ESG Weekly Update – May 24, 2024

24 May 2024

Other Notable Developments

Biodiversity Plan Recommendations: From May 13 through May 29, 2024, two subsidiary bodies of the Convention on Biological Diversity (“CBD”) will meet to discuss recommendations for implementing the CBD’s Biodiversity Plan. One subsidiary body will focus on the plan’s implementation strategy while the other will address the plan’s scientific and technical needs. Both will present their findings at the 16th Conference of the Parties to the Convention on Biological Diversity in October 2024.

California’s Green Investment: On May 15, 2024, California Public Employees’ Retirement System announced that it will invest more than $25 billion into “green-related private market investments.” The nation’s largest pension fund will focus on Asian and European private equity, real estate and infrastructure markets for climate investment opportunities and will invest this capital over the next six years.

EU: Financial Markets Regulator Seeks to Address Greenwashing Through New ESMA Guidelines

On May 14, 2024, the European Securities and Markets Authority (“ESMA”) released finalized guidelines aimed at regulating the use of ESG and sustainability-related terms in investment fund names within the EU. These guidelines, established to address the increasing risk of greenwashing, set investment thresholds required for sustainable investment funds and introduce a transition category for investments moving towards sustainability goals.

In particular, the guidelines require funds using sustainability terms in their fund names to have a minimum of 80% of investments that meet environmental or social characteristics or have sustainable investment objectives. Exclusion criteria based on the Paris-aligned Benchmarks or Climate Transition Benchmarks rules must also be applied depending on the term used in the fund name. The guidelines also introduce rules for funds using transition-related terms, such as “improving,” “progression” or “transformation,” which imply a positive evolution towards sustainability goals.

ESMA’s decision to issue these guidelines comes amidst a significant rise in investor demand for ESG-focused funds, leading to a surge in asset managers incorporating sustainability-related terms in fund names to attract investors. A recent study by ESMA revealed a substantial increase in the use of sustainability-related terms in fund names over the past decade, with many fund providers preferring generic ESG terms. Accordingly, ESMA recognized this demand could lead to unsubstantiated or exaggerated claims about the ESG-focused nature of those funds, compelling the study, development and issuance of these guidelines.

The new guidelines are set to be implemented three months after their publication on the ESMA website (in all official EU languages), with a transitional period lasting for six months after that date.

Press Release

U.S.: Fifth Circuit Dismisses Challenge to SEC Proxy Rule Due to Lack of Standing

On May 10, 2024 the United States Court of Appeals for the Fifth Circuit dismissed a challenge to the Final Rule of the U.S. Securities and Exchange Commission (“SEC”) requiring funds to disclose their votes on environmental, social and governance (“ESG”) matters (the “Rule”). The Rule requires funds to categorize their proxy votes by subject matter, with four of the categories being ESG-related.

The challenge was brought by the attorneys general of Texas, Louisiana, Utah and West Virginia, who filed a petition seeking prospective relief under the Administrative Procedure Act. The states argued that they would suffer injury under the Rule because funds would pass on costs of compliance with the Rule to all investors, including the states. The Fifth Circuit did not reach the merits of their claim and dismissed the suit for lack of standing, finding that "[e]vidence that funds may increase costs for investors is too hypothetical to support a claim of standing.”

The challenging states also argued that the Rule would harm their citizens and Texas’ oil and gas industry by allowing investors to pressure funds to vote for ESG measures providing limited investor value. In response to this argument, the Court again held that the states did not present sufficient evidence that the Rule would harm investor profits or damage any industry.

The Rule, adopted in November 2022, is scheduled to go into effect on July 1, 2024.


U.S.: Federal Reserve Board Releases Summary of Pilot Climate Scenario Analysis Exercise Conducted with Six of the United States’ Largest Banks

On May 9, 2024, the Federal Reserve Board (“FRB”) published a long-awaited summary of the results of its exploratory pilot Climate Scenario Analysis (“CSA”). The exercise, conducted with Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo, examined the banks’ ability to withstand climate-related financial risks.

Launched on January 17, 2023, the CSA was intended to assess large banking organizations’ climate risk-management practices and challenges, and to enhance the ability of large banking organizations and supervisors to identify, estimate, monitor and manage climate-related financial risks. Ultimately, the CSA may aid in understanding how emerging climate-related financial risks manifest and depart from historical experience. The pilot exercise was exploratory in nature and does not have consequences for bank capital or supervisory implications. It included a physical risk module focused on real estate credit portfolios and a transition risk module using scenarios designed by the Network of Central Banks and Supervisors for Greening the Financial System: Current Policies and Net Zero 2050.

The CSA exercise rendered several key insights, including the difficulties in measuring and incorporating highly uncertain risks into risk management frameworks, the importance of understanding insurance market dynamics when modeling physical risk impacts on credit exposures and the prevalence of modeling and data-related challenges. The participant banks indicated their plans to incorporate climate scenario analysis into their risk management processes over time, with next steps including acquiring more detailed climate and exposure data, improving modeling capabilities, designing scenarios that are more narrowly tailored to the bank’s specific business models, and developing in-house expertise to conduct such exercise rather than use third-party vendors.

Press Release
Summary of Results
Description of Current Policies and Net Zero 2050 Scenarios

U.S.: Governor DeSantis Signs New Anti-ESG Bill into Law

On May 2, 2024, Florida Governor Ron DeSantis signed into law Florida House Bill 989 (“H.B. 989”), which aims to provide legal recourse to consumers who believe that they have been denied banking services based on “unsafe and unsound practices.”

The new law establishes a coordinated complaint and investigatory process with the Florida Office of Financial Regulation for financial services consumers who believe they have been subject to unreasonable bank account cancellations and restrictions. Under H.B. 989, suspending and terminating a bank account is deemed an “unsafe and unsound practice” if the decision was made on the basis of: (i) the person’s political opinions, speech or affiliations; (ii) the person’s religious beliefs, religious exercise or religious affiliations; (iii) any rating, scoring, analysis, tabulation or action that considers a social credit score based on certain factors; or (iv) any factor that is not a quantitative, impartial and risk-based standard, including the person’s business sector.

If a customer or member of a financial institution suspects that the institution violated the “unsafe and unsound practice” standard, they have the right to submit a complaint to the Office of Financial Regulation within 30 days of the account suspension or closure. The complaint triggers an obligation for the financial institution to investigate its practices and report the results to the Office of Financial Regulation. If the investigation reveals such “unsafe and unsound practices,” the financial institution may be subject to sanctions.

Press Release   
H.B. 989

Global: SBTi Announces Revision to Corporate Net-Zero Standard

The climate-focused Science Based Targets initiative (“SBTi”) announced that it will revise the Corporate Net-Zero Standard by the end of 2025. SBTi initially launched the standard in October 2021 to provide a consistent, science-based definition of “net-zero” that companies could use when setting their own climate targets. In line with regular review cycles and following stakeholder feedback, SBTi is updating the Corporate Net-Zero Standard to align with the latest climate science, better address Scope 3 greenhouse gas emissions, and integrate regularized target cycles and progressive requirements that enable continuous improvement and assessment. The revised version will also clarify the Corporate Net-Zero Standard’s relationship to other SBTi standards and improve interoperability with relevant external standards and frameworks.

SBTi’s development of the “Corporate Net-Zero Standard V2.0” is subject to public comment through project feedback forms, public consultations and pilot testing. SBTi intends to publish interim deliverables such as Environmental Attribute Certificate reports, as well as a Scope 3 discussion paper and a draft standard and feedback report, before issuing the final updated standard and related corporate target-setting tools at the end of 2025.

SBTi Corporate Net-Zero Standard V2.0 Terms of Reference
SBTi Press Release


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