On March 20, the Securities and Exchange Commission (SEC) ordered ConocoPhillips and Occidental Petroleum to allow shareholders to vote on resolutions that would require the companies to set greenhouse gas emissions targets. The companies had requested a dismissal of such concerns, but the agency shot down that request.
Similarly, the SEC also rejected an ExxonMobil request to block a resolution from BNP Paribas Asset Management that called on the oil company to disclose its lobbying activities related to climate change.
Taken together, the decisions – and others – mark a new era of climate regulation by federal financial regulators.
ESG investments
Investors poured $152 billion into environmental, social and governance (ESG) investments in the fourth quarter of 2020, an 88 percent increase from the third quarter, according to the Wall Street Journal and Morningstar. That is also a tenfold increase from the fourth quarter of 2018.
The investment craze highlights the growing desire to clean up global finance.
The investment craze highlights the growing desire to clean up global finance, but it also highlights the degree to which greenwashing has accompanied the rise of ESG. To date, there has been a lack of clarity about what it ESG really means. Funds claim to be ESG-aligned when they may contain coal, oil, or gas stocks, for example.
In fact, there has been a surge of focus on ESG at the corporate level, including from fossil fuel executives. An analysis by Bloomberg Green found that U.S. oil and gas companies mentioned ESG nearly 300 times on earnings calls in the first quarter, a dramatic increase from just 36 mentions in the first quarter of 2020. No doubt, oil and gas executives are trying to get ahead of the changing winds in Washington.
But federal regulators are arguably reacting and catching up to changing trends rather than leading on them.
On March 10, the European Union implemented rules on ESG investments to standardize how they are defined in order to crack down on greenwashing.
The new rules place requirements on asset managers to disclose ESG information, such as carbon emissions of their investments and corporate ethics. Notably, the new EU rules impact any funds that have European investors, which means that even non-European money managers – such as those based in the U.S. – need to comply.
The U.S. has lagged, but that may soon change. “While we’ve so far seen an earlier and more policy and regulation-driven response to the climate crisis in Europe, we expect the U.S. to pay increasing attention, especially in light of the new administration in the White House,” Marie Freier, global head of ESG research at Barclays Plc, told Bloomberg Green in March.
The Trump administration had adopted rules that restricted pension funds and 401(k)s from pursuing ESG investments, a rule that the Biden administration said it would not enforce.
On March 15, the acting chair of the SEC Allison Herren Lee spoke about the need for more information from corporations regarding their ESG exposures. “Not all companies do or will disclose without a mandatory framework, raising the cost, or resulting in the misallocation, of capital,” Lee said at an event hosted by the Center for American Progress. “Investors also aren’t getting the benefits of comparability that would come with standardization.”
She also announced that the SEC would begin accepting public input on potential new climate disclosure requirements. The announcement indicates that the commission is aiming to update what might trigger a disclosure requirement for a company when it comes to its climate risk. “[I]t’s time to move from the question of “if” to the more difficult question of ‘how’ we obtain disclosure on climate,” Lee said.
Financial regulators step up scrutiny of climate risk
Other financial regulators are looking at climate risk as well. The Commodity Futures Trading Commission (CFTC) recently established the Climate Risk Unit, to help police new financial instruments to ensure they account for climate risk. The unit will police financial derivatives for their exposure to climate risk, such as severe weather.
Secretary Yellen said that she would open a climate change unit at the highest level of her agency.
“Climate change is an existential threat,” then Treasury Secretary nominee Janet Yellen said at a Senate hearing in January before her confirmation. “Both the impact of climate change itself and policies to address it could have major impacts, creating stranded assets, generating large changes in asset prices, credit risks and so forth that could affect the financial system. These are very real risks.” Secretary Yellen said that she would open a climate change unit at the highest level of her agency.
Sec. Yellen will also oversee the Financial Stability Oversight Council (FSOC), a council of top financial regulators from the SEC and the Federal Reserve, created in the aftermath of the 2008 financial crisis in order to watch over the financial system. Through the FSOC, Sec. Yellen could set the tone for broader financial regulation across agencies.
A new report from the Center for American Progress said “the FSOC should embed a focus on climate change and climate-related capabilities into its operating structure.” The report also said that FSOC should incorporate climate-related risks when it considers designating financial institutions as “systemically important,” a designation that triggers enhanced oversight.
President Biden has repeatedly spoke about a “whole of government” approach to climate change, and not relegating climate action simply to the EPA or to the Department of Energy. Part of the administration’s approach will include enhanced financial oversight.
This is part of a broader global trend. Greater oversight of climate risk and ESG funds from financial regulators is likely to become more pronounced this year. Climate finance will be a major theme at the COP26 summit in Glasgow, Scotland in November, and governments are likely rushing to roll out climate finance measures ahead of that event.
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