Other Notable Developments

Biodiversity Conference: On November 2, 2024, 196 States attending the 16th meeting of the Conference of the Parties to the Convention on Biological Diversity (“COP16”) established the “Cali Fund,” a global fund for distributing financial proceeds derived from digital genetic information. Under the agreed guidelines, large companies operating in the pharmaceutical, biotechnology and cosmetics sectors are expected to contribute 1% of profits or 0.1% of revenue to the fund when using, and directly benefitting from, digital sequence information on genetic resources. However, COP16 was suspended after a number of States pulled out of the negotiations, leaving several agenda items unresolved. States are expected to continue the talks at an interim meeting next year in Bangkok, Thailand.

U.S.: Summary Judgement Challenge to California’s Climate Disclosure Laws Denied

On November 5, 2024, Judge Otis Wright II of the U.S. District Court for the Central District of California denied plaintiffs’ motion for summary judgment against California’s 2023 climate disclosure laws, the Climate Corporate Data Accountability Act (“SB 253”) and Climate‐Related Financial Risk Act (“SB 261”). (For more about the laws, see our update here.) 

The plaintiffs, the U.S. Chamber of Commerce, the American Farm Bureau Federation and the California Chamber of Commerce, among others, argued that the laws violate the First Amendment’s prohibition against compelled speech and the Commerce Clause by attempting to regulate GHG emissions across states’ borders and are pre-empted by the federal Clean Air Act. With respect to the First Amendment grounds, the plaintiffs contended that SB 253 and SB 261 should be subject to strict scrutiny under U.S. Supreme Court First Amendment jurisprudence because they “do not regulate commercial speech and the regulated speech is not purely factual and uncontroversial.” Strict scrutiny applies when a law regulates speech based on its content, such as its subject matter, viewpoint, or topic, and is a difficult standard for the government to meet.

In denying the plaintiffs’ summary judgment motion, the Court determined that while the First Amendment is applicable to the California laws, discovery is necessary to assess the nature of the content-based regulation these laws impose and to determine the appropriate level of scrutiny.

Link:
Order

On November 4, 2024, the U.S. Securities and Exchange Commission (the “SEC”) issued a Risk Alert to registered investment companies (“RICs,” or “funds”), providing insight into the agency’s current examination process based on a review of recent deficiency letters. The SEC sends such letters to registrants when it identifies a significant deficiency or omission in a statement or prospectus.

Among other concerns, the alert calls out RICs’ use of environmental, social and governance factors in marketing materials, noting that SEC Division of Examinations staff have observed instances where funds have “mischaracterized” their use of such factors in “investment decision-making processes compared to their actual practices.” While a risk alert is not legally binding, it is an indication of SEC examiners’ key areas of focus, effectively putting funds on notice to consider the issues highlighted in the alert.

Link:
Risk Alert

On November 8, 2024, the SEC charged Invesco Advisers Inc. (“Invesco Advisers”) with making misleading statements about the percentage of assets managed in accordance with ESG considerations. Invesco Advisers agreed to pay a $17.5 million civil penalty to resolve the charges.

The SEC found that, between 2020 and 2022, Invesco Advisers claimed that 70% to 94% of its parent company’s assets under management were “ESG integrated.” These claims were made in presentations to the boards of advised funds and in proposals to prospective clients and other marketing materials. The SEC found that, in fact, the aforementioned percentages included assets held in passive exchange-traded funds that did not consider ESG in investment decision-making because they did not follow an ESG index.

Separately, the SEC found that Invesco Advisers did not have a comprehensive policy on how to determine the proportion of ESG-integrated assets under management, despite making such representations to clients. The SEC found that this represented a failure to adopt and implement policies reasonably designed to prevent violations of the Investment Advisers Act of 1940.

Links:
SEC Press Release 
SEC Order