U.S.: SEC Settles Charges with Deutsche Bank Subsidiary for ESG Reporting Failures
On September 25, 2023, the United States Securities and Exchange Commission (“SEC”) announced that it settled the charges against DWS Investment Management Americas Inc. (“DWS”), an investment adviser and subsidiary of Deutsche Bank AG. The charges regarded two separate enforcement actions against DWS (i) for failure to develop a mutual fund anti-money laundering program, and (ii) for misstatements related to DWS’s ESG investment process.
In particular, DWS had marketed itself to clients, both current and prospective, as a leader in ESG and promoted several of its “ESG-integrated” funds. The SEC found that DWS failed to implement certain provisions of its own global ESG integration policy despite leading clients to believe that it would do so. Specifically, DWS marketed its strategies as subject to an ESG information tool (part of DWS’s “ESG Integration Policy”) while not ensuring that portfolio managers actually used the tool for due diligence or risk management. As a result, the SEC initiated an enforcement action on the basis that DWS’s ESG-related marketing materials contained misleading statements.
In settling the charges, DWS agreed that it had violated provisions of the Investment Advisers Act of 1940 and other federal rules and paid a US$25 million penalty. The SEC credited remedial efforts taken by DWS during its investigation, including modifying the relevant processes, policies, procedures and controls.
SEC Press Release
U.S.: Federal Judge Upholds DOL ESG Investing Rule
Last year, the U.S. Department of Labor (“DOL”) finalized regulations permitting ESG to be taken into account by ERISA fiduciaries, with an effective date of January 30, 2023.
Republican attorneys general from several states have been working to overturn the regulations, which reversed Trump-era ESG restrictions. In Utah v. Walsh, Republican attorneys general representing 25 states sought to block the regulations by filing suit in Amarillo, Texas, where Judge Kacsmaryk is the only judge (more on this here). Judge Kacsmaryk, who was appointed by President Trump, denied an earlier motion by the DOL requesting that the case be transferred to another district.
On September 21, 2023, in an unexpected decision, Judge Kacsmaryk granted the DOL’s motion for summary judgment, effectively allowing the DOL regulations to stand and permitting retirement plan fiduciaries to consider ESG factors when selecting investments for retirement plans.
Applying Chevron v. Natural Resources Defense Council, the judge found that the DOL rule does not violate ERISA because (i) ERISA does not contemplate the possibility of a tie between two financially equivalent investment options, and (ii) the reasonableness of the DOL’s interpretation is supported by its prior rulemaking. In addition, the judge found that the DOL rule preserves the fiduciaries’ freedom to determine that an ESG-focused investment may not be prudent and that the rule’s statement provides that risk-return factors “may include” ESG factors but does not require fiduciaries to consider such factors. The judge further noted that “while the Court is not unsympathetic to Plaintiffs’ concerns over ESG investing trends, it need not condone ESG investing generally or ultimately agree with the Rule to reach this conclusion.”
U.S.: SEC Chair Reports on Feedback to Climate Disclosure Rule
On September 27, 2023, Gary Gensler, Chair of the SEC, gave testimony before Congress on feedback received on the SEC’s proposed climate disclosure rule (the “Climate Rule”), released in March 2022. The Climate Rule would require U.S. public companies to provide information on climate risks facing their business and report on various climate metrics, including Scope 1, 2 and 3 emissions (more on this here and here).
Chair Gensler reported that companies raised concerns about the inclusion of Scope 3 emissions as part of the reporting requirements in the Climate Rule. Scope 3 emissions result from an organization’s value chain and do not include emissions arising from activities of assets owned or controlled by the organization. While Scope 3 emissions typically make up the majority of an organization’s emissions, they are difficult to track and measure. Gensler cited a lack of developed, reliable Scope 3 data. While most companies understand their own direct emissions and are often already reporting Scope 1 and 2 emissions, fewer are reporting Scope 3 emissions, as they do not know the emissions of their “entire supply chains.”
Companies also raised concerns on how the rules will affect small businesses. Although the draft Climate Rule only apply to public companies and, as currently drafted, will exempt smaller companies from the Scope 3 reporting obligation, these companies may be pressured into gathering and providing emissions data to suppliers or purchasers that have to report on the emissions of the whole value chain.
While Gensler did not give an update as to when the final draft of the Climate Rule will be released, Companies may have to begin reporting Scope 3 emissions beforehand under the proposed Californian climate disclosure legislation or the EU’s Corporate Sustainability Reporting Directive (the “CSRD”), which applies to certain U.S. companies operating in the EU. These regimes require Scope 3 emissions reporting, which led Gensler to conclude that the SEC rules may be less costly if companies are already complying with these regimes.
Europe: Britain and Germany Roll Back Environmental Measures in Infrastructure Sector
Over the past week, the United Kingdom and Germany approved projects and policies prioritizing economic returns over green initiatives.
On September 27, 2023, the UK announced that it will proceed with Equinor’s North Sea Rosebank Field, one of the UK’s largest new oil and gas projects. In the face of environmentalists’ protests, spokespersons stated that energy security needs to be prioritized. The oil field is expected to produce 300 million barrels in its lifetime. The announcement came days after Prime Minister Rishi Sunak announced that the government will roll back interim plans for the 2050 net zero emissions target.
On September 25, 2023, the German government announced that it will halt plans to implement more stringent building insulation standards. Germany’s Minister of the Environment, Robert Habeck, noted that the insulation measures are being pushed back due to “high interest rates and inflation,” which “are a heavy burden for the construction industry.” He indicated that it is unlikely that the measures will be implemented in the current legislative period ending in 2025.
North Sea Transition Authority Rosebank Project
Rishi Sunak Net Zero Announcement