ESG Weekly Update – August 3, 2023

3 August 2023

U.S.: Committee Republicans Unveil ESG Bills Aimed at Regulators

On July 25, 2023, Chairman of the House Financial Services Committee Patrick McHenry announced Republicans’ introduction of four bills to address what McHenry characterized as “the threats environmental, social, and governance initiatives pose to the American financial system.”

The first bill, H.R. 4790, is titled the Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act, and was originally sponsored by Rep. Huizenga. The proposed legislation would replace the Securities and Exchange Commission’s (“SEC”) upcoming climate-related disclosure rules and, instead, only permit the SEC to require disclosures that the issuer has determined are material to a voting or investment decision.

The second and third bills together introduce reforms to proxy voting and shareholder proposals. H.R. 4767, the Protecting Americans’ Retirement Savings from Politics Act, imposes limitations on the SEC’s ability to define a “major policy use” and permits companies to exclude ESG proposals. H.R. 4655, the Businesses Over Activists Act, limits the SEC’s power to regulate shareholder proposals, shifting power back to state regulators in this area.

The fourth bill, H.R. 4823, titled the American Financial Institution Regulator Sovereignty and Transparency (American FIRST) Act, would limit nongovernmental organizations’ and international organizations’ influence on U.S. banking policy. It would require prudential regulators to report to Congress when implementing recommendations derived from the Financial Stability Oversight Council or Executive Orders, and make additional reforms to the Federal Reserve Act in line with the Republican anti-ESG effort.

The session concluded the Republicans’ “ESG month,” where the House conducted a slate of hearings on ESG-related topics.

Financial Services Committee

U.S.: Senate Launches Probe into Company Ties to Deforestation and Forced Labor

On July 24, 2023, Senate Finance Committee chair Ron Wyden sent a letter to Lear Corporation, a leather car seat manufacturer, demanding explanation for its relationship with companies suspected of contributing to deforestation of Brazil’s Amazon and to forced labor. The letter is part of a wider investigation on the effectiveness of trade-based efforts to combat environmental abuse and forced labor in the supply chain of companies selling products on the U.S. market.

The letter requested Lear Corporation to provide information on, among other topics:

  • Lear’s supply chain mapping and due diligence framework;
  • how Lear determines whether its leather is sourced from legal cattle ranches in Brazil; and
  • whether Lear has ever terminated a commercial relationship due to links to forced labor or other failure to comply with compliance policies.

Lear Corporation is expected to respond by August 7, 2023.


Australia: Securities and Investments Commission Brings Greenwashing Lawsuit Against Vanguard Australia

On July 25, 2023, the Australian Securities and Investments Commission (“ASIC”) announced that it had initiated civil proceedings against Vanguard Investments Australia, alleging that the investment advisor had made misleading claims regarding ESG investments in a Vanguard fund.

Specifically, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund was marketed to investors seeking ethically conscious investments. The regulator alleged that Vanguard misrepresented that all the securities in that fund were screened against certain ESG criteria. Vanguard explained that the investments were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, which excluded issuers with significant business activities in the fossil fuel industry and others. However, ASIC alleged that a significant number of the issuers of bonds in the index were not subjected to ESG research. Moreover, ASIC alleged that the bonds in the index exposed investors to investments that had ties to fossil fuels, contrary to Vanguard’s claims.

In bringing this lawsuit, ASIC’s Deputy Chair Sarah Court stated that “ASIC will continue its focus on alleged greenwashing conduct and we continue to stress to the financial services industry that if exclusions in investments are promised, these exclusions need to be applied and promises upheld.”

ASIC Press Release

U.S.: In Response to Republican Letter, Democrat AGs Urge Fortune 100 CEOs to Retain Diversity Programs

On July 19, 2023, Democrat Attorneys General from 20 states and the District of Columbia sent a letter to the CEOs of Fortune 100 companies urging them to continue corporate diversity efforts (the “Democrats’ Letter”). The Democrats’ Letter was sent in response to a previous letter, dated July 13, 2023, from the Republican Attorneys General of 13 states, which claimed to be reminding the CEOs of their obligations as employers “under federal and state law to refrain from discriminating on the basis of race” (the “Republicans’ Letter”). These pleas come on the heels of a recent Supreme Court decision in Students for Fair Admissions v. President & Fellows of Harvard College, No. 20-1199 (U.S. June 29, 2023) (“SFFA”), where the Court struck down race-conscious admissions programs at Harvard University and the University of North Carolina and ended the permissibility of affirmative action policies at U.S. colleges and universities.

Although the SFFA opinion was specific to higher education, the existence and timing of the Democrats’ Letter reflect the fear that the decision will impact diversity efforts in other settings, including the workplace. The Republicans’ Letter claims that companies’ explicitly race-based initiatives are now illegal as a result of the decision. The Democrats’ Letter assures recipients that SFFA “does not directly address or govern the behavior or the initiatives of private sector business” and explains the legality and importance of corporate diversity programs.

Democrats’ Letter
Republicans’ Letter

Global: Securities Regulators Endorse Inaugural Sustainability Disclosure Standards

On July 25, 2023, the International Organization of Securities Commissions (“IOSCO”) endorsed the inaugural standards set forth by the International Sustainability Standards Board for sustainability-related capital markets disclosures (more on this here). IOSCO’s endorsement of the standards is expected to give regulators confidence to adopt these standards in the future, although it remains unclear if such standards would be adopted in full or in part.

The IOSCO board of regulators includes over 130 member jurisdictions representing over 95% of global market capitalization. Notably, it includes regulators such as the U.S. Commodity Futures Trading Commission and the SEC.

Press Release