promoting transparent communication by companies. Furthermore, it considers the intersection of solicitors’ professional duties and the impact of climate change on solicitor-client relationships. The intention is to promote the practise of law in the context of climate change and guide solicitors in approaching this in a way which aligns with their professional duties and the administration of justice.

UK FRC consults on corporate governance code changes

The FRC have launched a public consultation on their proposed revision to the Corporate Governance Code for the first time in five years. The Code applies to all premium listed companies in the UK, but is also used as a benchmark of good practice for many other companies. The revision aims to enhance the Code's effectiveness in promoting good corporate governance, some of the changes include:

• Setting out a revised framework of prudent and effective controls to provide a stronger basis for reporting on, and evidencing their effectiveness;
• Improving the functioning of comply-or-explain, taking account of recently published FRC research and reports;
• Making necessary revisions to reflect the responsibilities of the board and audit committee for sustainability and ESG reporting, and associated assurance in accordance with a company's audit and assurance policy; and
• Updating the code to ensure that it aligns with changes to legal and regulatory requirements as set out in the Government's response to the White Paper, including strengthening reporting on malus and clawback arrangements.

The FRC invites stakeholders to send comments by Wednesday 13 September 2023.

ESG Counsel™

The Hogan Lovells ESG team is here to help, including on all the issues raised in this snapshot. Hogan Lovells is one of the leading ESG firms in the world, delivering uniquely tailored cross-practice and geographic holistic advice as ESG Counsel to clients globally. Our holistic and solutions-driven approach to managing ESG issues draws on the full scope of our global practice and sector capabilities (including our leading global corporate, environmental, governmental relations and regulatory, employment, and dispute resolution teams) to drive sustainable value and maximise positive impact for clients. Please contact us to discuss next steps or for our latest ESG-related materials, including our ESG Academy.

Event | ESG Future Changers: Building business sustainably | 20 July 2023

Our ESG Future Changers event in London on Thursday, 20 July 2023 from 5-8pm will bring together award-winning business leaders and advisers to address the opportunities and challenges involved in building business sustainably. Join us for a keynote fireside chat with Victoria Prew, Co-Founder and CEO of circular fashion marketplace HURR, and a lively panel discussion exploring how businesses can pursue growth in a way that is sustainable for business, people and planet. We will then enjoy a cocktail reception on our roof terrace. Find out more and register here.