U.S.: House Financial Services Committee Embarks on a Month of Hearings Focused on ESG
On July 12, 2023, the House Financial Services Committee kicked off a series of ESG-focused hearings as part of the Republican “ESG Month.” Six more hearings took place on July 13, 14 and 18, all focused on concerns over ESG disclosures and regulations.
At the first hearing, entitled “Protecting Investor Interests: Examining Environmental and Social Policy in Financial Regulation”, Republicans proposed 18 pieces of legislation that seek to limit the Biden administration’s efforts to promote climate-related policies. Members clashed over the role of the federal government in regulating ESG and the impact of the SEC’s proposed disclosure requirements on the economy. While Republican members argued that politically motivated regulations hurt investors and discourage companies from going public, Democrats pointed to a week of record-breaking temperatures to emphasize the necessity of holding public companies accountable for their environmental and social impact. Democrats further argued that fiduciary duties include securing the strongest possible risk-adjusted returns. If an investment is exposed to physical climate risks, the fiduciary has the duty to consider that risk.
Another major focus of the hearings was the proxy voting process. Republicans criticized the SEC’s 2021 proxy advisory firm rule (which allows shareholders to request proposals to be included in the company’s proxy statement; more on this here), arguing that it helps promote “politically motivated shareholder proposals” relating to ESG that inhibit companies’ economic growth. They also argued that the SEC’s recent change in attitude has led to a dramatic increase in shareholder proposals, placing a burden on institutional investors. In response, one witness indicated that the costs of responding to ESG proposals are small (adding that the indirect costs, such as directors’ time, are greater).
Global: Financial Stability Board Asks IFRS Foundation to Assume TCFD Monitoring Responsibilities in 2024
On July 6, 2023, the Financial Stability Board (“FSB”) met to discuss efforts to address financial risks arising from climate change.
The FSB noted that the IFRS Foundation had recently published the final International Sustainability Standards Board (“ISSB”) climate and sustainability-related disclosure standards (more on this here). Since the ISSB standards are based on the Task Force on Climate-related Financial Disclosures (“TCFD”) and are seen as “a culmination of the work of the TCFD”, the FSB decided to delegate monitoring of TCFD disclosures to the IFRS Foundation.
Nearly 4,000 organizations globally, including financial institutions that manage over $200 trillion in assets, have signed up to the TCFD. Centralizing ISSB and TCFD disclosure requirements under one organization should simplify the task of navigating various reporting regimes, as ESG regulations continue to proliferate.
FSB Press Release
Global: Report Identifies Human Rights Violations in Critical Minerals Supply Chains
On July 6, 2023, the UK-based Business and Human Rights Resource Centre published a report entitled “Unpacking Clean Energy: Human Rights Impacts of Chinese Overseas Investment in Transition Minerals.” The report focuses on 102 allegations of human rights violations, particularly concerning labor and environmental rights, perpetrated by Chinese investee companies in transition mineral supply chains between January 2021 and December 2022. The report takes an expansive view of supply chains, covering initial explorations, licensing, mining, and processing of transition mineral resources.
The abuses identified by the Business and Human Rights Resource Centre included lack of access to safe water supplies and health and safety risks. The report includes a country-by-country analysis—the five jurisdictions identified as harboring high levels of such allegations were (in order of magnitude) Indonesia, Peru, Democratic Republic of the Congo, Myanmar, and Zimbabwe. The report highlights that these jurisdictions largely lack legal remedies for victims.
The report further notes that fewer than 18 percent of the Chinese investee companies in the report have publicly available human rights policies. In addition to emphasizing the need for companies to develop and adhere to such policies, the report recommends that the energy transition industry employ fair labor negotiation practices, and calls for China to adopt a human rights regulatory framework to guide its offshore investment in the transition energy sector.
EU: Court of Justice Decides That EIB Must Conduct Internal Review on Decision to Finance Biomass Project
On July 6, 2023, the Court of Justice of the European Union (“CJEU”) affirmed the EU General Court’s January 2021 judgment in ClientEarth v. European Investment Bank.
At the heart of the judgment was a 2018 decision of the European Investment Bank (“EIB”) to provide a €60 million loan for the construction of a biomass power plant in Galicia, Spain. ClientEarth, an environmental NGO with London headquarters, requested that the EIB conduct an internal review of the decision in August 2018. ClientEarth argued that the project would not contribute to renewable energy objectives because (i) the environmental benefits associated with biomass had been overestimated, and (ii) the risk of logging and forest fires and associated damage had been underestimated. The EIB rejected ClientEarth’s request on the grounds that the decision to provide the loan was not an administrative act and the decision was not taken under environmental law per the Aarhus Convention—two conditions that render an EIB decision subject to the possibility of internal review.
ClientEarth brought a claim against the EIB in January 2019 before the EU General Court, alleging an improper rejection of its internal review request. The EU General Court sided with ClientEarth in its January 2021 Order, finding that the EIB’s decision to grant the loan was taken under environmental law and was an administrative act. It issued an Order that the EIB must accept ClientEarth’s petition for internal review.
In April 2021, the EIB appealed the decision. The CJEU issued its final decision on July 6, 2023, affirming the General Court’s 2021 Judgment.
ClientEarth (2023 Statement)
General Court 2021 Judgment
CJEU 2023 Judgment