2023 Off & Running in Different ESG Directions?

BCLP
Contact

Just over a month into 2023, we are poised for friction between the Biden Administration’s ESG strategy efforts and those of certain Congressional leaders now in the majority. A variety of proposed rules and legislation continue to move forward. There appear to be areas of common ground, but we continue to see various perspectives and priorities in tension. Discussed below are a number of early 2023 ESG related developments that we should continue to watch unfold this year.  

House Financial Services Committee. The 118th Congress is gearing up for business, including the House Financial Services Committee under the leadership of new chair, Patrick McHenry (R- NC). Earlier this month, Chairman McHenry announced authorization and oversight plans for the Committee, certain new subcommittee legislative proposals, and the formation of a Republican ESG Working Group. 

Authorization and Oversight Plan.

The Committee’s Authorization and Oversight Plan does not specifically mention ESG or climate risk in any section. However, many enumerated areas touch on ESG, including Financial Supervisions safety and soundness including systemic risk identification and mitigation, Access to Financial Services, Discrimination in Lending, and Diversity in Financial Services. It seems likely that another area of focus, Regulatory Burden Reduction, may be earmarked for assessing climate risk and other ESG related regulatory and disclosures burdens, especially as they impact community financial institutions.     

Promoting Access to Capital in Underbanked Communities Act. New proposed legislation was discussed at the February 8 Subcommittee on Financial Institutions and Monetary Policy hearing, “Revamping and Revitalizing Banking in the 21st Century.” The FSC Majority Staff Memorandum highlights positive developments in reducing the number of US households that are unbanked and several proposed bills, which will protect consumer privacy, potentially increase access to capital for underbanked communities, as well as facilitating entry of new de novo depository institutions, especially MDIs and CDFIs. In prepared remarks, Chair Andy Barr (R-KY) stated: “The fact is, encouraging the establishment of de novo financial institutions will help fill the needs left by a drought of new community financial institutions, along with consolidation and closures over the past decade. Enabling more de novo institutions will increase banking options and competition to better serve families, small businesses, and local communities.” While not specifically identifying ESG, these steps may promote access and equity in banking. 

Stated Priorities of the Republican ESG Working Group. According to the February 3 Statement, Congressman Bill Huizenga (R-MI) will chair the working group in addition to chairing the Oversight & Investigations Subcommittee. Chairman McHenry’s stated objective for the working group is to “develop a comprehensive approach to ESG that protects the financial interests of everyday investors and ensures our capital markets remain the envy of the world.” The McHenry statement criticized the Biden Administration, indicating that Financial Services Committee Republicans will, among other things, “hold Biden’s rogue regulators accountable.” We will have to wait and see what those promised efforts will entail and how bank and financial services company ESG strategies and regulatory compliance efforts may continue to be impacted.    

Federal Reserve Discussion Paper on Climate Change Efforts at Large Global Banks.  The Fed published this International Finance Discussion Paper in January 2023 assessing both progress by and continuing challenges for large global banks seeking to address climate change risks and implementing climate action plans. The paper notes momentum surrounding global climate related risk disclosures and risk monitoring including in the areas of data collection by the largest global banks (G-SIBs) and risk mitigation efforts. However, it also notes continuing challenges in modeling and measuring and disclosing climate actions, risks and opportunities. Ultimately, paper posits that even when disclosures and data become more comparable across banks, “it remains to be seen how investors and stakeholders will use the se disclosures in their decision-making.”  It also remains to be seen if and how the 118th Congress may conduct its financial services oversight with regard to these developing standards and continuing risks. 

Federal Reserve Climate-Related Financial Risk Management Principles Harmonization. Comments closed this week on the proposed Principles for Climate-Related Financials Risk Management for Large Financial Institutions (docket OP-1973). As noted on the docket of the OCC’s earlier proposal regulations.gov OCC 2021-0023, more than 12,000 comments have been received (with more than 300 posted publicly).  Several themes include: (a) ensuring flexibility and clarity of the rules, (b) consideration of burdens and benefits, including the notion that it is premature to set specific limits or targets regardless of assessed materiality, (c) concern over the potential burden of such rules being applied subsequently to smaller and community bank institutions, and (d) concern about potential overlaps and conflicts with securities and consumer protection law requirements. Certain comments favored the earlier proposed OCC and FDIC language. Certain others suggested closer attention in the FRB proposal to striking the right level of ownership responsibility for assessment, monitoring and risk mitigation, such as granular department operations level versus material risks the board should oversee. Hopefully, the final rules will incorporate the pragmatic suggestions offered and add clarity to risk mitigation and reporting framework guardrails.

FTC Green Guides Comment Period Extended to April. At it’s December 2022 open meeting, the Commissioners unanimously called for comments to revise and clarify the 2012 Guides for the Use of Environmental Marketing Claims (“Green Guides”). FTC Chair Lina Khan issued a Statement in which she extolled the value of building consumer confidence in ESG claims and ensuring a level playing field for business: “That’s why it’s so important for companies making these [green] claims to tell the truth. If they don’t, it distorts the market for environmentally friendly products. It puts honest companies, who bear the costs of green business practices, at a competitive disadvantage. And it harms consumers who want to make conscientious decisions about what products to buy and what businesses to support.”   The Request for Public Comment outlines 19 General Issues for comment including four queries that may yield sweeping assessments and changes:

“15. What potential environmental marketing claims are not covered by the Guides”

“17. Do the Guides overlap or conflict with other federal, state or local laws or regulations?”

“18. Are there international laws, regulations or standards with respect to environmental marketing claims the Commission should consider as it reviews the Guides?...Should the Guides be modified to harmonize with these international laws regulations or standards?”

"19. Should the Commission initiate a proceeding to consider a rulemaking under the FTC Act related to deceptive or unfair environmental claims?"

The nature of these queries demonstrates that the revisions may impact more than just retail consumer business. Banks and financial institutions may wish to monitor the Guide revisions with an eye to their own marketing and labeling of investment products and services. At some point in the future, query whether some will contend that banks and financial institutions may have specific “anti-greenwashing” due diligence obligations and risks deriving from its customers operations. The Request also identifies 12 specific green claims/labels to be reviewed including: carbon offsets and climate change, compostable, degradable, ozone-safe/ozone-friendly, recyclable and recycled content, and energy use/energy efficiency, organic, sustainable.  Of note, a decade ago in 2012, the Commission declined to issue guidance on the terms organic and sustainable. Certainly, guidance is expected to be forthcoming on those terms.

As of the date of this article, just over 100 comments had been received (with approximately 80 posted publicly at regulations.gov (docket FTC-2022-0077). A number, including several trade groups, requested extended time to prepare thoughtful analysis and suggestions. Earlier this week, with the comment period set to close February 21, the Commission extended the comment period to April 24.  Assuming a number of comments include the requested “scientific basis“ for suggested approaches, it is likely the Commission will take time to analyze and revise the Guides. However, in the interim, one can review the posted comments to discern likely areas of new guidance, which may help mitigate potential greenwashing risk.

Wrap Up. None of the above has created new bright line ESG disclosures or reporting rules, yet. But we can expect steady push for change, and in some instances, likely push back. To navigate, institutions should stay true to their mission strategy while continuing to look out for new obstacles that may require a change of course. Compliance and risk management teams who focus on emerging requirements and best practices will mitigate ESG operations and disclosure risks including alleged greenwashing or brand washing. Sustainability performance reporting and assessment procedures and metrics can be refined. Hopefully, 2023 will led to more clarity and progress in these areas, rather than confusion and disparate approaches and guidance.  Stay tuned for additional developments through the coming months and let us know if we can assist in your ESG strategy and risk mitigation journey.    

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© BCLP | Attorney Advertising

Written by:

BCLP
Contact
more
less

BCLP on:

Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
- hide
- hide