On June 23, 2022, the American Bankers Affiliation and 51 state bankers associations launched a letter to the federal monetary regulators1 that describes the ideas the regulators ought to use when growing steering and laws on environmental, social, and governance (“ESG”) points (“Trade Letter”).2 These ideas replicate the business’s view on how the federal government can preserve a free-market monetary system that additionally addresses nationwide and world challenges.
The Trade Letter is pushed by rising concern that new ESG regulatory necessities will impede banks’ potential to offer essential 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 ideas within the Trade Letter.
Background
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 ideas.3 The SEC has proposed ESG disclosure necessities for public firms and the funding administration business.4 The FHFA has added resilience to local weather threat as one among 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 particularly—extra actions and initiatives will be anticipated.
Every of those initiatives was supposed to deal with dangers regarding particular ESG points and sometimes was undertaken with out coordination and even regard to the actions which have or could also be taken by different regulators. This method can result in duplicative, inconsistent, and burdensome calls for on banking organizations. For instance, the OCC lately requested the banks it regulates to establish which of six climate-related reporting frameworks they use, and a few banks could also be reporting underneath a number of frameworks due to supervisory and stakeholder calls for.6
Additional, ESG necessities can be utilized to implement coverage objectives that diverge from historic observe and push the boundaries of a regulator’s statutory authority. For instance, the OCC was lately thought of imposing truthful entry necessities on the bigger banks that it regulates, which might have prohibited a financial institution from setting caps on its lending to a selected geographic area or business.7 This proposal was subsequently deserted by the company however illustrates the dangers concerned with unchecked motion by policymakers.
Trade Letter
The Trade Letter signifies that the bankers associations are involved that ESG necessities might 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 ideas, which the associations imagine will assist to forestall banking organizations from getting used as proxies to effectuate the ESG objectives of presidency policymakers.
- Banks ought to be free to (i) lend to, put money into, 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 truthful lending or different antidiscrimination legal guidelines.
- ESG dangers shouldn’t be thought of separate classes of threat however, relatively, considered as a part of the prevailing 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 choices.
- Regulatory efforts to make sure security and soundness ought to be appropriately utilized and never used deliberately or unintentionally to reallocate credit score or perform extra-prudential objectives.
- 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.
Conclusion
The ideas within the Trade Letter are common and replicate longstanding views concerning applicable regulation. A few of them might 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 prevailing threat classes/stripes utilized by banking organizations. Nevertheless, others are more likely to fluctuate within the eye of the beholder, reminiscent of whether or not a brand new ESG requirement is finishing up a prudential or extra-prudential objective. In some circumstances, these disagreements could also be resolved by way of the notice-and-comment rulemaking course of. In others, ESG necessities might face authorized challenges.8
Additional, the ideas within the Trade Letter don’t seem to incorporate, or be primarily based on, the ideas for supervision of climate-related monetary dangers that had been lately finalized by the Basel Committee on Banking Supervision (“BCBS”).9 Whereas BCBS ideas and requirements don’t bind US regulators, traditionally the US banking regulators have sought to align their actions with these of BCBS. Specifically, the OCC and the FDIC integrated a number of components from the BCBS ideas of their proposed local weather ideas. Due to this fact, the divergence between the Trade Letter and the BCBS ideas might cut back the probability 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 Change 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 in opposition to 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 ideas: https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee.
