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 creating steering and rules on environmental, social, and governance (“ESG”) points (“Trade Letter”).2 These rules replicate the trade’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 supply crucial services and products to prospects. 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.
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 rules.3 The SEC has proposed ESG disclosure necessities for public corporations and the funding administration trade.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 cases of comparable actions and initiatives and, given the evident curiosity of policymakers in ESG—and local weather threat specifically—extra actions and initiatives will 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 method can result in duplicative, inconsistent, and burdensome calls for on banking organizations. For instance, the OCC 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 objectives that diverge from historic apply and push the bounds of a regulator’s statutory authority. For instance, the OCC lately thought of 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 selected geographic area or trade.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 almost all financial institution supervision and disclosure necessities have served.
The Trade Letter places ahead the next 5 rules, which the associations imagine will assist to stop 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 customarily do enterprise with any entity or exercise that’s authorized with out authorities interference and (ii) select to not interact 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 of separate classes of threat however, somewhat, 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 targeted on what is important to tell enterprise and threat administration selections.
- 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 rules within the Trade Letter are normal 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 prone to range within the eye of the beholder, equivalent to whether or not a brand new ESG requirement is finishing up a prudential or extra-prudential aim. In some instances, 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 rules within the Trade Letter don’t seem to incorporate, or be primarily based on, the rules for supervision of climate-related monetary dangers that have been 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 integrated a number of components from the BCBS rules of their proposed local weather rules. Subsequently, the divergence between the Trade Letter and the BCBS rules might scale 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 Forex (“OCC”), Federal Deposit Insurance coverage Company (“FDIC”), Federal Housing Monetary Company (“ FHFA”), Securities and Alternate 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 which may 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 rules: https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee.