ESG Weekly Update – February 15, 2023

15 February 2023

U.S.: House Republicans Announce ESG Working Group

On February 3, 2023, House Financial Services Committee Chair Patrick McHenry (R-NC) announced the creation of a Republican working group that will coordinate the party’s response to the “ESG movement.” This follows the November 2022 elections in which the Republicans achieved a House majority and reflects a more active stance on ESG.

Rep. Bill Huizenga (R-Mich.) – who specifically noted the group’s concerns with last year’s Securities and Exchange Commission (“SEC”) climate disclosure proposal – will lead this initiative. The group’s top priorities reportedly will be to “rein in” SEC regulations, reinforce the materiality standard, and “hold to account market participants who misuse the proxy process or their outsized influence to impose ideological preferences in ways that circumvent democratic lawmaking.” Among other things, this group is expected to organize a number of ESG-related proposals from 2022 into a comprehensive legislative package.

Relatedly, Debevoise has launched an ESG Investigations Tracker, which is available on the Debevoise ESG Resource Center page. It is regularly updated to reflect ongoing developments in this space.

Press Release

U.S.: Republican Bill Would End the DOL’s ESG Rule

On February 1, 2023, Republicans in the Senate and House of Representatives announced their intention to propose joint bills to overturn the rule of the Department of Labor (“DOL”) permitting retirement plan fiduciaries to consider ESG factors when selecting investments and exercising shareholder rights. The rule came into effect on January 30, 2023, and effectively reversed two Trump-era rules that sought to prohibit consideration of ESG factors by ERISA plans.

All Republican members of the Senate and Democrat Joe Manchin of West Virginia support the return to this prohibition. President Biden is expected to veto any such legislation that emerges from the House and Senate. The announcement of the bills follows a lawsuit filed on January 26 by Republican leaders in 25 states seeking to invalidate the recent DOL rule.

Prudence and Loyalty in Selecting Plan Investments and Exercising Shareholder Rights

UK: ClientEarth Files Climate Risk Lawsuit Against Shell’s Board with Support from Institutional Investors

On February 9, 2023, ClientEarth filed a lawsuit in the High Court of England and Wales against 11 directors of Shell plc for allegedly “failing to manage the material and foreseeable risks posed to the company by climate change.”

ClientEarth claims that Shell’s directors breached their legal duties under Section 172 of the Companies Act 2006, which requires directors to act in a way that they consider most likely to promote the company’s success for the benefit of its shareholders as a whole. In particular, ClientEarth alleges that the directors failed to adopt and implement an energy transition strategy that aligns with the Paris Agreement.

As a shareholder in Shell, ClientEarth brought this claim as a derivative action, ultimately on behalf of the company itself. Additionally, ClientEarth announced that other investors in Shell – including AP3, Nest, London CIV, AP Pension, and Danske Bank Asset Management – support this lawsuit.

ClientEarth press release

Global: Net Zero Asset Owner Alliance to Impose Strict Decarbonization Targets on GPs

In January 2023, the UN’s Net Zero Asset Owner Alliance (“NZAOA”) published the third edition of the Target-Setting Protocol, in which members introduced new medium-to-long term reporting requirements for general partners (“GP”) in private equity, real estate equity, and infrastructure investments. For new fund commitments or new loan investments in these areas, members will need to ensure compliance with certain requirements, such that all investments become aligned to the 1.5°C Paris Agreement target. The timeline for targets in other investment portfolios depends on the asset class, but specific net-zero targets will need to be determined by the end of 2025 to have effect by 2030.

Targets will likely be calculated using the Science Based Targets Framework or the Net Zero Investment Framework, but members have been guided to aim for carbon reductions of “-22% to -32% by 2025, and -40% to -60% by 2030.” Elsewhere in the protocol, the NZAOA – representing 84 members with $11 trillion in AUM – confirmed that members may not use “carbon removals” for the purpose of achieving targets at any time before 2030.

Although the contents of the protocol’s third edition are primarily forward looking, the NZAOA urged members to engage with existing fund managers in order to implement similar decarbonization targets in their underlying assets. Future editions of the protocol will cover private debt fund investments, as well as a target-setting methodology.

Target-Setting Protocol: Third Edition

U.S.: SEC Division of Examinations Names ESG Investing as a 2023 Priority

On February 7, 2023, the SEC Division of Examinations released its 2023 examination priorities, which include ESG investing for the second year in a row. More specifically, the SEC says it will concentrate on three aspects of ESG-related advisory services and fund offerings:

  1. Whether ESG funds are operating in the manner set forth in their disclosures;
  2. Whether ESG products are appropriately labeled; and
  3. Whether ESG-related product recommendations are made in the best interests of retail investors.

This continued focus comes as increasing investor demand for ESG-related investments and strategies is driving further offerings in these areas. Division of Examinations’ Director Richard R. Best explained that the priorities “reflect the changing landscape and associated risks in the securities market and are the product of a risk-based approach to examination selection that balances our resources across a diverse registrant base.”

The SEC initially added ESG issues to the priority list in 2022, emphasizing the Division’s concern around misleading or materially false disclosures, the lack of standardization in ESG investing terminology, and the risk that various approaches to ESG investing can misinform investors.

SEC Press Release
SEC 2023 Examination Priorities