Guidelines for US ESG Regulation Launched by American Bankers Affiliation | Views & Events

On June 23, 2022, the American Bankers Affiliation and 51 state bankers associations launched a letter to the federal financial regulators1 that describes the foundations the regulators ought to make use of when rising steering and legal guidelines on environmental, social, and governance (“ESG”) factors (“Commerce Letter”).2 These guidelines mirror the enterprise’s view on how the federal authorities can maintain a free-market financial system that moreover addresses nationwide and worldwide challenges.

The Commerce Letter is pushed by rising concern that new ESG regulatory requirements will impede banks’ functionality to supply compulsory providers to purchasers. On this Approved Exchange, we provide background on new ESG requirements from the federal financial regulators and discuss concerning the guidelines throughout the Commerce Letter.

Background

These days, plenty of the federal financial regulators have undertaken initiatives to cope with ESG factors. The OCC and FDIC have proposed native climate menace administration guidelines.3 The SEC has proposed ESG disclosure requirements for public firms and the funding administration enterprise.4 The FHFA has added resilience to native climate menace as one in all its institution analysis requirements and is considering completely different actions.5 There are completely different circumstances of comparable actions and initiatives and, given the evident curiosity of policymakers in ESG—and native climate menace notably—further actions and initiatives might be anticipated.

Each of these initiatives was purported to cope with risks concerning specific ESG factors and typically was undertaken with out coordination and even regard to the actions which have or is also taken by completely different regulators. This technique may end up in duplicative, inconsistent, and burdensome requires on banking organizations. As an example, the OCC these days requested the banks it regulates to find out which of six climate-related reporting frameworks they use, and some banks is also reporting beneath plenty of frameworks attributable to supervisory and stakeholder requires.6

Further, ESG requirements may be utilized to implement protection goals that diverge from historic comply with and push the boundaries of a regulator’s statutory authority. As an example, the OCC was these days considered imposing truthful entry requirements on the larger banks that it regulates, which could have prohibited a monetary establishment from setting caps on its lending to a particular geographic space or enterprise.7 This proposal was subsequently abandoned by the corporate nonetheless illustrates the hazards involved with unchecked movement by policymakers.

Commerce Letter

The Commerce Letter signifies that the bankers associations are concerned that ESG requirements will doubtless be used to allocate capital and implement unrelated protection preferences. That’s in distinction to the historically neutral features that the majority monetary establishment supervision and disclosure requirements have served.

The Commerce Letter locations forward the subsequent 5 guidelines, which the associations think about will help to cease banking organizations from getting used as proxies to effectuate the ESG goals of presidency policymakers.

  1. Banks have to be free to (i) lend to, spend cash on, and often do enterprise with any entity or train that is licensed with out authorities interference and (ii) choose to not work together in lending, investing or completely different interactions so long as they do not violate truthful lending or completely different antidiscrimination authorized pointers.
  2. ESG risks should not be considered separate courses of menace nonetheless, barely, thought-about as part of the prevailing menace courses/stripes utilized by banking organizations.
  3. Disclosure requirements ought to remain tied to the concept of materiality and centered on what’s necessary to inform enterprise and menace administration selections.
  4. Regulatory efforts to verify safety and soundness have to be appropriately utilized and by no means used intentionally or unintentionally to reallocate credit score rating or carry out extra-prudential goals.
  5. The federal financial regulators should work collectively rigorously to be sure that they use fixed definitions, do not exceed their statutory mandates, and stay away from unintended penalties.

Conclusion

The foundations throughout the Commerce Letter are regular and mirror longstanding views regarding acceptable regulation. A couple of of them might already have been adopted by regulators, such as a result of the OCC’s and FDIC’s statements indicating that climate-related financial menace is part of the prevailing menace courses/stripes utilized by banking organizations. Nonetheless, others usually tend to differ throughout the eye of the beholder, equal as to whether or not a model new ESG requirement is ending up a prudential or extra-prudential goal. In some situations, these disagreements is also resolved by way of the notice-and-comment rulemaking course of. In others, ESG requirements might face licensed challenges.8

Further, the foundations throughout the Commerce Letter do not appear to include, or be based totally on, the foundations for supervision of climate-related financial risks that had been these days finalized by the Basel Committee on Banking Supervision (“BCBS”).9 Whereas BCBS guidelines and necessities do not bind US regulators, historically the US banking regulators have sought to align their actions with these of BCBS. Notably, the OCC and the FDIC built-in plenty of elements from the BCBS guidelines of their proposed native climate guidelines. As a result of this truth, the divergence between the Commerce Letter and the BCBS guidelines might in the reduction of the prospect of US regulators explicitly adopting the Commerce Letter.


1 The federal financial regulators are the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Overseas cash (“OCC”), Federal Deposit Insurance coverage protection Firm (“FDIC”), Federal Housing Financial Firm (“ FHFA”), Securities and Change Price (“SEC”), and Commodity Futures Shopping for and promoting Price (“CFTC”).

2 ABA, The have an effect on 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 Approved 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 Approved 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 Approved Exchange on the FHFA assertion: https://www.mayerbrown.com/en/perspectives-events/blogs/2021/12/fhfa-releases-statement-on-climate-change.

6 See our Approved Exchange on the OCC survey: https://www.mayerbrown.com/en/perspectives-events/publications/2022/01/us-occ-extends-climate-risk-survey.

7 See our Approved Exchange 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 As an example, see our Approved Exchange on the licensed challenges that might be launched in the direction of the SEC’s native climate menace 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 Approved Exchange on the BCBS guidelines: https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee.