Rules for US ESG Regulation Launched by American Bankers Affiliation

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 rules on environmental, social, and governance (“ESG”) points (“Trade Letter”).² These ideas replicate the trade’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’ skill to offer mandatory services and products to clients. On this Authorized Replace, we offer background on new ESG necessities from the federal monetary regulators and talk about the ideas within the Trade Letter.

Background

Lately, most of the federal monetary regulators have undertaken initiatives to handle ESG points. The OCC and FDIC have proposed local weather danger administration ideas.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 danger 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 danger particularly—extra actions and initiatives might be anticipated.

Every of those initiatives was supposed to handle 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 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 targets that diverge from historic observe and push the boundaries of a regulator’s statutory authority. For instance, the OCC was 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 specific 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 can 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 ideas, which the associations consider will assist to stop banking organizations from getting used as proxies to effectuate the ESG targets of presidency policymakers.

Banks needs 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 honest lending or different antidiscrimination legal guidelines.
ESG dangers shouldn’t be thought of separate classes of danger however, fairly, considered as a part of the prevailing danger classes/stripes utilized by banking organizations.
Disclosure necessities ought to stay tied to the idea of materiality and targeted on what is critical to tell enterprise and danger administration choices.
Regulatory efforts to make sure security and soundness needs to 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 intently 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 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 danger is a part of the prevailing danger classes/stripes utilized by banking organizations. Nonetheless, 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 aim. In some instances, these disagreements could also be resolved by way of the notice-and-comment rulemaking course of. In others, ESG necessities could 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 have 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. Particularly, the OCC and the FDIC integrated a number of components from the BCBS ideas of their proposed local weather ideas. Subsequently, the divergence between the Trade Letter and the BCBS ideas could 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 Alternate Fee (“SEC”), and Commodity Futures Buying and selling Fee (“CFTC”).

² ABA, The influence 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 towards the SEC’s local weather danger 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.