ESG Weekly Update – June 23, 2022

23 June 2022

U.S.: West Virginia Targets Financial Firms for ESG Initiatives

A number of the United States’ largest financial institutions – including BlackRock, JP Morgan Chase, Morgan Stanley, and Wells Fargo – have been notified by West Virginia officials that they could be banned from doing business with the state because of perceived “boycotts” of the fossil fuel industry.

West Virginia Senate Bill 262, which took effect June 10, allows the state treasurer’s office to create a Restricted Financial Institution List consisting of financial institutions that allegedly refuse to deal with coal, oil or natural gas companies “without a reasonable business purpose.” The same day, State Treasurer Riley Moore notified the firms that his office determined that they were engaged in a boycott of energy companies based on public information. Under the provisions of the new law, the financial institutions have 45 days to demonstrate that they are not engaged in such a boycott; otherwise, they will be identified as Restricted Financial Institutions and prohibited from entering into or remaining in banking contracts with the state.

West Virginia joins Texas and several other states that have adopted laws targeted at restricting state bodies from contracting with companies that are perceived to boycott fossil fuel. The U.S. Securities and Exchange Commission (SEC) has also taken notice of potentially conflicting state-level ESG rules and federal ESG regulations, opening inquiries into whether companies have acted inconsistently with their ESG policy disclosures in efforts to comply with state laws.

Text of West Virginia Senate Bill 262

EU: Two EU Parliamentary Committees Block Proposal to Include Gas and Nuclear in EU Taxonomy

After the EU Parliament’s Economic and Monetary Affairs Committee (EMAC) approved plans to reformulate the EU Green Bond Standard last month, the EMAC, together with the Environment, Public Health and Food Safety Committee, have now voted against including gas and nuclear within the parameters of the EU Taxonomy.

The EU Commission originally tabled a Taxonomy Delegated Act, proposing the inclusion of certain gas and nuclear activities (under certain conditions) in the list of environmentally sustainable economic activities covered by the EU Taxonomy. The proposal’s rationale was to identify activities which contribute to climate change mitigation under Article 10(2) of the EU Taxonomy and more widely to finance sustainable growth by encouraging green investments and preventing greenwashing, while acknowledging the role of nuclear and gas in ensuring a stable energy supply during the transition. Many MEPs have been reluctant to support the proposal as the technical screening standards used to support their inclusion did not match the criteria for “environmentally sustainable economic activities.”

Because of this skepticism, MEPs have recommended a public consultation and impact assessment for related future delegated acts. All members of the EU Parliament and Council will vote on the proposal in early July. The Commission will be required to withdraw or amend the proposal should a majority of MEPs (353 or more) vote against it.

EU Parliament press release
Taxonomy Report: technical screening criteria
Article 3 Taxonomy Regulation

Global: Basel Committee on Banking Supervision Finalizes Climate Guidance

On June 15, the Basel Committee on Banking Supervision (BCBS) issued principles for the effective management and supervision of climate-related financial risks following a consultation period that began in November 2021 with the release of a set of draft principles. The final guidance consists of 18 principles – 12 principles for the management of climate-related financial risks and six principles for the supervision of climate-related financial risks – and supporting commentary.

The final guidance is largely similar to the draft guidance with some key substantive changes, which are organized under descriptive headers below.

i. Scenario Analysis and Stress Testing

The final guidance draws a sharper distinction between scenario analysis and stress testing. In the management portion of the final guidance, discussion of stress testing moves from the scenario analysis section to the section on capital and liquidity adequacy. The final guidance includes new language on incorporating climate-related financial risks into banks’ internal capital and liquidity adequacy assessment processes, including into their stress testing programs. The supervisory portion of the final guidance discusses scenario analysis and stress testing separately.

ii. Corporate Governance

The final guidance includes new language on several corporate governance topics:

  • Distinction between board and management roles – “references to the board and senior management throughout the principles should be understood in accordance with their respective roles and responsibilities,” and the final guidance confirms that it does not advocate a specific board structure.
  • Aligning compensation with climate goals – the final guidance adds language suggesting that “incorporation of material climate-related financial risks into the bank’s overall business strategy and risk management frameworks may warrant changes to its compensation policies.”
  • Aligning internal strategies with public communications – the final guidance adds that it is the responsibility of bank boards and senior management to “ensure that their internal strategies and risk appetite statements are consistent with any publicly communicated climate-related strategies and commitments.”

iii. Coordination among Supervisors

The final guidance encourages home and host supervisors to “leverage existing frameworks for cross-border banking groups, where possible.” With respect to supervisory exercises (i.e., scenario analysis or stress testing), the final guidance encourages cross-jurisdictional authorities to “share best practices, the outcome of these supervisory exercises, subject to applicable legal constraints, and to use common scenarios where appropriate.”

iv. Internal Control Framework

The final guidance adds language suggesting specific roles and responsibilities with respect to climate-related financial risk management.

  • First line of defense – the final guidance states that climate-related risk assessments may be undertaken “in ongoing monitoring and engagement with clients as well as in new product or business approval processes.”
  • Second line of defense – the final guidance suggests that the risk function should undertake “climate-related risk assessment and monitoring independently” from the first line of defense.
  • Third line of defense – the final guidance suggests that the internal audit function should provide an independent review and objective assurance of the quality and effectiveness of the internal control framework and systems as well as the first and second lines of defense.

v. Evolving Capabilities

The final guidance includes language acknowledging that “the management of climate-related financial risks, and the methodologies and data used to analyze these risks, are currently evolving and are expected to mature over time.”

Press Release
Principles for the effective management and supervision of climate-related financial risks
Consultative Document: Principles for the effective management and supervision of climate-related financial risks

UK: UK Launches Its First Carbon Storage Licensing Round in the North Sea

The North Sea Transition Authority, a UK licensing authority, launched its first carbon storage licensing round on June 14. Carbon capture and storage (CCS) is the process by which CO2 emission, mainly from industrial processes, is captured, transported (e.g., through repurposed gas pipelines) and stored in rock formations or depleted oil and gas fields. Successful bidders will be offered areas to develop projects off the UK coast in the Southern North Sea, Central North Sea, Northern North Sea and East Irish Sea.

CCS is the main element of the North Sea Transition Deal, a partnership between the UK government and oil and gas industry representatives. The deal was agreed in March 2021 with the aim of reducing greenhouse gas emissions from upstream oil and gas activities. CCS plays an important part in the UK’s mission to achieve Net Zero by 2050 and could meet roughly 30% of the emissions reduction target. Furthermore, the UK oil and gas industry is well placed to use existing infrastructure for CCS.

Bidders may submit applications by September 13, 2022.

Press release
North Sea Transition Authority
North Sea Transition Deal