On June 23, 2022, the American Bankers Affiliation and 51 state bankers associations launched a letter to the federal monetary regulators1 that describes the rules the regulators ought to use when growing steering and laws on environmental, social, and governance (“ESG”) points (“Trade Letter”).2 These rules mirror the business’s view on how the federal government can keep a free-market monetary system that additionally addresses nationwide and international challenges.
The Trade Letter is pushed by rising concern that new ESG regulatory necessities will impede banks’ capability to offer crucial services and products to clients. On this Authorized Replace, we offer background on new ESG necessities from the federal monetary regulators and focus on the rules within the Trade Letter.
Lately, lots of the federal monetary regulators have undertaken initiatives to deal with ESG points. The OCC and FDIC have proposed local weather threat administration rules.3 The SEC has proposed ESG disclosure necessities for public corporations and the funding administration business.4 The FHFA has added resilience to local weather threat as one in all its establishment evaluation standards and is contemplating different actions.5 There are different situations of comparable actions and initiatives and, given the evident curiosity of policymakers in ESG—and local weather threat specifically—extra actions and initiatives might be anticipated.
Every of those initiatives was meant to deal with dangers regarding particular ESG points and infrequently was undertaken with out coordination and even regard to the actions which have or could also be taken by different regulators. This strategy can result in duplicative, inconsistent, and burdensome calls for on banking organizations. For instance, the OCC just lately requested the banks it regulates to determine which of six climate-related reporting frameworks they use, and a few banks could also be reporting below a number of frameworks due to supervisory and stakeholder calls for.6
Additional, ESG necessities can be utilized to implement coverage targets that diverge from historic observe and push the boundaries of a regulator’s statutory authority. For instance, the OCC was just lately thought-about imposing honest entry necessities on the bigger banks that it regulates, which might have prohibited a financial institution from setting caps on its lending to a specific geographic area or business.7 This proposal was subsequently deserted by the company however illustrates the dangers concerned with unchecked motion by policymakers.
The Trade Letter signifies that the bankers associations are involved that ESG necessities shall be used to allocate capital and implement unrelated coverage preferences. That is in distinction to the traditionally impartial functions that the majority financial institution supervision and disclosure necessities have served.
The Trade Letter places ahead the next 5 rules, which the associations consider will assist to stop banking organizations from getting used as proxies to effectuate the ESG targets of presidency policymakers.
- Banks must be free to (i) lend to, spend money on, and usually do enterprise with any entity or exercise that’s authorized with out authorities interference and (ii) select to not have interaction in lending, investing or different interactions as long as they don’t violate honest lending or different antidiscrimination legal guidelines.
- ESG dangers shouldn’t be thought-about separate classes of threat however, moderately, considered as a part of the present threat classes/stripes utilized by banking organizations.
- Disclosure necessities ought to stay tied to the idea of materiality and centered on what is critical to tell enterprise and threat administration selections.
- Regulatory efforts to make sure security and soundness must be appropriately utilized and never used deliberately or unintentionally to reallocate credit score or perform extra-prudential targets.
- The federal monetary regulators ought to work collectively carefully to make sure that they use constant definitions, don’t exceed their statutory mandates, and keep away from unintended penalties.
The rules within the Trade Letter are normal and mirror longstanding views relating to acceptable regulation. A few of them could have already got been adopted by regulators, such because the OCC’s and FDIC’s statements indicating that climate-related monetary threat is a part of the present threat classes/stripes utilized by banking organizations. Nevertheless, others are prone to range within the eye of the beholder, resembling whether or not a brand new ESG requirement is finishing up a prudential or extra-prudential purpose. In some instances, these disagreements could also be resolved by the notice-and-comment rulemaking course of. In others, ESG necessities could face authorized challenges.8
Additional, the rules within the Trade Letter don’t seem to incorporate, or be based mostly on, the rules for supervision of climate-related monetary dangers that had been just lately finalized by the Basel Committee on Banking Supervision (“BCBS”).9 Whereas BCBS rules and requirements don’t bind US regulators, traditionally the US banking regulators have sought to align their actions with these of BCBS. Particularly, the OCC and the FDIC included a number of parts from the BCBS rules of their proposed local weather rules. Due to this fact, the divergence between the Trade Letter and the BCBS rules could cut back the chance of US regulators explicitly adopting the Trade Letter.
1 The federal monetary regulators are the Board of Governors of the Federal Reserve System (“Federal Reserve”), Workplace of the Comptroller of the Foreign money (“OCC”), Federal Deposit Insurance coverage Company (“FDIC”), Federal Housing Monetary Company (“ FHFA”), Securities and Trade Fee (“SEC”), and Commodity Futures Buying and selling Fee (“CFTC”).
2 ABA, The impression of Environmental, Social and Governance steering and regulatory proposals on banking (June 23, 2022), https://www.aba.com/advocacy/policy-analysis/ltr-esg-guidance.
3 See our Authorized Updates on these proposals: https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/climate-related-risk-management-principles-released-by-us-fdic; https://www.mayerbrown.com/en/perspectives-events/publications/2021/12/climaterelated-risk-management-principles-released-by-us-occ.
4 See our Authorized Updates on these proposals: https://www.mayerbrown.com/en/perspectives-events/publications/2022/05/us-sec-proposes-rules-regarding-esg-for-certain-funds-and- advisers; https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/sec-proposes-climate-change-disclosure-rules-applicable-to-public-companies.
5 See our Authorized Replace on the FHFA assertion: https://www.mayerbrown.com/en/perspectives-events/blogs/2021/12/fhfa-releases-statement-on-climate-change.
6 See our Authorized Replace on the OCC survey: https://www.mayerbrown.com/en/perspectives-events/publications/2022/01/us-occ-extends-climate-risk-survey.
7 See our Authorized Replace on the OCC’s proposed requirement: https://www.mayerbrown.com/en/perspectives-events/publications/2020/11/occ-proposes-fair-access-to-financial-services-requirements.
8 For instance, see our Authorized Replace on the authorized challenges that could be introduced towards the SEC’s local weather threat disclosure proposal: https://www.mayerbrown.com/en/perspectives-events/publications/2022/04/us-secs-climate -risk-disclosure-proposal-likely-to-face-legal-challenges.
9 See our Authorized Replace on the BCBS rules: https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee.