ESG Weekly Update – May 19, 2023

19 May 2023

U.S.: Supreme Court to Reconsider Precedent Supporting Federal Agencies’ Interpretative Power

On May 1, 2023, the U.S. Supreme Court agreed to hear Loper Bright Enterprises v Raimondo, a case brought by a group of fishing companies challenging a rule issued by the U.S. Department of Commerce fisheries regulatory division.

The issue before the U.S. Supreme Court is whether it should reconsider its 1984 decision in Chevron v. Natural Resources Defense Council, which found that courts should defer to federal agencies’ reasonable interpretation of ambiguous legislation. The doctrine has been historically crucial in allowing regulators to overcome outdated legislation or adapt to new technologies. The outcome of Loper could have significant implications for U.S. regulatory rule-making at the federal level, including regarding the SEC’s proposal to require public companies to disclose information to investors about their environmental impact and carbon emissions.

The Supreme Court has, so far, resolved challenges to the doctrine without addressing it directly. However, several current members of the Court, including Justice Neil Gorsuch and Justice Clarence Thomas, have been critical of Chevron in the past and, given increasing skepticism on the Court of federal agency rule-making, there is a possibility that the doctrine could be overturned.

The implications of the doctrine being overturned, should that occur, are uncertain. While the Biden administration has not relied significantly on the Chevron doctrine in its rule-making to date, with only four out of the 51 major rules promulgated explicitly involving Chevron, the outcome of Loper could impact efforts to issue new rules related to climate, gun ownership and financial markets.

Supreme Court Docket

U.S.: House Committee on Oversight and Accountability Hears Testimony on ESG Influence

On May 10, 2023, the U.S. House Committee on Oversight and Accountability held the first in a planned series of hearings related to ESG in the United States, entitled “ESG Part I: An Examination of Environmental, Social, and Governance Practices with Attorneys General.”

The hearing included testimony from Attorney General Steve Marshall of Alabama and Attorney General Sean Reyes of Utah, as well as Illinois State Treasurer Michael Frerichs, relating to state officials’ concerns regarding the growing influence of ESG investing. Marshall and Reyes are part of the group of Republican state attorneys general that previously sued the Department of Labor over its rule permitting consideration of ESG factors in ERISA plan management (more on this here and here). In their testimony, the attorneys general called for further congressional oversight, asking the Committee to repeal the Department of Labor ERISA rule, investigate the impact of asset manager climate pledges on public utility companies and explore the role of proxy advisory firms in recommending pro-ESG shareholder votes.

The Committee’s Republican majority was largely critical of both ESG investing as a concept and the Biden administration’s approach to regulation. In their questioning, several Republican members of Congress argued that asset managers violate their fiduciary duty to clients when they place environmental, social and governance concerns above financial performance. Others argued that ESG strategies cause long-term harm to consumers by decreasing productivity, increasing prices and driving anti-competitive conduct.

In response, Committee Democrats defended the strategy, emphasizing ESG’s ability to create value in companies and limit risk in investing. Ranking Member Jamie Raskin, Democratic Congressman from Maryland, noted that “America’s most successful investors and asset managers have systematically embraced responsible investment principles as a fulfillment of their fiduciary duty to minimize risk, maximize returns, and prudently plan for long-term challenges, like the ones associated with the destabilizing factor of climate change.”

Hearing & Testimony
Republican majority press release
Democrat minority press release

U.S.: Oklahoma Identifies Companies It Views as “Boycotting” Energy Companies

On May 3, 2023, the Oklahoma State Treasury placed 13 banks and asset managers on a “Restricted Financial Company List.” According to the Treasury’s statement, under Oklahoma’s Energy Discrimination Elimination Act of 2022, “the Oklahoma State Treasurer is required to prepare and maintain a list of financial institutions that boycott energy companies.”

The law defines “boycott energy company” as an entity “without an ordinary business purpose, refusing to deal with, terminating business activities with, or otherwise taking any action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company because the company: (a) engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil-fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law, or (b) does business with a company described by subparagraph a of this paragraph.”

Under the law, companies on this list must, within 90 days of being notified, “cease boycotting energy companies to avoid qualifying for divestment by state governmental entities.” If the companies do not comply, the law provides that “the state governmental entity shall sell, redeem, divest, or withdraw all publicly traded securities of the financial company,” with the exception of “any indirect holdings in actively or passively managed investment funds or private equity funds.”

Oklahoma State Treasury Statement
Oklahoma’s Energy Discrimination Elimination Act of 2022

Australia: Securities and Investments Commission Issues Report on Recent Anti-Greenwashing Actions

On May 10, 2023, the Australian Securities and Investments Commission (“ASIC”) published a report on its recent greenwashing intervention actions. The report shows that, between July 1, 2022 and March 31, 2023, ASIC requested 23 corrective disclosures, issued 11 infringement notices and commenced one civil penalty proceeding.

ASIC focused specifically on net zero statements and targets; the use of terms such as “carbon neutral”, “clean” or “green”; fund labels; and the scope and application of investment exclusions and screens. As a result of its interventions, 14 entities amended their disclosure in 21 Product Disclosure Statements, and one fund’s name was changed. In relation to listed companies, nine entities amended their prospectuses, company websites or market announcements.

ASIC stated that it has a number of ongoing investigations into suspected greenwashing and anticipates that it will take further enforcement action. ASIC further stated that it will be “progressing [its] surveillance on the superannuation fund sector and the wholesale green bond market, and will continue [its] surveillance of the managed fund and corporate sectors.”


Italy: Greenpeace Leads Italy’s First Climate Change Claim

A group of 12 Italian citizens, together with two NGOs, Greenpeace Italy and ReCommon, sued Italian oil company ENI and its two main shareholders, the Italian Ministry of Economy and the state development bank (Cassa Depositi e Prestiti S.p.A.) for their contribution to climate change.

According to Greenpeace, ENI’s worldwide greenhouse gas emissions constitute a significant contribution to global warming posing environmental and health risks. The claimant citizens further allege that ENI’s conduct violated their rights to life, health and private and family life by contributing to the effects of climate change impacting the regions where they live. The claim against the two shareholders is grounded on their influence on ENI’s policies.

The claimants seek to obtain a declaration—without quantification of damages—that ENI and the two shareholders are jointly and severally liable for current and future damages as a result of climate change. In addition, the claimants request an injunction to:

  • “make ENI cease its damaging conduct and order the company to adopt an industrial strategy to reduce the climate-changing CO2 emissions associated with its operations by 45 per cent by 2030 against the company’s 2020 baseline, in line with the requirements of the Paris Agreement”; and
  • “order the Ministry of Economy and Finance and Cassa Depositi e Prestiti to adopt their own policies that guide their participation in the company by setting and monitoring ENI’s climate objectives in line with the Paris Agreement and human rights.”

Greenpeace stated that the “primary objective” of the lawsuit was “to establish an important precedent in an Italian court, namely that the commitments of the Paris Agreement also apply to large private energy companies such as ENI directly.”

Greenpeace Media Briefing

UK: British Insurance Brokers’ Association Published Practical ESG Guidance for Brokers

On May 7, 2023, the British Insurance Brokers’ Association (“BIBA”) published the “Broker’s Guide to ESG” to assist its members in understanding the ESG movement in commercial sectors and to support them in integrating ESG considerations and principles into their own businesses. BIBA cited marketplace pressure on businesses and sectors to evidence understanding of and focus on ESG issues as the impetus for the publication. The guide is accompanied by an eight-page “Mini Guide to ESG,” which provides a synthesized discussion of the complete guide.

The Broker’s Guide to ESG includes discussions of ESG lexicon, practical tips for communications and advice on how to identify and implement ESG strategies at business level. In particular, the guide highlights 11 ESG topics as “ESG Stepping Stones,” which it uses to provide practical guidance to BIBA members who are deciding how to prioritize ESG.

The ESG Stepping Stones include green offices; carbon management; diversity, equity and inclusion; mental health and wellbeing; local community engagement; modern slavery and human rights; anti-bribery and corruption; data protection and privacy; responsible investment strategies; responsible procurement strategies; and client partnerships on green initiatives, including repairs and products.

BIBA has noted that the guide is a “living dynamic” document that will be supplemented and amended as ESG priorities evolve.

BIBA – Broker’s Guide to ESG
BIBA – Mini Guide to ESG

EU: European Supervisory Authorities Consult on Regulatory Technical Standards to the Sustainable Finance Disclosure Regulation

On April 12, 2023, the Joint Committee of the European Supervisory Authorities (“ESAs”) addressed certain technical issues and broadened the disclosure framework in a consultation paper on the Regulatory Technical Standards (“RTS”) to the Sustainable Finance Disclosure Regulation (“SFDR”).

The consultation paper proposes a number of changes to the RTS, including: (i) extending the list of social indicators for principal adverse impacts (“PAIs”) to cover earnings in countries designated as “non-cooperative” for tax purposes, investments in companies related to tobacco, percentage of employees earning less than an “adequate wage” and other issues; (ii) improving the definitions, methodologies, metrics and presentation for various PAIs; and (iii) proposing to simplify the templates for pre-contractual and periodic disclosures.

Please see our client update for more detailed information here.

ESAs’ Joint Consultation Paper on the Review of SFDR Delegated Regulation

EU: European Commission Provides Further Interpretation of the Sustainable Finance Disclosure Regulation

On April 14, 2023, the European Commission published answers to questions on the interpretation of the SFDR that have been raised by the ESAs in September 2022.

Importantly, the clarifications address the concept of sustainable investments under the SFDR. It is now clear that sustainable investments under the SFDR are more flexibly determinable by financial market participants, unlike investments aligned with the EU Taxonomy Regulation. The Commission further clarified that referring to transition plans does not make an investment sustainable under SFDR.

The Commission also answered questions on reporting on PAIs at financial product and financial market participant levels. For more detailed information, see our update here.

European Commission’s answers to questions raised by the ESAs (published 14 April 2023)

EU: Corporate Sustainability Due Diligence Directive Inches Closer to Adoption

On April 25, 2023, the European Parliament’s Committee on Legal Affairs adopted its negotiating position on the Corporate Sustainability Due Diligence Directive (“CSDDD”). The draft will be put to a vote in Parliament and, if approved, will start the negotiations for the final version of the CSDDD.

The proposed CSDDD introduces obligations for EU companies and non-EU companies operating in the EU with respect to actual and potential human rights and environmental adverse impacts. This will likely cover a company’s own operations and their subsidiaries’ but also those of other entities in their value chain. The negotiating parties have now further determined their positions.

In December 2022, the European Council put forward its own changes to the draft CSDDD. It proposed to limit the scope of due diligence obligations from “value chain” (as originally drafted by the European Commission) to “chain of activities,” which would exclude obligations relating to the use of a company’s products by consumers. The Council further proposed to allow member states to decide whether regulated financial undertakings (which includes fund managers) would be covered by CSDDD and also removed provisions on directors’ duties.

The European Parliament’s Legal Committee proposal, however, reversed these amendments. Instead, with respect to regulated financial undertakings, the Committee proposed introducing due diligence obligations only regarding activities of clients that directly receive financial services. The draft also introduced an obligation for institutional investors (and possibly the funds they control) to take appropriate measures to induce their investee companies to end adverse impacts caused by them.

For more detailed information, see our update here.

European Council Position Press Release
JURI Position Press Release