U.S.: Federal Reserve Board Kicks Off Climate Risk Exercise for Largest U.S. Banks
On January 17, 2023, the U.S. Federal Reserve Board (the “Board”) began its inaugural climate scenario analysis for the six largest banks in the United States. Similar stress tests have already been administered in the UK and the EU.
The aims of the scenario analysis are to assess the banks’ climate-related risk management practices and to build capacity to identify and manage climate-related risks. The exercise will gather data on governance and risk management processes, measurement methodologies, risk metrics, data challenges and lessons learned.
As part of the exercise, the banks are asked to explore the effects of two climate scenarios, for physical and transition risks, on specific areas of their loan portfolios. The physical scenario examines potential harm to people and property from climate-related incidents, such as hurricanes and wildfires, and how such events will affect the banks’ real estate portfolios in the northeastern United States and at least one other region in the United States. The transition scenario assesses the risk to corporate loans and real estate portfolios during the transition to net zero greenhouse gas emissions by 2050. Notably, the Board’s scenario analysis does not address capital consequences.
Participating banks include Bank of America, Citigroup, Goldman Sachs, JP Morgan Chase, Morgan Stanley and Wells Fargo. The banks are expected to submit the results from the exercise by the end of July 2023. The Board plans to publish insights, such as potential risks and effective risk management practices, gained from the risk exercise, but will not release firm-specific information.
U.S.: Florida Prohibits State-Run Funds from Considering ESG Factors
On January 17, 2023, Florida Governor Ron DeSantis and the Trustees of the State Board of Administration (“SBA”) formally approved new changes to the state’s pension fund investment policies. The updated Florida Retirement System Investment Policy Statement and SBA corporate governance proxy voting guidelines require the state’s fund managers to focus solely on “maximizing the highest rate of return” and prevent them from “sacrificing” any investment returns to promote “non-pecuniary factors.” These changes formalize an August 2022 resolution, previously authorized by the SBA Trustees and Governor DeSantis, to define and limit the factors that Florida’s state pension fiduciaries may consider when making investments.
In a statement, Governor DeSantis explained that the amendments are intended to prohibit the use or involvement of ESG considerations in Florida’s investing decisions. To supplement such efforts, Governor DeSantis has proposed state legislation to permanently ban SBA managers from considering ESG factors and require them to focus solely on maximizing return on investment. The bill would also prohibit financial institutions from implementing ESG restrictions on consumer lending and other transactions. These proposals will be considered in the next Florida state legislative session, scheduled to begin on March 7, 2023.
For more context, check the Debevoise tracker summarizing the various U.S. state-level ESG developments (accessible here), and the tracker collecting developments on federal and state investigations of ESG practices (accessible here).
August 2022 Resolution
2022 Investment Policy Statement
2022 Proxy Guidelines
U.S.: Republican State Attorneys General Question ISS and Glass Lewis About ESG Policies
On January 17, 2023, Republican attorneys general from 21 states challenged two proxy advisory firms, Institutional Shareholder Services (“ISS”) and Glass Lewis, over their ESG voting recommendations. Led by the Utah and Texas attorneys general, the letter called attention to the advisors’ climate and boardroom diversity recommendations.
The attorneys general asserted that the proxy advisors violated their duties to their clients, stating “evidence regarding climate change advocacy and goals suggests potential violations of your contractual obligations and legal duties.” The letter pointed to the advisors’ “net zero emissions” goals as drivers for certain recommendations that the attorneys general found to be contrary to their clients’ financial interests. The attorneys general also claimed that certain pledges related to diversity policies caused the advisors to breach contractual and fiduciary duties, as well as some state anti-discrimination laws.
The letter requests that ISS and Glass Lewis cease the challenged practices, affirm their commitment to clients and respond to certain questions related to their duties to clients, their definitions and assumptions, their process for analyzing companies’ policies, and their membership and coordination in ESG initiatives by January 31, 2023.
Attorney General Letter
Global: World Economic Forum Survey Finds Environment as Top Global Risk
On January 11, 2023, the World Economic Forum (“WEF”) published its Global Risks Report for 2022 which analyzes the findings of WEF’s survey of perception of risks and is based on responses from 1,200 private sector risk managers, public policy makers and industry leaders.
The report found that the failure to mitigate and adapt to climate change, natural disasters, biodiversity loss, natural resource loss and large-scale environmental damage are among the 10 highest global risks. It further predicts that the current cost-of-living concerns will be replaced by environment-linked risk over the next decade, particularly in light of recent extreme weather events, and points to increasing migration and related humanitarian crises resulting from climate change as well the social implications of the climate transition.
Global: UNEP and S&P Global Sustainable Launch Nature Risk Profile Methodology
On January 17, 2023, at the World Economic Forum annual meeting, the UN Environment Programme (“UNEP”) and S&P Global launched the Nature Risk Profile, a new methodology for analyzing the impact and dependency of companies on nature. The aim is to provide the financial sector with quantitative data on nature-related risk, particularly concerning biodiversity loss. The data featured in the Nature Risk Profile is expected to have a significant impact on global financial decision-making.
The Nature Risk Profile is powered by science-based impact and dependency measurement tools using metrics and data for several key areas, including companies’ impact on biodiversity, risks arising from dependency on biodiversity, and proximity to biodiverse areas. The methodology aligns with the approach and implementation of the Taskforce on Nature-related Financial Disclosures (“TNFD”), an initiative that is developing a disclosure framework for organizations with the aim to shift financial flows away from nature-negative outcomes.