ESG Weekly Update – August 31, 2022

31 August 2022

UK: Occupational Pension Scheme Reporting Requirements Come into Effect in October

Starting on October 1, 2022, the United Kingdom’s Occupational Pension Schemes regulations for 2022 (the “2022 Regulations”) will come into force, creating new requirements for trustees of UK occupational schemes.

The 2022 Regulations amend the UK’s 2021 Climate Change Governance and Reporting Regulations, which introduced reporting requirements aligned with the Task Force for Climate-Related Financial Disclosures (“TCFD”) and aimed to improve both governance quality and action by trustees in assessing and managing climate risk. The 2022 Regulations introduce new obligations for in-scope trustees in calculating and reporting climate-related risk metrics.

Among the new obligations are that trustees select, calculate and report on a “portfolio alignment metric” for the assets of their scheme, in addition to calculating an absolute emissions metric, an emissions intensity metric and an additional climate change metric as currently required. The 2022 Regulations note that this new portfolio alignment metric does not apply in respect of a scheme year which ends before October 1, 2022.

The 2022 Regulations (See also status and Consultation Outcome)
Explanatory Note
2021 Regulations

EU: ESMA Advocates for a New EU ESG Benchmark Label

The European Securities and Markets Authority (“ESMA”) has recommended a new ESG benchmark. The recommendation comes in response to a consultation by the European Commission (the “Commission”) on the Benchmarks Regulation (“BMR”) ‒ which regulates the indices used to measure the performance of investment funds – through which the Commission identified shortcomings in the current BMR framework.

ESMA recommends the new benchmark as a means of raising standards and ensuring consistency among sustainable finance metrics and indices currently being offered to investors. In addition, ESMA says, the new benchmark would create a barrier against greenwashing, preventing asymmetry of information between users and benchmark providers.

Following its review, the Commission will submit a report to the European Parliament and Council by next summer.

ESMA letter

U.S.: California Bans Sales of New Gasoline Cars by 2035

The California Air Resources Board (the “Board”) voted last week to pass the Advanced Clean Cars II rule, requiring all new cars sold in the state by 2035 to be free of greenhouse gas emissions. The rule imposes interim targets including requiring 35% of new passenger vehicles to produce no emissions by 2026. This target rises to 68% by 2030.

The Board predicts that the new rule will cause a 25% reduction in smog-causing pollution and a reduction in negative health effects of up to $13 billion due to fewer cardiopulmonary deaths, hospitalizations for cardiovascular or respiratory illness and emergency room visits for asthma. The Board estimates that, as a result of the new rule, greenhouse gas emissions from cars, pickups and SUVs in the state will be cut in half by 2040.

Eighteen states currently follow or plan to follow California’s previous vehicle rules including New York, Oregon and Nevada. These states have adopted California’s Low-Emission Vehicle criteria, GHG emission regulations and Zero-Emission Vehicle regulations under the Clean Air Act, and such states together constitute 40% of new car sales in the United States. The Board has indicated that it expects many of these states to also adopt the California rule. Section 177 of the Clean Air Act (42 U.S.C. § 7507) authorizes other states to adopt California's motor vehicle emissions standards in lieu of federal requirements.

California Air Resources Board press statement

U.S.: Florida Adopts Anti-ESG Resolution

On August 23, 2022, the State Board Administration (the “SBA”) of Florida adopted a resolution on the investment policy and proxy voting policies for the Florida state-administered pension plan, revising the policies to exclude “the consideration of the furtherance of social, political or ideological interests.”

The resolution directs the SBA to prioritize investment return and risk-return assessment over nonpecuniary factors and, regarding proxy voting, directs the SBA to act solely in the interests of beneficiaries over nonpecuniary factors. The resolution also mandates a comprehensive review and report on the governance policies of the pension plan by December 2023.

The resolution, titled “A Resolution Directing an Update to the Investment Policy Statement and Proxy Voting Policies for the Florida Retirement System Defined Benefit Pension Plan, and Directing the Organization and Execution of an Internal Review,” is one of a number of state-level initiatives to prevent ESG considerations by state pension plans. Other states, including Texas, recently have passed laws limiting state entities’ ability to do business with firms perceived as “boycotting” certain industries such as oil and gas or firearms. The result is an increasingly bifurcated landscape at the U.S. state level when it comes to ESG, with some states requiring state entities to consider ESG factors and others prohibiting it, presenting considerable challenges for firms seeking to do business across the United States.

Florida ESG Resolution
Pensions & Investments