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Red Ripple can Still Make Waves for Sustainable Investors

US mid-term election results may increase the anti-ESG noise in Congress, but courts may pose a bigger risk to disclosure rules.  

A much-anticipated ‘red wave’ of Republican victories failed to materialise in the US mid-term elections held on Tuesday, but the party’s antipathy toward ESG is likely to complicate life for sustainability-led investors, according to experts.  

Speaking at a post-poll webinar, Bryan McGannon, Director of Policy and Programs at the US Forum for Sustainable and Responsible Investment (US SIF), said the expected-but-unconfirmed outcome of a Republican-led House of Representatives would “increase the noise” on ESG.  

A Republican-majority House would be able to pass motions and hold hearings to demonstrate their opposition to mandatory climate disclosure requirements or use of ESG factors in investment decisions. But this would not have significant impact on President Joe Biden’s green agenda, said McGannon.   

“The reality is nothing that they move forward legislatively will become law. We don’t have any sense that the President will kind of give in on any of these issues.” 

Three days after the polls closed, the Republican party has secured 213 seats in the House of Representatives, compared to 206 for the Democrats, needing five more for a majority. In the Senate, the Republicans have 49 confirmed seats to 48 Democrats, with one race, Georgia, going to a run-off in December.   

State-level bifurcation  

Julie Gorte, Senior Vice President for Sustainable Investing at Impax Asset Management, said states with Republican governors would continue to increase rhetoric and actions in opposition to use of ESG factors in investment decisions by asset and fiduciary managers.  

“It’s obvious that ESG or sustainable investing is a target for the Republican Party and that will continue,” she said.   

With some results still unconfirmed, Tuesday’s elections saw Republicans lose two state governerships, leaving the country evenly split. Gorte said this would lead to an increasingly “bifurcated” approach to ESG along state lines, noting that some states were setting net zero targets for the investment policies of their endowment funds, while others were boycotting organisations for not investing in fossil fuels. 

“We’re seeing a lot of action at the state level. I think that will continue. The one thing that really is guaranteed is that there will be a lot more noise and a lot more hand wringing about ESG,” she said.   

Recently, a number of Republican-run states have withdrawn funds from asset managers for reasons of ESG integration and have also subpoenaed major US banks on grounds of their participation in the Net Zero Banking Alliance. NZBA Chair Tracey McDermott consequently sent an open letter to members in October, reiterating that the alliance has “an autonomous governance structure and decision-making process”, to allay fears of third parties setting rules for US banks to follow. 

Climate disclosure clash 

A Republican-led House has a number of potential channels for disrupting the plans of the US Securities and Exchanges Commission (SEC) to introduce climate disclosure requirements for listed corporates. Prior to the election, reports suggested Republicans might look to strike funding for enacting the climate disclosure rule from the SEC’s budget.  

USSIF’s McGannon said the regulator remained in a strong position to introduce the rule early next year, due to an established majority among sitting commissioners supporting their current programme.  

“Life for the SEC will be hard, because of information requests oversight hearings, but they have the three votes for the proposals they’ve put forward. They will be able to move their agenda without much concern,” he said.  

The SEC was due to introduce its climate rules in November, which are expected to require firms to disclose the material impacts of climate-related risks on their business operations in their registration statements and periodic reports, as well as disclose their transition plans.  

The draft framework proposed that companies disclose their Scopes 1 and 2 emissions, and Scope 3 where material, which is in keeping with existing guidelines outlined by the Taskforce on Climate-related Financial Disclosure (TCFD) and adopted by the International Sustainability Standards Board (ISSB).   

The rule-making process has been delayed due to a technical glitch, which forced the regulator to reopen its consultation process until 1 November, despite the fact the consultation already received feedback from more than 14,000 organisations and individuals.   

Major questions doctrine  

Jon Hale, Director of Sustainability Research for the Americas at Sustainalytics, said the largest threat to the SEC’s disclosure rule, now widely expected to be released in its final version in Q1 2023, would come in the courts.   

“One thing is absolutely certain, and that is the final climate rule, will be litigated and the Supreme Court’s decision in West Virginia versus the Environmental Protection Agency could make it harder for it to pass muster in a conservative court,” he said.  

That case, ruled on by the Supreme Court last June, established the ‘major questions doctrine’, which effectively constricts agency rulemaking in so-called major issues when Congress hasn’t clearly expressed a view.  

Hale also noted however that the SEC had a long-established practice of requiring regulated firms to disclose on risks as and when they became of material concern to investors, which set a precedent for its climate risk reporting proposals. “Climate is no different. It is a risk that has emerged. The SEC has a long-standing ability to require issuers to disclose about these kinds of risks,” he said. 

Gorte emphasised that the absence of a climate risk reporting rule in the US would leave investors without mission-critical information.   

“Investors don’t have the information we need to clearly and accurately price either transition risk or physical risk. And these risks are now in the trillions of dollars. We don’t have the tools we need to incorporate all material risks and opportunities,” she said.  

The SEC has introduced changes designed to ensure green funds are correctly and accurately labelled. An amendment to the Investment Company Act’s ‘Names Rule will expand the requirements and subsequent disclosure expectations of the 80% rule so it covers a wider variety of sustainability-labelled funds. A proposed new rule aims to amend reporting rules concerning advisers’ and funds’ incorporation of ESG factors in their marketing material.  

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