Federal court rules in favor of Biden ESG retirement rule

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and corporate governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

In Washington, D.C.

Federal court rules in favor of Biden ESG retirement rule

A federal appeals judge in Amarillo, Texas, issued a ruling on September 21 refusing to block the Biden Labor Department’s investment rule allowing ESG considerations in retirement plans governed by the Employee Retirement Income Security Act of 1974 (ERISA). Texas and Utah are leading 24 other states in challenging the rule:

A Biden administration rule that allows employee retirement plans to consider environmental, social and governance issues in investment decisions survived a legal challenge by 26 states on Thursday.

Judge Matthew J. Kacsmaryk of U.S. District Court in Amarillo, Texas, said in a 14-page opinion that he would not block the rule, part of the so-called E.S.G. investment trend that places emphasis on companies’ records on labor issues, social justice and environmental factors.

Judge Kacsmaryk’s opinion found fault with the lawsuit, filed in January by Republican-led states claiming that the rule violated the federal law governing retirement plans. Among other things, the opinion argued that Congress hadn’t specifically addressed whether factors such as E.S.G. could be used to determine investment priorities.

“While the court is not unsympathetic to plaintiffs’ concerns over E.S.G. investing trends, it need not condone E.S.G. investing generally or ultimately agree with the rule to reach this conclusion,” Judge Kacsmaryk wrote. …

In 2020, the Labor Department under President Donald J. Trump said it was seeking new federal regulations to discourage those considerations. In 2021, after President Biden took office, the department proposed rule changes that would make it easier for retirement plans to take social factors into account.

Those changes took effect on Jan. 30. In March, Congress passed a measure blocking them, after two Democratic senators, Jon Tester of Montana and Joe Manchin III of West Virginia, joined Senate Republicans in a rebuke of Mr. Biden. Later that month, Mr. Biden used his first veto to keep the Labor Department rule in effect.

Treasury releases guidelines for net zero finance

Treasury Secretary Janet Yellen on September 19 announced the release of the Treasury Department’s Principles for Net-Zero Investing during a speech at the Bloomberg Transition Finance Action Forum. Although the principles are recommendations, they align with the Biden administration’s approach to promoting ESG considerations in private investments:

The Treasury Department has released a new set of guidelines for financial institutions working to reduce their carbon footprint in the latest climate change push by the Biden administration. …

The goal is to encourage the mobilization of more private sector capital to mitigate the effects of climate change. Many firms have made individual net-zero commitments, and the principles seek to help provide guidance and best practices.

“There is extensive evidence showing that the changing climate has significant financial impacts,” Yellen said in her remarks. “Without considering these factors, financial institutions risk being left behind with stranded assets, outdated business models, and missed opportunities to invest in the growing clean energy economy.” …

The treasury secretary said the principles would also help financial institutions that haven’t yet made net-zero commitments to see what doing so might entail.

This latest initiative is another elevation of so-called environmental, social, and governance investment principles by the Biden administration. ESG investing has become increasingly widespread. It is a corporate model that doesn’t solely look at maximizing profit but also incorporates other elements into financial decisions — for instance, how an investment might affect fossil fuel use. …

During a Monday call with reporters, a Treasury Department official stressed that the principles are voluntary and said that they were flexible given that a one-size-fits-all approach doesn’t work because of the differences, for instance, in size, between financial institutions.

The Treasury official acknowledged that while the principles don’t include any resources, materials, or guidance that doesn’t already exist, the department is attempting to make a form of unifying guidance given the proliferation of tools, resources, and approaches to net zero that has been floating around. The official said it is an attempt to distill all of that down into a road map based on existing best practices for firms.

The Treasury Department framework includes nine guiding principles for financial institutions adopting a net-zero commitment, the first one being a push to limit the increase in the global average temperature to 1.5 degrees Celsius.

“To be credible, this declaration should be accompanied or followed by the development and execution of a net-zero transition plan,” the report reads. …

Yellen on Tuesday also announced a major $340 million commitment by major philanthropic groups to support research, data availability, and technical resources intended to assist financial institutions with carrying out successful net-zero commitments.

Some of the organizations behind the multimillion-dollar philanthropic commitment include the Bezos Earth Fund, Bloomberg Philanthropies, Climate Arc, ClimateWorks, Hewlett Foundation, and Sequoia Climate Foundation, according to a press release provided to the Washington Examiner ahead of Yellen’s remarks.

The SEC announces new rule on ESG investing claims

The Securities and Exchange Commission (SEC) on September 20 announced the implementation of a new rule that the agency says is aimed at preventing companies from making misleading marketing claims about their ESG commitments:

Wall Street’s top regulator on Wednesday adopted a new rule cracking down on so-called “greenwashing” and other deceptive or misleading marketing practices by U.S. investment funds.

The changes to the two decades-old Securities and Exchange Commission (SEC) “Name Rule” requires that 80% of a fund’s portfolio matches the asset advertised by its name.

It takes aim at a boom in funds that have tried to exploit investor interest in environmental, social and governance, or ESG, investing with names that do not accurately reflect its investments or strategies.

“A fund’s investment portfolio should match a fund’s advertised investment focus,” SEC chair Gary Gensler said on Wednesday at a meeting to vote on the rule. “Such truth in advertising promotes fund integrity on behalf of fund investors.”

The SEC since 2021 has also focused on prosecuting ESG-related misconduct and “greenwashing”, bringing enforcement actions and levying fines. …

The rule also targets funds with names suggesting a focus on particular characteristics, like “growth” and “value,” or particular economic themes or investment strategies, such as artificial intelligence, big data, or health innovation.

Funds would also be required to define the terms they use and explain the criteria for selecting investments in their disclosures.

The 80% investment requirement currently applies to other fund characteristics such as risk. As a result of the change, 76% of investment funds would be subject to the “Names Rule” up from the current 60%, SEC officials said prior to the vote.

SEC announces settlement with Deutsche Bank over alleged misleading ESG claims

The SEC on September 25 announced its penalties and settlement with Deutsche Bank over alleged misleading ESG marketing claims:

Deutsche Bank AG’s DWS asset management arm agreed to pay a total of $25 million to settle Securities and Exchange Commission probes into alleged greenwashing and anti-money laundering lapses.

The penalties include $19 million for “materially misleading statements” about how it incorporates environmental, social, and governance factors into research and investment recommendations and $6 million for failing to develop a mutual fund AML program, the SEC said in a statement on Monday. DWS didn’t admit or deny the SEC’s findings. …

“Investment advisers must ensure that their actions conform to their words,” Sanjay Wadhwa, deputy director of the SEC’s enforcement division, said in the statement on Monday. “DWS advertised that ESG was in its ‘DNA,’ but, as the SEC’s order finds, its investment professionals failed to follow the ESG investment processes that it marketed.”…

A spokesman for DWS said the firm is “pleased that the SEC recognized our cooperation in the investigation and our remediation efforts.” The ESG order found “no misstatements in relation to our financial disclosures or in the prospectuses of our funds.”

“The order also makes clear that there was no intent to defraud, and the weaknesses identified by the SEC are in relation to processes and procedures that the firm has already taken steps to address,” the spokesman said.

In the states

California legislature passes emissions reporting requirement

As the SEC continues to work on its revamped emissions reporting rule, the state of California is moving forward with its efforts to require companies doing business in the state to document and report their carbon usage. The state legislature passed two bills proposing reporting requirements last week, which Gov. Gavin Newsom (D) said he will sign:

Last week, the California Legislature passed two far-reaching climate disclosure bills – SB 253, the Climate Corporate Data Accountability Act (CCDAA), and SB 261, the Climate-Related Financial Risk Act (CRFRA) – together, the California Climate Accountability Package. The passage of these bills puts California in the position to implement first-of-its-kind mandatory climate disclosure in the US. While these bills are similar to the climate rule proposed by the Securities and Exchange Commission (SEC) in March 2022, the bills reach further on several fronts… Because the bills would apply to both public and private companies over certain revenue thresholds, they are expected to significantly broaden the number of companies required to publish public climate disclosures. Gov. Gavin Newsom has until October 14, 2023, to sign or veto the bills and, if he does neither, they will automatically become law – though he has indicated that he plans to sign both bills.

In summary, SB 253 requires disclosure of and independent third-party assurance on all global greenhouse gas (GHG) emissions – Scopes 1, 2 and 3 – for any entity “doing business in California” with global annual revenues exceeding $1 billion. SB 261 requires disclosure of climate-related financial risks, in accordance with recommendations from the Task Force on Climate-Related Financial Disclosures (TCFD), for entities doing business in California with global annual revenues exceeding $500 million. A discussion of the requirements of each bill, as well as a comparison to other climate disclosure rules, follows below. Although both bills provide broad outlines of climate reporting expectations, the California Air Resources Board will be responsible for developing implementing regulations, which will presumably contain more detailed reporting instructions. …

The California Climate Accountability Package goes further than the SEC proposed climate rule, as it applies to both public and private companies that do business in the state and meet certain annual revenue thresholds. The SEC’s proposed climate rule targets only public companies reporting to the SEC, including US public companies and foreign private issuers.