The state-of-play for sustainable finance regulation in the US

As registration opens for RI USA 2021, Paul Verney takes a look at how regulatory developments are changing the country’s sustainable finance landscape

It’s fair to say that the US has been well behind many rulemakers in Europe and Asia when it comes to climate risk (perhaps not surprising, given the political landscape they have been operating under for the last four years). But that landscape has shifted dramatically in 2021, and the US is fighting hard to get back in the race, with big implications for companies and investors.

On Joe Biden’s first day as US President, he rejoined the Paris Accord. Within the first six months of holding office, we have already seen him move to rescind controversial Trump-era rules requiring workplace pension schemes to stick solely to financial factors when selecting investments or casting votes at AGMs. Then, in May, he put out an Executive Order on Climate-Related Financial Risk designed to mobilise rulemakers to accelerate their efforts to manage climate risk.

Below, I’ve laid out some of those rulemakers – the agencies that will be key to the success or failure of this turbocharged sustainability push – and how they’ve responded to the Executive Order so far.

First, though, it’s worth highlighting that, while the federal government is sending clear signals about its plans to push US investors and corporations to decarbonise, at state-level it’s a more varied picture – and, in some cases, directly at odds with Biden’s plans. Texas, for example, passed a bill in June that prevents state pension plans and investment funds from investing in businesses that cut ties with the oil and gas industry.

Financial Stability Oversight Council (FSOC) 

A large body of work within Biden’s wide ranging Executive Order falls on the Financial Stability Oversight Council (FSOC), the regulatory supergroup created after the financial crisis to monitor risks to the US financial system.

The FSOC is chaired by US Treasury Secretary Janet Yellen and among its 10 voting members are the heads of the country’s most powerful financial regulators, including the Chairs of the Federal Reserve, Jay Powell, and the Securities and Exchange Commission, Gary Gensler.

Biden has asked the FSOC to compile a landmark report on the efforts of its member agencies to integrate climate risk into their policies and programmes. That document should include, the President stipulated, recommendations around what additional disclosure measures should be introduced for companies, banks, investors and other regulated entities to “mitigate climate-related financial risk to the financial system or assets”.

FSOC Chair Janet Yellen has until mid-November to complete the report, and it’s expected to kick off another wave of developments that will have major implications not just for the US financial system, but for the world.

Earlier this year, its Division of Examinations identified tackling greenwashing as one of its priorities for 2021

The Securities and Exchange Commission (SEC)

The SEC is the regulator that’s undergone the most visible turnaround on ESG since Biden was elected.

Earlier this year, its Division of Examinations identified tackling greenwashing as one of its priorities for 2021. Shortly afterwards, the regulator created a Climate and ESG Taskforce to address potentially false claims being made by funds and investment advisors in relation to ESG labelled products. Since then, it’s issued a risk alert on the issue after uncovering instances of ESG products that were investing and voting in ways that seemed inconsistent with their marketing.

The SEC is also mulling dedicated sustainability-related disclosure requirements for companies, pitting it against the EU, which has spent the past couple of years positioning itself as the de-facto global standard setter for ESG reporting through its new Taxonomy and Sustainable Financial Disclosures Regulation, and an overhaul of its Non-Financial Reporting Directive.

The key battle being fought on ESG disclosures is how ‘materiality’ should be understood. In Europe, rules are being developed to capture ‘double materiality’ – how business activities impact the environment and society as well as how corporate bottom lines could be hurt by green and social issues. There is pressure in the US for regulators to take a narrower approach, focusing strictly on immediate financial risk.

And it’s stirred up the US market. A consultation launched in March on the topic received 550 unique responses by the time it closed in June.

Those consultation responses also highlighted clashes between big companies and asset managers over what form ESG disclosures should take in the US. Some of the tech giants, for example, argued against the inclusion of ESG disclosures in companies’ financial filings, with Alphabet and Microsoft expressing concerns about litigation if information submitted in 10k reports was found to be incorrect. But big investors including Pimco and Invesco insisted that financial filings are exactly where such information should be disclosed, to ensure it’s taken seriously.

Within the SEC itself, opinions are also divided: the body’s five Commissioners have already made more than 10 speeches between them on ESG disclosure this year, expressing differing positions on what the rules should look like. Their final decision is due in October.

Just like the SEC, the Fed has changed its tune under the Biden Administration

Meanwhile, Commissioner Allison Herren Lee has hinted that the SEC could review the ‘no action’ process through which companies get the go-ahead from the regulator to omit ‘inappropriate’ shareholder resolutions from the ballot at annual meetings. During Donald Trump’s presidency, firms found a lot of success getting ESG-focused proposals excluded via the ‘no action’ process; although the SEC has become less amenable to such petitions under Biden, with a number of pioneering proposals on race and climate being upheld by the regulator.

There will be a new stumbling block for some shareholders though: under Trump, rules were developed that will require investors to own a higher amount of company stock before they can file a resolution, and proposals will need to have achieved a certain level of support in order to return to the ballot the following year. Those rules are set to come into effect next proxy season, and critics have argued they will stop multiyear investor campaigns on emerging ESG topics. Climate and lobbying-based proposals, for example, received low support for years before they were normalised enough to bag the majority backing they’ve been getting in the past 12 months. Others say the rule change will simply root out activists and small campaigners that repeatedly file the same proposal without garnering significant support – dubbed “zombie proposals” by the US Chamber of Commerce in a 2018 position paper.

US Federal Reserve 

Until last year, the US Federal Reserve was conspicuously absent from global discussions about sustainability, drawing regular criticism for being the only major central bank not to join the influential Network of Central Banks and Supervisors for Greening the Financial System.

But, just like the SEC, the Fed has changed its tune under the Biden Administration, joining the network just weeks after last year’s presidential elections. In March, it launched a Supervision Climate Committee to assess how ‘climate ready’ banks in the US are, with reports that it’s already in discussions with big banks on how their loan books would perform under different climate scenarios.

The Fed has also set up a Financial Stability Climate Committee to assess climate-related risks across the financial system – taking a macroprudential view.

It’s still early days, and the US has serious ground to make up, but we’re starting to see a top-down, coordinated effort to get the world’s biggest financial market to deal with sustainability issues – particularly around climate. We’ll be discussing this throughout RI USA in December, so join us to hear more about what it means for investors and companies everywhere. Interesting times ahead!


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