In the Loop: US ESG hearings, FOI discoveries, and ESG ratings

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ESG hearings and a surprising FOI find

The wasting of everyone’s time continued on Tuesday as the US House Committee on Oversight and Accountability held its second hearing into ESG, this time focusing on the “cascading impacts of ESG compliance”.

As during the previous session, very little constructive discussion was had, with one witness alleging that ESG standards force companies to engage with campaigns on defunding the police or “promoting gender transitions in children”.

The hearing was a joint subcommittee hearing, a downgrade from the full committee hearing status granted to the previous session, which might account for Democrat attendees outnumbering Republicans by around two to one.

However, Democrat patience with the hearings is evidently wearing thin, with California’s Katie Porter calling the previous hearing “the stupidest hearing I’ve ever been to”, while Vermont’s Becca Balint referred to this week’s hearing as “a colossal waste of time” and referred to witness statements on gender transition as “garbage”. The world awaits hearing number three with bated breath.

In other backlash news, Responsible Investor‘s investigations desk has been making heavy use of state freedom of information laws in an attempt to better understand how the backlash is coordinated.

While these often turn up surprising and useful documents, there can also be peculiar discoveries.

A recent trove of documents released by the Kentucky state treasurer’s office shows that the State Financial Officers Foundation is also distributing newsletters from Smart Women, Smart Money (SWSM), a female-focused financial magazine published by the group, whose managing editor is SFOF CEO Derek Kreifels’ wife.

State financial officers who would like to read hard hitting pieces including “The Single Girl’s Guide to Valentine’s Day” and “Building a Legacy With Love, Faith, and Lavender” may find it difficult, as the link to SWSM on SFOF’s website appears to have been hijacked by an Indonesian gambling site. (RI accepts no liability if you get in trouble with your IT department for checking this yourself).

This week in RI

The world’s largest investor engagement initiative, Climate Action 100+, this week kicked off its highly anticipated second phase, which will run until 2030. In addition to tightened signatory requirements, Phase 2 of the initiative will also see a small reshuffle of target companies.

Staying with engagement, RI revealed that the Investor Coalition for Equal Votes has signed up its first asset manager. The investor initiative, which is engaging on dual-class share structures, is also increasingly targeting index providers.

This week saw the OECD launch an updated framework for responsible business conduct, now setting out expectations for companies operating in OECD countries to align their operations with climate goals.

Finally, RI this week published a deep-dive into how UK pension fund consultants are working with schemes on climate and biodiversity considerations.

Quote of the week

“Humanity needs nature to survive, and so do the economy and banks. The more species become extinct, the less diverse are the ecosystems on which we rely. This presents a growing financial risk that cannot be ignored”

A stark warning on nature from Frank Elderson, a member of the executive board of the European Central Bank

EU ESG ratings proposal – what’s expected?

The EU’s long-awaited ESG ratings regulation is set to be published on Tuesday next week as part of a wider sustainable finance package.

Sources have told RI the proposal is expected to cover what is defined as specialised entities providing ESG ratings for the use of investors and issuers.

Out of scope are credit rating agencies incorporating ESG into credit ratings; financial institutions developing in-house ESG ratings as well as providers of data and services such as ESG assessment tools.

According to sources, the European Commission is not expected to propose a specific methodology for ESG ratings. Instead, minimum transparency rules for methodologies will be outlined.

It is also expected that the proposal will set out rules on the separation of businesses to prevent conflicts of interest. The Financial Times reported this week that ESG rating providers will be required to divest from any conflicting activities such as consulting or offering insurance to businesses that they rate.

It is unclear whether the proposal will cover the aspect of fees or costs associated with ESG ratings. Once source said this is not expected to be included in the proposal, while another source said there could be some “light requirements”.

Authorisation and supervision of entities in scope is expected to fall under ESMA.

After the EC announces the proposal, the next step will be the adoption of the European Parliament and the council of member states, as a public consultation has already been held.

The EC had not replied to a request for comment at the time of writing.

An RI Europe gift from the EC

We are shaping up for a busy week. RI Europe starts on Tuesday – which also happens to be the day on which the European Commission is due to release a raft of sustainable finance regulation updates.

On the plus side, this should make for some interesting conversations at the event in London, both on and off the stage. We will have a keynote from Helena Viñes Fiestas, Commissioner of the Spanish Financial Markets Authority and Chair of the EU Platform on Sustainable Finance, and a panel on EU regulation on day one, as well as a live Q&A on day two with Martin Špolc, head of sustainable finance at the European Commission’s Directorate General for Financial Services.

Of course, the downside is that we will have to juggle our conference and editorial duties. But don’t worry, we will make sure to keep you updated on all the latest developments.

Hope to see you in London next week!

Today’s letter was prepared by the RI editorial team