Climate change and the global need for net zero A changing climate poses many risks. The world is already 1°C warmer than pre-industrial levels, and we are experiencing extreme and unpredictable weather events attributed to this changing climate. A warming of 2°C compared to pre-industrial levels would significantly increase the risk of floods, drought, extreme heat and poverty for hundreds of millions of people, alongside decreased biodiversity and species extinctions within the natural world. The Paris Agreement set out a global framework to limit global warming to below 2°C above pre-industrial levels and pursuing efforts to limit it to 1.5°C. Numerous climate scenarios investigate differing socio-economic pathways to achieve this goal. The most cited all require the reduction of greenhouse gas (GHG) emissions, coupled with GHG removal strategies, to achieve overall net zero GHG emissions at least by the end of this century, if not by 2050. The UK, through its section 1 of the Climate Change Act 2008 and the EU, through the Climate Neutrality Regulation (EU) 2021/1119, have committed to achieving net zero emissions

Investors care about the environmental, social and governance (ESG) standards that their portfolio companies are demonstrating, and regulators (such as the FCA in the UK) are making ESG disclosures a priority for public companies. For more on ESG, see Practice Notes: ESG—new starter guide and Sustainable business and environmental, social, governance (ESG)—introduction for companies and advisors. As institutional shareholders invest record amounts in ESG-conscious funds and companies, boards of directors are looking for ways their companies can design and implement a business strategy that produces a sustainable future and remain relevant in a world where climate change, social injustice, pandemics, disease prevention, and wellness are the new normal. This checklist provides guidance for boards to help formulate their ESG strategy. The key takeaways include that boards: • need diverse members with appropriate ESG skills to make sure their companies' strategies are sustainable and relevant • should consider issuing green bonds to fund sustainable projects and to access ESG capital • should know their ESG proxy and other rankings

What are ESG derivatives? ESG derivatives are derivatives which contain an environmental, social and governance (ESG) overlay or reference point/asset. These range from conventional ‘business as usual’ derivatives to bespoke transactions with particular sustainability goals. Some of the key types of ESG derivatives are discussed below. Sustainability-linked derivatives Sustainability-linked derivatives (SLDs) are an example of how an ESG overlay can be added to a conventional over-the-counter (OTC) derivative, and are usually structured to include a bespoke ESG target for one or both parties within a ‘business as usual’ derivatives transaction. If the relevant party meets the ESG target (which is measured using key performance indicators, or KPIs) then the cashflows of the derivative will be adjusted such that the party pays less if it meets the agreed ESG target and/or more if it fails to meet the agreed ESG target. This may be by way of adjustment to scheduled derivative payments or standalone ESG premium payments. This acts as an incentive for the relevant party to meet its ESG goals, which is particularly important for buy-side counterparties

This Practice Note explains what environmental, social and governance (ESG) issues are and the ways in which they may impact property disputes. What is ESG? Environmental, social and governance (ESG) is an umbrella term used to refer to the environmental, social and governance issues or aspects of an activity undertaken by an organisation as follows: • environmental factors: which relate to the impact on and from the natural environment, including carbon footprint, energy efficiency, and pollution caused as a result of their operations • social factors: which looks at human rights risks across the organisation’s supply chain, including modern slavery • governance factors: which looks at how an organisation governs itself, including executive pay and board diversity For further details on elements to ESG, see below diagram: ESG reporting requirements can be mandatory or voluntary depending on the jurisdiction in which the organisation operates and the markets it serves and its investor arrangements. In the UK the maturity and breadth of ESG laws are developing and include: • company law-based duties on directors

Environmental, social and governance (ESG) issues permeate many different aspects of a client’s business and activities. Many of these areas will be subject-matter or industry specific, for example, around investment, trade supplies, etc. Any one of them could, in turn, present a litigation risk for the client. It is essential, therefore, that dispute resolution lawyers are aware of the different issues which may affect their clients and on which their colleagues are advising. The content in the subtopic: ESG for dispute resolution lawyers—overview provides guidance specific to dispute resolution lawyers. In addition, our ESG and sustainability collection aims to help practitioners advising businesses by providing a holistic overview of the many pervasive ESG issues, as well as providing detailed practical guidance on what all this means for an entity's operations, and connected risks and opportunities. The content includes ESG and sustainability practical guidance in relation to competition, digital transformation, employment, energy efficiency, environment, finance, financial services and asset management, governance, mobility, pensions, reporting and disclosure, sectors, social and supply chain management. To assist dispute resolution

ESG has become a key area for businesses globally. In a number of countries, reporting on ESG is now either mandatory or under active consideration. The effects of the climate change crisis, the global pandemic, heightened volatility in geopolitics and the energy crisis have revealed how significantly corporations can impact societies and the natural world. This Practice Note looks at the basics of ESG. It explains what it is and the challenges it poses for in-house lawyers, together with suggested areas to focus on to ensure you are able to address ESG issues for your organisation. What is ESG? At its most basic ESG is an umbrella term that describes a range of environmental, social and governance factors impacting: • the requirements organisations must meet • how they must operate, and • how they are measured ESG factors ESG factors are used to incorporate responsibility into business conduct. ‘E’ is for environmental. The E in ESG considers the impact on, and from, the natural environment and will take into account an organisation’s

Introduction Environmental, social and governance (ESG) regulatory risk in Australia arises where an organisation’s ESG-related disclosures, claims, operations, governance arrangements or risk-management practices fail to comply with applicable legal and regulatory requirements. Australia does not have a single ESG regime. Instead, ESG risk is addressed through a combination of laws pertaining to corporations, financial services, consumer protection, environmental, employment, privacy, anti-bribery and modern slavery. Non-compliance can result in regulatory enforcement, private litigation, commercial consequences and reputational harm. Australia’s ESG framework has become more prescriptive and enforcement-focused in recent years, particularly in relation to climate reporting, greenwashing, privacy and governance controls. Key ESG risks for Australian organisations include: • misleading or deceptive environmental, sustainability or other ESG-related claims • climate-related disclosure, governance, risk management and reporting obligations • environmental issues, such as approvals and compliance, climate transition, decarbonisation, nature-related risk, pollution and contamination, waste and circular economy obligations, resource use and depletion and emissions-related regulation, and • social and governance issues, such as the use and development of artificial intelligence (AI), modern slavery, human rights, data protection and privacy, cyber

Introduction Brazil’s environmental, social and governance (ESG) regime is best understood as a federal-state-municipal enforcement stack, with high real-economy impact and unusually strong public enforcement and collective litigation channels. In practice, ESG risk most often crystallises through: • environmental licensing, embargoes, fines and remediation obligations via federal and state environmental authorities within the National Environmental System (SISNAMA) • public civil actions (ação civil pública) and prosecutor-led settlements that can move faster than regulatory processes • capital markets disclosure discipline led by the Brazilian Securities Commission (CVM), now explicitly anchored to International Sustainability Standards Board (ISSB)/International Financial Reporting Standards (IFRS) sustainability standards • consumer/advertising scrutiny of sustainability claims through the Consumer Defence Code, regulators, Consumer Protection and Defence Offices (PROCONs), and • advertising self-regulation and the supervising authority of the National Council for Advertising Self-Regulation (CONAR) Corporate reporting The most important ‘recent structural’ development for corporate reporting is CVM Resolution No. 193 (20 October 2023), which regulates the preparation and disclosure of sustainability-related financial information

Introduction Canada’s environmental, social and governance (ESG) regime involves a combination of federal and provincial law. In practice, most execution risk crystallises through four channels: • greenwashing enforcement and related challenges under the federal Competition Act • securities law liability for misrepresentations and continuous disclosure expectations (primarily provincial/territorial securities regulators acting through the Canadian Securities Administrators (CSA)) • federal and provincial environmental permitting and compliance (ie impact assessment, pollution control, chemicals, water, fisheries habitat, waste), and • supply chain transparency under the federal forced labour reporting statute A cross-border lawyer should start by mapping who regulates the client (and where), because the same ESG narrative can be scrutinised simultaneously by the Competition Bureau, securities regulators, prudential supervisors (for financial institutions) and environmental enforcement officers. Litigation risk for ESG and sustainability claims The focus for most sustainability claims has shifted materially since June 2024. Amendments to civil provisions in the Competition Act on misleading statements created explicit greenwashing exposure for: product and service environmental benefit claims that must be supported by an adequate and proper test; and for business

Introduction China’s environmental, social and governance (ESG) regime is best understood as: • a fast-formalising disclosure stack for capital markets and large enterprises • a mature, high-intensity environmental compliance and permitting system, and • broad consumer/competition-style controls on misleading commercial statements that are increasingly being used to police green messaging In practice, the highest execution risk typically sits with operational E compliance (permits, monitoring data integrity and inspections) and with statement risk (listed-company disclosures, prospectuses, sustainability reports, product labels and marketing) rather than with a single, consolidated ESG law. Sustainability reporting In the area of corporate and investor reporting, the recent focus has been on the sustainable reporting framework of stock exchanges and the national standard system led by the Ministry of Finance. The Shanghai Stock Exchange released the ‘Guidelines No 14 of Shanghai Stock Exchange for Self-Regulation of Listed Companies—Sustainability Report (Trial)’ in April 2024 and this guideline came into effect on May 1, 2024. This guideline transforms ESG into regulatory expectations for specific large, listed companies and companies with cross-border listing operations. On

Introduction Germany’s ESG regime is best understood as a combination of EU disclosure and German enforcement channels with particular relevance for consumer or market-facing statements. For cross-border teams, the immediate execution risk is rarely the abstract existence of EU frameworks; it is: • whether German implementation timing creates temporary legal gaps or transition mechanics • whether regulators and private enforcers treat a statement as misleading, and • whether operational environmental compliance constraints are enforced through decentralised Länder permitting and administrative courts Disclosure and reporting On disclosure and reporting, Germany remains in a transposition catch-up phase for the Corporate Sustainability Reporting Directive (EU) 2022/2464 (EU CSRD). Following the publication of a draft on 10 July 2025, the Federal Government introduced a CSRD transposition bill and the legislative process has since progressed, but not yet been completed. At EU level, the earlier ‘stop-the-clock’ changes deferred reporting obligations for later CSRD waves, and the now-final Omnibus I package has since further reshaped timing and scope assumptions for later

Introduction Hong Kong’s environmental, social and governance (ESG) regime is best understood as anchored to market conduct and disclosures, with execution risk concentrated around listed-issuer reporting standards from Hong Kong Exchange (HKEX), financial-product integrity standards set by the Securities and Futures Commission (SFC), and environmental permitting and compliance managed by the Environmental Protection Department (EPD). In practice, ESG risks may surface through three routes: • HKEX disclosure and governance scrutiny (including disciplinary outcomes and reputational pressure) • regulatory action for misleading statements in the securities/funds realm (via SFC and, for retail trade practices, Hong Kong Customs & Excise Department (CED)), and • operational enforcement of EPD pollution, waste and permit regimes, sometimes with judicial review risk around major projects and permits Climate related disclosures for listed issuers The dominant near-term execution driver is climate-related disclosure uplift for listed issuers, following HKEX’s consultation conclusions and implementation guidance. These align more closely with International Financial Reporting Standards (IFRS) S2 concepts and build out governance, strategy, risk management and metrics disclosures under the ESG framework,