January-February 2024 Update
We are pleased to share the January-February 2024 issue of Wilson Sonsini's Sustainability and ESG Advisory Practice Update. Each issue combines news, key legal developments, and resources related to sustainability and environmental, social, and governance (ESG) matters relevant to public and private companies internationally.
In this issue, we cover:
- uncertainty around the compliance deadline with California’s AB 1305;
- updates to proposed U.S. Department of the Treasury (Treasury) and Internal Revenue Service (IRS) regulations for green energy credits;
- the Federal Energy Regulatory Commission’s (FERC’s) review of its policy on blanket ownership authorizations;
- the first European Sustainability Reporting Standards entering into force;
- Canada finalizing its zero emissions vehicle regulations; and
- the publication of Wilson Sonsini’s 2023 SV 150 Corporate Governance Report.
We hope that you will find this information practical and useful. For any questions, please contact Amanda Urquiza, Manja Sachet, Scott Zimmermann, or any other attorney from Wilson Sonsini’s Sustainability and ESG teams.
United States
California AB 1305 Compliance Deadline Remains Uncertain
In 2023, California enacted Assembly Bill 1305: Voluntary Carbon Market Disclosures (AB 1305), which requires certain private and public companies to make climate disclosures available on their websites. AB 1305 did not include an explicit compliance date, and it was widely reported that compliance was required by January 1, 2024. On December 6, 2023, the author of AB 1305, Assembly Member Jesse Gabriel, submitted a letter to the Chief Clerk of the California Assembly indicating that his intent was that the first annual disclosures under AB 1305 commence on January 1, 2025. On January 3, 2024, Assembly Member Gabriel was granted unanimous consent to include a statement of his intent in the Assembly Daily Journal that the first annual disclosure under AB 1305 be posted by January 1, 2025. Although the statement may provide helpful guidance about the legislative intent behind AB 1305, it is not binding law, which still needs to be clarified.
Please see our December 2023 update for additional information about AB 1305.
U.S. Chamber of Commerce Leads Plaintiffs in Alleging First Amendment and Commerce Clause Violations in Challenge to California Air Resources Board Over State Climate Disclosure Laws
On January 30, 2024, the U.S. Chamber of Commerce and several other plaintiffs filed a complaint against the California Air Resources Board challenging California Senate Bill 253 and Senate Bill 261. Senate Bill 253, the Climate Corporate Data Accountability Act, requires that companies operating in California with over $1 billion in revenue disclose annual emissions beginning in 2026 and Senate Bill 261, the Voluntary Carbon Market Disclosures Act, requires that companies operating in California with annual revenue of more than $500 million report climate-related financial risks prior to January 1, 2026. Plaintiffs allege that the bills violate the First Amendment’s protections against compelled speech, that the breadth of disclosure violates the Commerce Clause, and that the bills are preempted by the Clean Air Act. The lawsuit was filed in the U.S. District Court for the Central District of California and the outcome remains uncertain.
Please see our client alert for more information on SB 253 and SB 261.
Direct Pay/Transferability Portal Now Open
On December 22, 2023, the IRS unveiled its online pre-registration tool for taxpayers seeking direct pay or transferability of certain tax credits provided by the Inflation Reduction Act of 2022 (IRA). States, local governments, nonprofits, tribal entities, rural electric cooperatives, and other eligible entities seeking to receive direct payment for any of the following tax credits, and taxpayers seeking to transfer the following tax credits must pre-register and receive a registration number for the project using the IRS’s online pre-registration tool:
- Section 45 renewable electricity production credit
- Section 45Y clean electricity production credit
- Section 48 investment tax credit
- Section 48E clean electricity investment credit
- Section 45U zero-emission nuclear power production credit
- Section 45Q carbon oxide sequestration credit
- Section 45Z clean fuel production credit
- Section 45V clean hydrogen production credit
- Section 30C alternative fuel vehicle refueling property credit
- Section 45W commercial clean vehicle credit
- Section 48C qualifying advanced energy project credit
- Section 45X advanced manufacturing production credit
FERC Initiates New Proceeding to Review Its Policy on Federal Power Act (FPA) Section 203(a)(2) Blanket Authorizations, Posing Potential Ramifications for ESG Investing
On December 19, 2023, FERC issued a Notice of Inquiry to request public comments on questions relating to FERC’s current policy on providing blanket authorizations for the acquisition of voting securities of public utilities by holding companies, including investment companies, under FPA Section 203(a)(2). Changes in FERC policy on such blanket authorizations could make it more difficult for investment companies to engage in transactions involving public utilities—including generation resources engaged in FERC-jurisdictional transactions—going forward. Further, as highlighted in a concurring statement issued by one of FERC’s commissioners, depending on the record established through the public comments, the proceeding could diminish investment companies’ ability to influence their public utility portfolio companies’ ESG policies. Initial comments are due on March 26, 2024.
Please see our client alert for additional information about the Notice of Inquiry.
Treasury and IRS Release Proposed Regulations on Section 45V and Section 48 Hydrogen Credits
On December 22, 2023, Treasury and the IRS released proposed regulations under Section 45V, relating to a production tax credit for the production of clean hydrogen, and Section 48, relating to an alternative investment tax credit for a clean hydrogen production facility, of the Internal Revenue Code of 1986, as amended (the Code). The proposed regulations address several gating issues regarding eligibility for Section 45V and Section 48 hydrogen credits, including guidelines for determining lifecycle greenhouse gas (GHG) emission rates resulting from the hydrogen production process, the use of energy attribute certificates (EACs) for sourcing electricity feedstock for the hydrogen production process, and verification by an unrelated qualified verifier of the clean hydrogen production and sale.
Under the IRA, the calculation of lifecycle GHG emissions for purposes of clean hydrogen credits includes all upstream emissions from “well-to-gate,” meaning through the point of production, including any emissions associated with feedstock growth, extraction, processing, and delivery to the production facility, in addition to any capture and sequestration of carbon dioxide generated by the hydrogen production facility. Under the proposed regulations, Treasury and the IRS adopted a Section 45V-specific Greenhouse gases, Regulated Emissions, and Energy use in Technologies (GREET) model for determining lifecycle GHG emissions. Further, to confirm that electricity used in the clean hydrogen production process is sourced from renewable or zero-emission sources, the proposed regulations impose three new criteria, sometimes referred to as the “three pillars,” for EACs to qualify, which are: 1) clean power generation facilities must have begun commercial operations within three years of the hydrogen facility being placed into service (i.e., the “incrementality” pillar); 2) clean power must be sourced from the same geographic region as the hydrogen producer (i.e., the “deliverability” pillar); and 3) EACs must be matched on an annual basis (i.e., the claimed clean power generation must occur within the same year that the electrolyzer generating clean hydrogen is operating), transitioning to an hourly matching requirement in 2028.
Written and electronic comments must be received by February 26, 2024.
Treasury and IRS Release Proposed Regulations on Section 45X Advanced Manufacturing Production Credit
On December 15, 2023, Treasury and the IRS released proposed Advanced Manufacturing Production Credit regulations under Section 45X of the Code, which provides an advanced manufacturing production credit to taxpayers that domestically produce and sell eligible components. Among other things, the proposed regulations clarify the definition of “produce” and distinguish the production of an eligible component from “mere assembly” or “superficial modification” of such component. The proposed regulations provide helpful clarifications regarding the use of contract manufacturing arrangements to produce eligible components, including a special rule that allows parties to a contract manufacturing agreement to agree, and certify, which party to the contract may claim the Section 45X credit. Finally, the proposed regulations provide certain anti-abuse rules that disallow the Section 45X credit in cases of production and sale of eligible components where the component is not intended to be used and where the primary purpose of the production and sale is to generate Section 45X credits.
Written and electronic comments must be received by February 13, 2024.
IRS Releases Guidance on Eligible Census Tracts for Section 30C Qualified Alternative Fuel Vehicle Refueling Property Credit
On January 19, 2024, the IRS released Notice 2024-20 (the Notice), which provides a list of census tracts eligible for the alternative fuel vehicle refueling property credit under Section 30C, along with accompanying frequently asked questions. Under Section 30C, eligible census tracts are defined by statute as either a census tract not in an “urban area” or as one described in Section 45D(e) of the Code, which designates certain low-income communities for purposes of the new markets tax credit. For purposes of determining eligible census tracts in non-urban areas, the Notice provides that a census tract is deemed non-urban if at least 10 percent of the census blocks within the tract are not designated as urban areas (i.e., if 10 percent or more blocks within the census tract are rural, the census tract qualifies for Section 30C purposes). For purposes of determining eligible census tracts in low-income communities, the Notice largely relies on designations made under Section 45D(e) but provides a transition rule under which taxpayers who place qualifying property in service between January 1, 2023 and December 31, 2024, can utilize either 2011-2015 or 2016-2020 new market tax credit census tract data to determine if the property is in a low-income community census tract. For property placed in service after 2024, taxpayers must use 2016-2020 census tract data. The Notice also provides that refueling property located in U.S. territories qualifies if it is owned by a U.S. citizen (other than a U.S. citizen who is a bona fide resident of a territory), a U.S. corporation or U.S. territory corporation. Finally, the Notice includes two appendices that identify which particular census tract numbers are qualifying census tracts. The date the qualifying refueling property is placed in service determines which appendix should be used. As stated in the Notice, the IRS intends to propose regulations addressing these rules. Taxpayers are entitled to rely on the Notice until such time that proposed regulations are released.
Please see our client alert for additional information about Notice 2024-20.
Treasury Updates the List of Electric Vehicles That Qualify for Code Section 30D $7,500 Tax Credit
On December 30, 2023, Treasury released a revised list of vehicles that qualify for the Section 30D tax credit for 2024, which provides up to a $7,500 credit per qualified vehicle. Nineteen vehicles manufactured by seven automakers (Chevrolet, Chrysler, Ford, Lincoln, Jeep, Rivian, Tesla), and placed in service in 2024, qualify for the Section 30D tax credits, subject to other requirements.
The availability of the Section 30D tax credit to purchasers of all-electric, plug-in hybrid, and fuel cell electric vehicles, as well as the amount of the credit, depends on several factors, including whether the vehicle: a) meets critical mineral and battery component requirements; b) underwent final assembly in North America; and c) meets targeted manufacturer suggested retail price limits. Notably, the 2024 list significantly reduced the number of qualified vehicles due to critical mineral and battery sourcing requirements that went into effect as of January 1,2024. While many electric vehicle manufacturers and vehicles were excluded from the list, interestingly, some are offering cash rebates to compete with the revised Section 30D tax credit.
Please see our IRA Resource page for more information on the Section 30D tax credit and other clean energy tax credits available under the IRA.
Europe
First European Sustainability Reporting Standards (ESRS) Enter into Force
After Commission Delegated Regulation (EU) 2023/2772 was published on December 22, 2023, the first set of ESRS went into effect on January 1, 2024, for financial years beginning on or after that date. The ESRS constitute a reporting framework under the Corporate Sustainability Reporting Directive (CSRD) for in-scope companies. The ESRS define information that companies must disclose about their material impacts, risks, and opportunities relating to sustainability issues. There are sector-agnostic standards, topical standards, and sector-specific standards. Reporting duties under the CSRD are tiered according to company size and will begin to apply in a graduated manner up to the 2028 fiscal year.
European Union (EU) Securities Regulator Publishes Consultation on Guidelines for Enforcement of Corporate Sustainability Information
On December 15, 2024, the European Securities and Markets Authority (ESMA) published a consultation on draft guidelines for enforcement by national authorities related to corporate sustainability information as required under the CSRD. The draft enforcement guidelines cover how agencies should be resourced, how to select companies whose sustainability information will be examined, how enforcement actions will be conducted, and how national authorities should coordinate their activities. The consultation is open for participation until March 15, 2024. The ESMA is expected to publish its guidelines in the third quarter of 2024.
EU Agrees on Political Deal for Regulating ESG Ratings Providers
On February 5, 2024, the European Parliament and the European Council (the Council) provisionally agreed on a regulation governing the providers of ESG ratings products. The proposed regulation aims to improve the transparency of activities undertaken by ESG ratings providers and to prevent potential conflicts of interest. If enacted, ESMA would become the regulator responsible for authorizing and supervising ESG ratings providers. The proposed regulation still needs to be formally passed by both EU legislative bodies.
EU Reaches Provisional Political Agreement on Net-Zero Industry Act
On February 5, 2024, the European Parliament and the Council provisionally agreed on a deal for the Net-Zero Industry Act (NZIA), with the goal of strengthening net-zero technology manufacturing in the EU. The proposed NZIA would implement a number of measures, including: 1) defining a list of technologies as “net-zero,” such as heat pumps, electrolyzers and hydrogen fuel cells, and carbon capture, utilization, and storage technologies (CCUS); 2) shortening the maximum time limits for issuing permits for the construction or expansion of large net-zero technology manufacturing sites; and 3) providing indicative targets for CO2 CCUS, with an annual CO2 injection capacity of at least 50 million tons by 2030. The proposed NZIA still needs to be formally passed by both EU legislative bodies, which is expected to occur in the first half of 2024.
Application of German Supply Chain Due Diligence Act Widens
On January 1, 2024, the ambit of the German Supply Chain Due Diligence Act (SCDDA) increased such that it now applies to foreign companies that have a branch in Germany and at least 1,000 employees in Germany—a reduction from the current threshold of 3,000 employees—without distinguishing between part-time and full-time employees.
The SCDDA imposes a number of due diligence obligations on in-scope companies concerning their supply chain, including: 1) conducting risk assessments; 2) enacting preventative measures; 3) undertaking remedial actions (up to terminating a business relationship with a supplier); and 4) documentation and annual reporting. In addition, companies that are direct or indirect suppliers of in-scope companies may be asked by their customers to take steps to comply with the SCDDA.
Sanctions for violating the SCDDA can include fines of up to two percent of a company’s average annual turnover for companies with more than €400 million in annual turnover.
United Kingdom (UK) Regulator Embraces Code of Conduct for ESG Ratings Providers
On December 14, 2024, the UK’s Financial Conduct Authority (FCA) endorsed a new voluntary code of conduct for ESG ratings and data products providers developed by the International Capital Markets Association (ICMA) and the International Regulatory Strategy Group (IRSG). In addition, last year the UK government published a consultation on whether to bring ESG ratings providers into the regulatory ambit of the FCA. Results of the consultation are expected in the first quarter of 2024, which may include mandatory regulation for ESG ratings providers.
Canada
Canada Mandates Zero Emission Car Sales by 2035
In December 2023, the Canadian government finalized amended passenger automobile and light truck GHG emission regulations. The purpose of the amended regulations is to reduce GHG emissions from cars and light trucks by implementing requirements that, beginning in model year 2026, will incrementally lead to all new cars and light trucks sold in Canada being zero emissions vehicles by model year 2035.
Brazil
Brazilian Securities and Exchange Commission Releases Joint Circular Letter on Duty to Verify Suitability of Investment Products with a Focus on ESG
On December 26, 2023, the Brazilian Securities and Exchange Commission (CVM) released a Joint Circular Letter signed by the Superintendents of Institutional Investor Supervision (SIN) and Market Relations and Intermediaries (SMI) clarifying the interpretation of provisions under CVM Resolution 30. CVM Resolution 30 deals with the duty to verify the suitability of investment products, services and operations for a client’s profile. The Joint Circular Letter clarifies that regulated agents must consider the alignment of a product or service’s ESG goals with their client’s investor profile, ensuring that such products are suitable for clients. Additionally, the Joint Circular Letter exhorts securities intermediaries and consultants to ensure that the products that they recommend avoid greenwashing practices that could harm clients by inducing them to invest in products that do not meet their ESG investment objectives.
International Sustainability Standards Board (ISSB) Publishes Amendments to Sustainability Accounting Standards Board (SASB) Standards to Bolster International Applicability
In December 2023, the ISSB published revisions to the SASB Standards to bolster their international applicability. The amendments were designed to enable preparers to effectively apply SASB Standards across jurisdictions and regardless of which type of generally accepted accounting principles a preparer uses without changing the SASB Standards’ structure or purpose. The SASB Standards help preparers apply IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information.
