ESG Weekly Update – March 22, 2023

22 March 2023

U.S.: President Biden Vetoes Senate Resolution against Department of Labor ESG Rule

President Biden used his first veto against a resolution passed by the Senate on March 1. The resolution sought to nullify a Department of Labor rule allowing retirement plan fiduciaries to consider ESG factors, among others, when selecting investments and exercising shareholder rights (more on this here). President Biden noted that “this resolution would prevent retirement plan fiduciaries from taking into account factors, such as the physical risks of climate change and poor corporate governance, that could affect investment returns. Retirement plan fiduciaries should be able to consider any factor that maximizes financial returns for retirees across the country.”

A two-thirds vote in both the House of Representatives and the Senate is required to override a presidential veto.

Press release
Debevoise Update – DOL ESG Rule

EU: Commission Requests “One-Off” Climate Stress Test

On March 8, 2023, the European Commission’s Directorate-General for Financial Stability, Financial Services and Capital Markets Union called on the European Insurance and Occupational Pensions Authority, the European Securities and Markets Authority and the European Banking Authority (collectively known as the European Supervisory Authorities) to work with the European Central Bank and European Systemic Risk Board to conduct a one-off climate stress test.

The letter requests an assessment of the EU financial system’s resilience to stress during the transition to the EU’s 2030 goals for reducing greenhouse gas emissions by at least 55% by 2030, compared to 1990 levels. The stress test scenarios should cover “climate-change related risks that could already materialise in the near term, most likely in the form of asset price corrections triggered by a sudden reassessment of transition or physical risks” and combinations of such risks with other stress factors. The Commission noted that the purpose of the exercise is not to set prudential requirements but rather to better understand vulnerabilities in the financial system.

The Commission expects the results “by the end of 2024 and in any case not later than Q1 2025.”

Request for a one-off stress-testing exercise

U.S.: Environmental Protection Agency Announces Proposed Restrictions Relating to Drinking Water

On March 14, 2023, the U.S. Environmental Protection Agency (the “EPA”) released the proposed health-based Maximum Contaminant Level Goals and the National Primary Drinking Water Regulation for six different per- and polyfluoroalkyl substances (“PFAS”) in drinking water, based on the best available science.

PFAS are chemicals used in various consumer products, such as nonstick pans or waterproof clothing, which have been linked to negative health effects such as cancer and reproductive, thyroid, liver and immune problems as well negative impacts on fetal growth, among other things. PFAS do not break down in the environment, meaning that they may be absorbed in drinking water.

The proposed regulations would require water utilities to remove PFAS from drinking water to limit human exposure. In particular, the regulation proposes to set a maximum amount of PFAS in drinking water at which no known adverse health effects occur. For two types of PFAS, the proposed level is zero, indicating that there is no safe level of exposure. The proposed regulation also would establish legally enforceable levels of PFAS to which water utilities would be held accountable. Proponents praise the proposal as a long overdue control of a known harm, while critics insist that the standard is unrealistic and too costly.

The EPA is holding a public hearing on the proposal on May 4, 2023, with the public comment period ending 30 days after the publication in the Federal Register.

Proposed Regulation (pre-publication)
EPA Fact Sheet

U.S.: Climate-Related Financial Risk Advisory Committee Holds Inaugural Meeting

On March 7, 2023, the Climate-Related Financial Risk Advisory Committee (the “CFRAC”), an external advisory committee of the Financial Stability Oversight Council (the “FSOC”), held its inaugural meeting.

Treasury Secretary Janet Yellen kicked off the inaugural meeting with prepared remarks reiterating the potentially significant economic and financial impacts of intensifying climate-related events, such as severe storms, wildfires and tornadoes. Secretary Yellen specifically noted that some insurers have been raising costs or, in some cases, pulling back coverage, in high-risk areas, which could have devastating consequences for homeowners and their property values, as well as spillover effects to the financial system as a whole. She also explained that a delayed and disorderly transition to a net-zero economy could lead to shocks to the financial system.

CFRAC was established in October 2022 to assist FSOC with gathering information and providing analysis on climate-related risks to the financial system. CFRAC’s membership includes representatives from academia, non-profits and the financial services industry.


U.S.: California Pension Fund Publishes Proxy Season Outlook

On March 13, 2023, the California Public Employees’ Retirement System (“CalPERS”) published its Proxy Voting & Corporate Engagement Update. The publication disclosed that, in 2022, CalPERS voted against 95 directors of 26 high-emitting companies on climate-risk oversight. CalPERS engaged with these companies as part of its commitment to Climate Action 100+ (“CA100+”), an investor-led initiative that pushes for climate change agendas at the largest corporate greenhouse gas emitters. For 2023, CalPERS announced that it intends to expand its climate change policy beyond CA 100+ to cover the 350 highest-emitting companies in its portfolio.

CalPERS is one of the founding members of CA100+, which was launched following a carbon footprinting exercise conducted by CalPERS in 2015. The exercise revealed that just 80 of the thousands of companies in the fund’s portfolio were responsible for about half of the total emissions of all companies in the portfolio.

Ahead of the 2023 proxy season, the CalPERS outlook contributes to boardroom discussions on how companies should be responding to climate change. CalPERS manages US$453 billion in assets to cover pension and health benefits for over 1.5 million Californian public employees.

CalPERS Proxy Voting & Corporate Engagement Update, Mar. 13, 2023
CalPERS Proxy Voting Guidelines