U.S.: West Virginia Targets Financial Firms for ESG
Initiatives
A number of the United States’ largest financial
institutions – including BlackRock, JP Morgan Chase, Morgan
Stanley, and Wells Fargo – have been notified by West Virginia
officials that they could be banned from doing business with the
state because of perceived “boycotts” of the fossil fuel
industry.
West Virginia Senate Bill 262, which took effect June 10, allows
the state treasurer’s office to create a Restricted Financial
Institution List consisting of financial institutions that
allegedly refuse to deal with coal, oil or natural gas companies “without a reasonable business purpose.” The same day,
State Treasurer Riley Moore notified the firms that his office
determined that they were engaged in a boycott of energy companies
based on public information. Under the provisions of the new law,
the financial institutions have 45 days to demonstrate that they
are not engaged in such a boycott; otherwise, they will be
identified as Restricted Financial Institutions and prohibited from
entering into or remaining in banking contracts with the state.
West Virginia joins Texas and several other states that have
adopted laws targeted at restricting state bodies from contracting
with companies that are perceived to boycott fossil fuel. The U.S.
Securities and Exchange Commission (SEC) has also taken notice of
potentially conflicting state-level ESG rules and federal ESG
regulations, opening inquiries into whether companies have acted
inconsistently with their ESG policy disclosures in efforts to
comply with state laws.
Links:
Text of West Virginia Senate Bill 262
EU: Two EU Parliamentary Committees Block Proposal to Include
Gas and Nuclear in EU Taxonomy
After the EU Parliament’s Economic and Monetary Affairs
Committee (EMAC) approved plans to reformulate the EU Green Bond
Standard last month, the EMAC, together with the Environment,
Public Health and Food Safety Committee, have now voted against
including gas and nuclear within the parameters of the EU
Taxonomy.
The EU Commission originally tabled a Taxonomy Delegated Act,
proposing the inclusion of certain gas and nuclear activities
(under certain conditions) in the list of environmentally
sustainable economic activities covered by the EU Taxonomy. The
proposal’s rationale was to identify activities which
contribute to climate change mitigation under Article 10(2) of the
EU Taxonomy and more widely to finance sustainable growth by
encouraging green investments and preventing greenwashing, while
acknowledging the role of nuclear and gas in ensuring a stable
energy supply during the transition. Many MEPs have been reluctant
to support the proposal as the technical screening standards used
to support their inclusion did not match the criteria for “environmentally sustainable economic activities.”
Because of this skepticism, MEPs have recommended a public
consultation and impact assessment for related future delegated
acts. All members of the EU Parliament and Council will vote on the
proposal in early July. The Commission will be required to withdraw
or amend the proposal should a majority of MEPs (353 or more) vote
against it.
Links:
EU Parliament press release
Taxonomy Report: technical screening
criteria
Article 3 Taxonomy Regulation
Global: Basel Committee on Banking Supervision Finalizes
Climate Guidance
On June 15, the Basel Committee on Banking Supervision (BCBS)
issued principles for the effective management and supervision of
climate-related financial risks following a consultation period
that began in November 2021 with the release of a set of draft
principles. The final guidance consists of 18 principles – 12
principles for the management of climate-related financial risks
and six principles for the supervision of climate-related financial
risks – and supporting commentary.
The final guidance is largely similar to the draft guidance with
some key substantive changes, which are organized under descriptive
headers below.
i. Scenario Analysis and Stress Testing
The final guidance draws a sharper distinction between scenario
analysis and stress testing. In the management portion of the final
guidance, discussion of stress testing moves from the scenario
analysis section to the section on capital and liquidity adequacy.
The final guidance includes new language on incorporating
climate-related financial risks into banks’ internal capital
and liquidity adequacy assessment processes, including into their
stress testing programs. The supervisory portion of the final
guidance discusses scenario analysis and stress testing
separately.
ii. Corporate Governance
The final guidance includes new language on several corporate
governance topics:
- Distinction between board and management roles
– “references to the board and senior management throughout
the principles should be understood in accordance with their
respective roles and responsibilities,” and the final guidance
confirms that it does not advocate a specific board structure. - Aligning compensation with climate goals – the
final guidance adds language suggesting that “incorporation of
material climate-related financial risks into the bank’s
overall business strategy and risk management frameworks may
warrant changes to its compensation policies.” - Aligning internal strategies with public
communications – the final guidance adds that it is the
responsibility of bank boards and senior management to “ensure
that their internal strategies and risk appetite statements are
consistent with any publicly communicated climate-related
strategies and commitments.”
iii. Coordination among Supervisors
The final guidance encourages home and host supervisors to “leverage existing frameworks for cross-border banking groups,
where possible.” With respect to supervisory exercises (i.e.,
scenario analysis or stress testing), the final guidance encourages
cross-jurisdictional authorities to “share best practices, the
outcome of these supervisory exercises, subject to applicable legal
constraints, and to use common scenarios where
appropriate.”
iv. Internal Control Framework
The final guidance adds language suggesting specific roles and
responsibilities with respect to climate-related financial risk
management.
- First line of defense – the final guidance
states that climate-related risk assessments may be undertaken “in ongoing monitoring and engagement with clients as well as
in new product or business approval processes.” - Second line of defense – the final guidance
suggests that the risk function should undertake “climate-related risk assessment and monitoring
independently” from the first line of defense. - Third line of defense – the final guidance
suggests that the internal audit function should provide an
independent review and objective assurance of the quality and
effectiveness of the internal control framework and systems as well
as the first and second lines of defense.
v. Evolving Capabilities
The final guidance includes language acknowledging that “the management of climate-related financial risks, and the
methodologies and data used to analyze these risks, are currently
evolving and are expected to mature over time.”
Links:
Press Release
Principles for the effective management and
supervision of climate-related financial risks
Consultative Document: Principles for the effective
management and supervision of climate-related financial
risks
UK: UK Launches Its First Carbon Storage Licensing Round in the
North Sea
The North Sea Transition Authority, a UK licensing authority,
launched its first carbon storage licensing round on June 14.
Carbon capture and storage (CCS) is the process by which CO2
emission, mainly from industrial processes, is captured,
transported (e.g., through repurposed gas pipelines) and stored in
rock formations or depleted oil and gas fields. Successful bidders
will be offered areas to develop projects off the UK coast in the
Southern North Sea, Central North Sea, Northern North Sea and East
Irish Sea.
CCS is the main element of the North Sea Transition Deal, a
partnership between the UK government and oil and gas industry
representatives. The deal was agreed in March 2021 with the aim of
reducing greenhouse gas emissions from upstream oil and gas
activities. CCS plays an important part in the UK’s mission to
achieve Net Zero by 2050 and could meet roughly 30% of the
emissions reduction target. Furthermore, the UK oil and gas
industry is well placed to use existing infrastructure for CCS.
Bidders may submit applications by September 13, 2022.
Links:
Press release
North Sea Transition Authority
North Sea Transition Deal
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Source: mondaq.com
