U.S.: Department of Labor Releases Final ESG Rule for ERISA Plans

On November 22, 2022, the U.S. Department of Labor made available final regulations addressing a fiduciary’s duties under ERISA that revise and rescind portions of the Trump-era rules that had placed a chilling effect on the ability to consider ESG factors in the management and investment of US corporate retirement plan assets (e.g., pensions and 401(k) plans). The final regulations are intended to create a framework within which an ERISA fiduciary may take ESG into account in a manner that complies with ERISA, and largely track the Department’s proposed regulations on the topic that were issued in October 2021. The ESG-related portion of the regulations take effect 60 days after their publication in the Federal Register (expected December 1, 2022).

We have prepared a more detailed Debevoise Update on this topic, available here.

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Press Release
Rule

EU: ESMA Launches Consultation on Guidelines for Using ESG Terms in Fund Names

The European Securities and Markets Authority (ESMA) has invited comments on its proposed guidelines regarding funds’ names using ESG or sustainability-related terms. ESMA proposes that such terminology should be used only when supported by material evidence of sustainability characteristics or when the commitment to ESG and sustainability is fairly and consistently reflected in the funds’ investment objectives.

The consultation seeks feedback on four main aspects of the contemplated guidance:

• to use any ESG-related terminology in a fund’s name, at least 80% of its investments should “meet the environmental or social characteristics or sustainable investment objectives in accordance with the binding elements of the investment strategy”;
• to use the word “sustainable” (or a derived term), a fund should allocate at least 40% of its investments to sustainable activities, as defined by the Sustainable Finance Disclosure Regulation (SFDR);
• any funds using ESG- or sustainability-related nomenclature should be subject to minimum safeguards, including exclusion criteria relating to controversial weapons, tobacco, and extractive industry investments; and
index and impact funds also should meet the thresholds mentioned above.

The proposal is similar to a draft rule developed by the SEC earlier this year, which also recommended an 80% threshold for investment funds to use ESG terminology in their names (more on this here).

ESMA will consider all comments received by February 20, 2023. The responses should follow the outline recommended here.

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Announcement

U.S.: SEC Fines Goldman Sachs for Not Following ESG Investment Policies

On November 22, 2022, the U.S. Securities and Exchange Commission (the “SEC”) entered into a settlement agreement with Goldman Sachs Asset Management, alleging that it had not consistently followed its ESG policies and procedures in connection with products marketed as ESG investments. The products together held approximately $725 million in assets under supervision. Goldman paid a $4 million penalty and did not admit or deny the alleged shortcomings.

This settlement follows other ESG-related regulatory enforcement activity. Earlier this year, for example, BNY Mellon agreed to pay to the SEC a $1.5 million penalty for alleged misstatements on how it incorporated ESG factors in its funds (which we reported here). In addition, Deutsche Bank’s investment arm, DWS, has been under investigation by the German regulator, BaFin, and the SEC in relation to its ESG practices. The increased scrutiny comes at a time of increased demand for ESG investment products, with more enforcement activity by the SEC’s Climate and ESG Task Force likely to follow.

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SEC Statement

Global: Countries Reach Agreement to Establish Climate Change Loss and Damage Fund

On November 20, 2022, the final day of COP27, participating states agreed to establish a new fund and other funding arrangements to compensate “developing countries that are particularly vulnerable to the adverse effects of climate change.”

Governments also agreed to set up a transitional committee to oversee the operationalization of the new arrangements and make recommendations to be addressed at the COP28 in 2023. Details remain to be decided relating to who will contribute and how much, how the funds will be administered, and which countries should be the beneficiaries.

The historic decision is part of a package that includes an agreement to set up the Santiago Network for Loss and Damage, a network of organizations, bodies, and experts established to provide technical assistance to vulnerable countries on identifying approaches to minimize and address loss and damage. In addition, countries made new pledges to finance the Adaptation Fund, a fund established fifteen years ago with the aim to improve the resilience of the most affected communities.

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Press Release
COP27 Decision Package

U.S.: State Attorneys General Respond to Criticism of ESG Investing

On November 21, 2022, Attorney General for the District of Columbia Karl Racine and 17 Democrat state attorneys general signed a letter to federal lawmakers addressing prior statements against ESG investing. In particular, the letter responded to statements by 19 Republican state attorneys general criticizing asset managers for allegedly prioritizing ESG investment criteria rather than shareholder profits when managing state pension funds.

The latest letter emphasized that ESG factors “are like any other material factors—such as supply chain concerns or changing interest rates—that inform investment decision-making” and that consideration of ESG factors is a matter of prudent investment decision-making. The letter argued that state pension funds consider ESG factors because doing so yields positive financial results including in states where this now would be prohibited.

The attorneys general rejected the prior claim that public pension plans’ consideration of ESG factors in financial decisions is contrary to their fiduciary duties, asserting that doing so is consistent with legal responsibilities to evaluate potential risk and reward in assessing the merits of an investment.

The letter also rejected the claim that asset managers that consider ESG factors may be violating antitrust and competition laws, arguing that an expression of general recommendations or a statement in favor of or against certain policies does not, without more, violate the Sherman Antitrust Act. In particular, the consideration of ESG factors does not “categorically block investment in any given industry or sector”, but merely allows for an “evaluation of the expected impact of environmental, social, and governance events on returns.”

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Letter

EU: “Women on Boards” Directive Seeks to Increase Number of Women in Corporate Leadership Roles

On November 22, 2022, the European Parliament formally adopted the “Women on Boards” Directive. This initiative requires publicly listed companies in the EU to increase the number of women in leadership positions by June 30, 2026. More specifically, the EU set two alternative thresholds: companies must demonstrate that either 40% of non-executive positions or 33% of all director positions are held by women. In working to achieve these targets, companies must engage in merit-based, transparent hiring practices. Businesses with fewer than 250 employees are exempt.

Companies covered by the law will be required to publish on their websites and in their annual reports information about the gender breakdown across their leadership as well as details about how the requisite thresholds will be met if not currently achieved.

The directive requires EU Member States to ensure enforcement of the gender equality requirements through penalties including financial penalties and the potential annulment of the board of directors. EU Member States will have two years to implement the directive in their national legal and regulatory systems.

Recently, the EU Parliament adopted the Corporate Sustainability Reporting Directive which creates new reporting obligations for companies on sustainability-related matters. For more information on this, see our ESG Weekly Update and our Debevoise In Depth article.

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Press Release