We’ve provided insights previously about increased regulatory and litigation activity related to Environmental, Social and Governance (ESG) disclosures by companies to current and prospective investors. For those not yet entirely familiar with ESG, Investopedia provides a nice overview. It states that ESG criteria are “a set of standards for a company’s behavior used by socially conscious investors to screen potential investments”. Environmental criteria considers how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examines how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.” Over the last year or so, federal regulators of the banking and finance industry have been particularly active in setting expectations of, and proposing, ESG-related disclosure requirements for the companies they oversee. Industry groups are not particularly pleased, and have been heatedly raising concerns to rule makers.
In a June 23, 2022 letter, the American Bankers Association and bank trade associations from all 50 states and Puerto Rico asserted that they should be at liberty to make their own lending and investment decisions, and that “banks should not be used as proxies to effectuate environmental or other social policy goals.“ The letter, which also argued that ESG risks are "already embedded" in existing risk categories that banks manage and evaluate, was addressed to U.S. Treasury Secretary Janet Yellen and the heads of the Federal Reserve, SEC, FDIC, FHFA, OCC and CFTC.
Regulatory proposals and public comments by federal agency leaders about ESG initiatives have proliferated in the past year. The agencies to which the letter was addressed have prioritized evaluating climate change as a financial stability threat and establishing climate risk management expectations for banks, among other things. The SEC labeled ESG investing a “significant focus area” in a March 2022 report, and has warned that registered investment advisers could be “overstating or misrepresenting” ESG considerations in their portfolios. That alleged practice has become known as “greenwashing,” a term that means conveying a false impression to consumers or investors that a company's products and ways of doing business are more environmentally-friendly, or at least more focused on environmental issues, than they actually are.
The banking industry groups’ letter is the latest strong indication that regulators and regulated entities are on a collision course with respect to ESG disclosure issues. The intensity on both sides is ratcheting up, and litigation — initiated both by public agencies and private litigants — regarding the accuracy of companies’ disclosures and the adequacy of their ESG initiatives seems inevitable in the relatively near future.