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ESG Outlook 2021: Spotlight on USA

Linklaters Dispute Resolution Partner Doug Davison reviews the ESG-focused priorities for the new Biden-Harris Administration.

There has been much speculation as to what the Biden-Harris Administration will mean for the development of environmental, social and governance (ESG) issues and sustainable finance in the US.

A return to climate diplomacy

Within hours of his inauguration as the 46th President of the United States, Joe Biden signed an executive order to re-join the Paris Agreement on climate change – heralded by many across the globe as America’s return to the global diplomatic stage.

The EU welcomed the move, saying: “We are looking forward to having the United States once again at our side in leading global efforts to combat the climate crisis. The climate crisis is the defining challenge of our time and it can only be tackled by combining all our forces. Climate action is our collective global responsibility.” This may indeed be the start of a new era of US/EU climate diplomacy but will it be an era of cooperation, competition or perhaps a mix of both?

President Biden’s inaugural address was peppered with references to the climate crisis and racial injustice. But turning pledges into action is by no means likely to be a smooth process in the current, fragile political climate – not to mention the health and economic havoc wreaked by the Covid-19 pandemic.

So what else can we expect from the Biden-Harris Administration on climate and other aspects of ESG?

And was Amanda Gorman, the youngest American poet laureate, right in saying at President Biden’s inauguration ceremony: “For there is always light, if only we’re brave enough to see it. If only we’re brave enough to be it.”

Ambitious Biden Administration plans

President Biden has taken the first step towards the US re-joining the Paris Agreement on climate change with one of the first executive orders he signed on his inauguration on January 20, 2021.

Biden has appointed John Kerry, who had played a key role in negotiating the Paris Agreement back in 2015, as a special presidential envoy for climate. Biden has also announced ambitious plans for the US to achieve a 100% clean energy economy and net-zero emissions no later than 2050. His administration may also stop leasing any new oil and gas rights on federal land and water, tighten emissions standards and raise fuel economy standards. Indeed, one of his administration’s first actions was to revoke the permit for the Keystone XL pipeline.

We expect to see swift action, as the incoming administration’s chances of passing major legislation in line with his climate agenda received a significant boost from the Democrats securing both Georgia Senate seats. Biden’s administration has already designated January 27 as “Climate Day” and plans to issue an “omnibus” climate executive order to mark the occasion. The United States will also host a climate leaders’ summit on Earth Day, April 22.

ESG disclosures

President Biden has pledged to take action to require public companies to disclose climate risks and greenhouse emissions in their operations and supply chains. Former SEC Chairman Jay Clayton took a principles-based approach to recent amendments to the SEC’s disclosure rules, generally avoiding mandating ESG disclosures. However, it is expected that the SEC will institute broader rulemaking and guidance on the federal monitoring of ESG issues under the new administration.

While SEC Commissioner Alice Herren Lee stepped in as the acting chair of the SEC, the new SEC chair has not yet been named. We expect the new chair may be more open to mandatory ESG disclosures and could join the other two SEC Commissioners, including the acting chair Alice Herren Lee, who have already expressed their support for such action, to form a majority at the SEC to push for such disclosures.

DOL Financial Factors in Selecting Plan Investments Rule

The recent Department of Labor (DOL) rule preventing certain employee benefit plans from investing in “non-pecuniary” vehicles, which could discourage investment in ESG funds, has been put on hold as the Biden Administration and the Labor Secretary and former Boston Mayor Martin Walsh conduct a holistic review.

In his first few hours in office on the day of the inauguration, President Biden signed a flurry of executive orders including a regulatory freeze order directing all executive departments and agencies to review certain federal regulations and other actions during the Trump Administration that conflict with “important national objectives,” including the DOL’s “Financial Factors in Selecting Plan Investments” rule.

While the outcome of the review remains to be seen, institutions marketing financial products into both the US and the EU are endeavouring to tread a delicate line in order to satisfy the US rules, those of the EU Sustainable Finance Disclosure Regulation and the commercial appetite for ESG products.

Department of Labor proxy voting and shareholder rights rule

The DOL also squeezed in a final rule on proxy voting before the end of 2020, which establishes a regulatory framework for exercising shareholder rights by private employee benefit plans’ fiduciaries. In line with the DOL’s recent investment rule prescribing investment considerations by plan fiduciaries to only “pecuniary factors” (see above), this final rule directs plan fiduciaries to only engage in a proxy voting decision when such a decision could have a financial impact on the retirement plan. The rule took effect as of January 15, 2021.

Although this rule was not included in the Biden Administration’s regulatory freeze, it may still be rescinded or amended by the Biden Administration by undertaking a new notice-and-comment rulemaking or by the Congress under the Congressional Review Act.

Carbon tax

President Biden’s climate change plan also supports international carbon taxes that would impose carbon adjustment fees or quotas on carbon-intensive goods from countries that are failing to meet their climate and environmental obligations.

Department of Justice enforcement

Consistent with President Biden identifying climate change as an “existential threat,” he is expected to establish an Environmental and Climate Justice Division within the Department of Justice (DOJ). This unit will drive government enforcement efforts, and will be tasked with strategically supporting ongoing plaintiff-driven climate litigation.

Nasdaq board diversity proposal

Nasdaq has proposed requiring its listed companies to have, or explain why they do not have, at least two board of directors members who are diverse (i.e. female, an underrepresented minority or LGBTQ+), including: (i) at least one female director; and (ii) at least one underrepresented minority or LGBTQ+ director. Companies would also have to provide annual board diversity statistics.

However, it is not clear when or whether the SEC will approve Nasdaq’s proposal.

Launch of One Planet Private Equity Funds

Five global private equity firms joined forces to form the One Planet Private Equity Funds (OPPEF) initiative, which will aim to “advance the understanding of climate-related risks and opportunities” within portfolios companies so that they can “build better and more sustainable business”. OPPEF will be joining two other groups under the One Planet initiative, one for sovereign wealth funds and the other for asset managers. In their joint statement announcing the launch of OPPEF, the founding members added that they will commit to “the sharing of our investment best practices with the members of the OPSWF and OPAN, and to develop a sectoral agenda, namely on energy transition and renewable energy, technology and innovation, utilities, real estate, transport and infrastructure”.

Proposed rule by the Office of the Comptroller of the Currency

The Office of the Comptroller of the Currency (OCC), a major bank regulator, proposed a rule on November 20, 2020 that would prohibit banks from turning away certain industries (such as fossil fuel, prison and gun manufacturing) under certain circumstances. This appears to be a reaction to major banks’ policies for stopping or limiting lending practices in areas such as Arctic drilling and coal mines. The banks responded that their recent policies are not political but based on determination that such areas are not likely to be profitable. The acting Comptroller of the Currency Brian Brooks finalized the rule on his last day in the office, mere 10 days after the close of the comment period (during which time more than 35,000 comments were reviewed and the final rule was drafted).

However, the shelf life of this final rule is not expected to last long. The Fair Access rule is included in the broad regulatory freeze that President Biden declared on his first day in office, aimed at halting the rule from being published on the Federal Register and taking effect on April 1, 2021. Although independent agencies such as the OCC would technically not be subject to the regulatory freeze, many expect the agency will not simply ignore the memo from the White House. Further, the rush to finalize the rule may trigger the Congressional Review Act, and the rule may be repealed in the Congress.

US authorities focus on business and human rights impacts

US authorities are increasing scrutiny of the potential presence of forced labour in companies’ supply chains. This pressure has been accompanied by increased enforcement actions by the US Customs and Border Protection agency in relation to goods imported into the US and concerns that they were manufactured using forced labour.

Supreme Court set to weigh in on rising tide of ESG-related lawsuits

The US Supreme Court is considering cases raising ESG issues.

In particular, in the 2020-2021 term, the Court agreed to hear an appeal filed by certain energy companies sued by the city of Baltimore for alleged climate change impacts. The Baltimore case is one of many others – including suits filed by Maui, Hoboken, Honolulu, the District of Columbia, San Mateo, San Francisco, Oakland and the State of Delaware – asserting common law and state law claims for damages arising from adverse climate impacts from fossil fuels.

The Court also heard arguments in December 2020 in a case against food manufacturers relating to alleged human rights abuses and child slavery in the supply chain, an issue which has also arisen in suits filed against various technology companies reliant on the mining sector for key inputs.

Decisions are likely to be forthcoming in 2021.

This commentary was co-authored by Linklaters colleagues Brad Caswell (Partner – Investment Funds, New York), Mina Whangbo (U.S. Associate – Investment Funds, New York) and Menaka Nayar (Managing Associate – Dispute Resolution, New York).

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