ESG Weekly Update – November 8, 2023

08 November 2023

U.S.: FRB, FDIC and OCC Issue Principles for Climate-Related Financial Risk Management for Large Financial Institutions

On October 24, 2023, the Federal Reserve Board (“FRB”), the Federal Deposit Insurance Corporation (“FDIC”), and the Office of the Comptroller of the Currency (“OCC”) finalized joint principles intended to provide large financial institutions – those with over $100 billion in total consolidated assets – with a high-level framework for the “safe and sound” management and mitigation of climate-related financial risks. The rationale for the principles is that:

  1. financial impacts that result from the economic effects of climate change and the transition to a lower carbon economy pose an emerging risk to the safety and soundness of financial institutions, and the financial stability of the United States more broadly; and
  2. weaknesses in how financial institutions identify, measure, monitor, and control the physical and transition risks associated with a changing climate could adversely affect their safety and soundness.

The principles therefore address the management of climate-related financial risks in broad areas, including: governance; policies, procedures, and limits; strategic planning; risk management; data, risk measurement, and reporting; and scenario analysis. Additionally, the principles address certain traditional risk categories, including credit, liquidity, operational, legal and compliance, and other financial and nonfinancial risks.

The finalized principles are designed to be consistent with the risk-management frameworks set out in in the FRB, FDIC and OCC’s existing rules and guidance. They are substantively similar to draft principles issued by the agencies over the past two years, with modifications to respond to industry feedback.

Interagency Principles (Federal Register)
Joint Press Release
Summary of the Principles

U.S.: House Judiciary Committee Subpoenas Two Pro-ESG Shareholder Advisory Groups

On November 1, 2023, House Judiciary Committee Chairman Jim Jordan (R-Ohio) subpoenaed As You Sow and the Glasgow Financial Alliance for Net Zero (“GFANZ”), two shareholder-advisory organizations, seeking documents and communications with other shareholder groups regarding “how [they] advance ESG policies,” particularly climate-related ESG efforts.

The cover letter to the As You Sow subpoena alleges that, as a member of Climate Action 100+ and other ESG initiatives, it collusively agreed to work with companies to deliver net-zero greenhouse gas emissions by 2050. The subpoena follows up on a request for documents that the House Judiciary Committee sent to As You Sow on August 1, 2023. As You Sow expressed its willingness to cooperate with the subpoena, but stated that “the subpoena is flawed, with demands that are inapplicable to As You Sow, and is so broad as to be virtually unbounded.”

Likewise, the Committee previously wrote to GFANZ on July 6, 2023, requesting documents and communications relating to how GFANZ advances ESG policies, in particular its net-zero commitments (for further details on this letter, see our ESG Investigations Tracker here). GFANZ sent two responses in August and September 2023, which the Committee found insufficient.

As You Sow and GFANZ are among several organizations that the House Judiciary Committee has sent subpoenas to as part of its probe into ESG. The House Judiciary Committee argues that ESG initiatives may violate antitrust law because they are, in effect, a conspiracy by corporations to “collectively adopt and impose left-wing environmental, social, and governance (ESG)-related goals.”

House Judiciary Committee Press Release
As You Sow Press Release

EU: European Banking Authority Recommends Revisions to Pillar 1 Framework to Include Environmental and Social Risks

On October 12, 2023, the European Banking Authority (“EBA”) published a report on the role of environmental and social risks in the prudential framework of financial institutions. The report forms the basis for the EBA’s proposed revision of the Pillar 1 framework, which establishes broadly applicable capital requirements for lenders. The proposed revisions aim to support the transition to a sustainable economy while maintaining banking sector resiliency.

Among its short-term proposals for actions to be taken in the next three years, the EBA recommends rules that require banks to:

  1. consider environmental risks as part of stress testing programs;
  2. request the inclusion of environmental and social factors for external credit assessments, as well as due diligence and valuations;
  3. identify whether environmental and social factors can trigger operational risk losses; and
  4. include environment-related concentration risk metrics in their supervisory reporting.

The EBA is also considering other revisions to the Pillar 1 framework that reflect the banking sector’s changing environmental and social risks profile, including the use of scenario analysis and transition plans. Notably, the EBA declined to incorporate lower capital requirements, which had been requested in order to encourage lending to companies investing in green technologies.

EBA Press Release
EBA Report

EU: European Commission Consults on Changes to Sustainable Finance Disclosure Regulation

On September 14, 2023, the European Commission launched the first stage in its review of the Sustainable Finance Disclosures Regulation (“SFDR”) by means of a public consultation aimed at a broad set of stakeholders. The consultation covers a large number of topics on the implementation of the SFDR and its overall effectiveness, with the Commission asking for views on a number of concrete improvements. The Commission’s work covers current areas of uncertainty in the SFDR and reflects its continuing concerns regarding greenwashing. As expected, the consultation proposes, among other things, a new categorization system for funds, reflecting the SFDR’s development into a “labelling and marketing tool” beyond its originally intended use as a disclosure framework.

The consultation is open until December 15, 2023, and the questionnaire can be found here. The Commission is expected to publish a proposal to revise the SFDR in 2024, which will be subject to further consultation and the usual scrutiny process by EU institutions.

Commission Consultation Document
Debevoise Client Update

Asia: Working Group Set Up to Develop Hong Kong ESG Code of Conduct

On November 1, 2023, the Hong Kong Securities and Futures Commission and the International Capital Market Association announced that they will convene a working group to create a voluntary code of conduct for ESG ratings and data product providers. The working group will focus on transparency, systems and controls, governance, and management of conflicts of interest when setting up baseline best practices governing the conduct of ESG service providers in Hong Kong.

As the ESG ratings and data products industry in Hong Kong is not currently regulated, the voluntary code of conduct aims to strengthen the transparency, reliability, and quality of ESG information used in making investment decisions, and thereby reduce investors’ concerns about greenwashing.

The working group consists of Bloomberg, Fidelity International, Invesco, Morningstar Sustainalytics, among others.

Securities and Futures Commission Press Release