U.S.: States Investigate Banks for ESG Practices
On October 19, 2022, attorneys-general from 19 U.S. states launched civil investigations into whether the ESG practices of some of the nation’s largest banks are harmful to the energy industry. The banks under investigation include Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley, and Wells Fargo.
The investigation targets activity related to each bank’s membership in the United Nations Net-Zero Banking Alliance (“NZBA”), a UN-convened group of over 100 banks that are “committed to aligning their lending and investment portfolios with net-zero emissions by 2050.”
Arizona Attorney General Mark Brnovich characterized the NZBA as an agreement between financial institutions to support the “climate agenda” by “choosing not to work with companies engaged in fossil fuel-related activities.” He further stated that “this means some farmers, oil leasing companies, and other businesses will be unable to get a loan because of the alliance.”
The Texas Attorney General’s Office released a similar statement and civil investigative demands for each bank, including, for example, requiring documents and communications related to the bank’s decision to join each climate initiative of which it is a member, including, but not limited to, the NZBA.
Companies operating in the United States are increasingly facing conflicting demands from state regulators, some of which seek to encourage ESG-focused investment and some of which appear to be opposed to any consideration of ESG factors. Debevoise & Plimpton will hold a webinar on November 9 entitled “State Level ESG Investment Developments – A Fast Evolving Landscape.” An announcement of the webinar will be sent shortly. We hope that you can join us.
Arizona Attorney General – Statement
Texas Attorney General – Statement
UK: FCA Proposes New Rules on Sustainability Disclosure Requirements and Investment Labels
On October 25, 2022, the UK Financial Conduct Authority (“FCA”) published a consultation on a new regulatory framework for sustainability disclosure requirements and investment labels. The key elements of this proposal are to introduce investment labels (mainly meant for retail products but also available for funds marketed to institutional investors).
The proposal introduces a regime of detailed disclosure, including for fund-related precontractual and ongoing sustainability disclosures, as well as entity-related sustainability reports. It also introduces a general anti-greenwashing rule, as well as naming and marketing rules restricting the use of certain sustainability-related terms in product names and marketing materials.
Though the proposal bears similarity to—and overlaps with—disclosure and marketing requirements under the EU Sustainable Finance Disclosure Regulation (“SFDR”), the FCA took a slightly different approach than the EU. The SFDR is not intended to introduce labels, but rather requires retail and institutional funds to provide certain minimum disclosures on ESG risks. It also requires these funds to disclose sustainability information in a specific manner and on an ongoing basis, though only to the extent that the funds promote certain sustainability-related themes. Going forward, fund sponsors will need to ensure that they meet the UK labeling and/or naming and marketing rules, while also staying consistent with their SFDR qualification and related EU disclosure obligations.
UK: HSBC Climate Advertisements Banned by the Advertising Standards Authority
On October 19, 2022, the UK’s Advertising Standards Agency (“ASA”) held, in what has been described as “the first ruling of its kind,” that sustainability-focused advertisements run by HSBC were misleading. The ASA launched the investigation after receiving 45 complaints over HSBC’s advertisements, which included statements about the bank’s $1 trillion commitment to help clients plant trees and transition to net zero. The ASA asserted that such statements were undermined by HSBC’s funding of fossil fuels and deforestation.
The ASA ruling stated that it “did not consider that [the ads meant] consumers would understand the intricacies of transitioning to net zero, and would not expect that HSBC, in making unqualified claims about its environmentally beneficial work, would also be simultaneously involved in the financing of businesses that made significant contributions to carbon dioxide and other greenhouse gas emissions, and would continue to do so for many years into the future.” The ASA concluded that the ads omitted material information and were therefore misleading.
The ASA ruled that HSBC must remove the ads in question. The ASA further ruled that HSBC must ensure that future marketing materials featuring environmental claims are adequately qualified and do not omit material information about the bank’s contribution to carbon dioxide and greenhouse gas emissions.
EU: Platform on Sustainable Finance Publishes Final Report on Minimum Safeguards under the EU Taxonomy Regulation
On October 11, 2022, the European Commission’s Platform on Sustainable Finance published its Final Report on Minimum Safeguards under the EU Taxonomy Regulation. The Report sets out checks for firms to determine whether the companies in which they invest have in place “minimum safeguards” in relation to human rights, employment rights, anti-bribery, taxation and fair competition.
Whilst the checks described in the Report form part of the process for qualifying an investment under the Taxonomy Regulation as taxonomy-aligned, the practical impact of the report is likely to be wider. The Report’s standards represent general criteria for due diligence on human rights and best business practices. In addition, there is significant overlap between the concept of “Minimum Safeguards” in the Report and the concept of “good governance” in the definition of sustainable investment and sustainability requirements for funds classified under Articles 8 and 9 of the EU Sustainable Finance Disclosure Regulation.
The Report draws a direct line to the pending Corporate Sustainability Due Diligence Directive (“CSDDD”) and the pending Corporate Sustainability Reporting Directive (“CSRD”): portfolio companies complying with the CSDDD will be deemed to comply with the Minimum Safeguards, and if a company is subject to the strict reporting standards under the CSRD, that will provide the basis for—and make it easier to verify—compliance with the Minimum Safeguard.
While the Report recognizes a different scale of checks depending on the size of the company, it generally sets a high bar for the standards to be met.
For more information on the Report, please see our Client Update.
Global: Microsoft Launches Scope 3 Emissions Tracking and Analysis Tool
On October 13, 2022, Microsoft launched a series of enhancements, including a tool to improve Scope 3 emissions data recording, to its Cloud for Sustainability (the “Cloud”) and Microsoft Sustainability Manager, which enables companies to record, report, reduce and replace their emissions. The software utilizes real-time data sources to provide more accurate carbon accounting and management.
The recent updates increase the capabilities of the Cloud by incorporating tools that provide companies with the capability to track Scope 3 emissions, including emissions generated in value chains outside their direct control. In addition, companies will be able to track water and waste data, as well as fuel- or power-related emissions within their operations, which can be broken down by activity in order to set and track goals for future emission reductions.
Global: Impact Investing Reaches over $1 Trillion for the First Time
On October 12, 2022, the Global Impact Investing Network (“GIIN”) released a report—GIINsight: Sizing the Impact Investing Market 2022—which estimated that the worldwide impact investing market had reached $1.164 trillion, reflecting a 40% increase in the last two years. Impact investing is the allocation of investments that target not only monetary returns but also specific and measurable environmental, social or governance goals.
The report studied data collected from more than 3,000 asset owners and managers. It found that the market shows “undeniable momentum.” It also spotlighted two areas of particular growth:
- the green bond market, which, since launching in 2008, reached $578 billion in 2021; and
- corporate impact investing, through which corporations deploy their cash reserves to push for social change, often in response to shareholder pressure to address climate change and social inequity.
Amit Bouri, CEO of GIIN, stated that though this market growth serves as a “very positive sign for impact investing, it is also a call for further action.” Specifically, he views further growth of impact investing as necessary to meet the UN Sustainable Development Goals by 2030 and to achieve net zero emissions by 2050.