U.S.: Senate Banking Committee Minority Releases Report on Asset Managers' Proxy Voting Power on ESG Practices
On December 6, 2022, the Republican staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs released a report detailing concerns that large asset managers are using their proxy voting power to advance "liberal social goals," which the report describes as encompassing diversity and inclusion and ESG considerations more broadly.
The report, entitled "The New Emperors: Responding to the Growing Influence of the Big Three Asset Managers," claims that the "Big Three," BlackRock, State Street and Vanguard, exercise significant voting power to influence corporate policy instead of maximizing investor profits. By relying on "passive investor" exceptions, it is argued, these large asset managers exert influence and evade standard disclosures.
The report further refers to a number of developments in corporate practice the authors view as problematic. For instance, the increasing number of public companies that permit majority voting (instead of plurality voting) opens the door, the report argues, to "just say no" campaigns against director candidates. Another example cited in the report is the Dodd-Frank Act requirement to hold a nonbinding shareholder vote on executive compensation, which gives more leverage to the large asset managers in obtaining concessions from management in exchange for their support.
The report makes seven recommendations for Congress and regulators to constrain the large asset managers' purported influence:
- Opening investigations into the asset managers' influence over portfolio companies;
- Scrutinizing their abbreviated Schedule 13G disclosures in relation to disclosures of passive investors' beneficial ownership for instances when they should be filing standard 13D disclosures;
- Amending Schedule 13G to require large asset managers to disclose concessions and arrangements relating to their positions in portfolio companies, regardless of whether they have a control purpose or effect;
- Updating Section 13(d) of the Securities Exchange Act to account for current corporate governance practices, such as increased influence on director elections or votes on shareholder proposals;
- Defining "control" for the purposes of Section 13(d) with more particularity, or asking the U.S. Securities and Exchange Commission (the "SEC") to provide by rule additional detail on how control determinations should be made;
- Assessing the asset managers' control of banks under the Bank Holding Company Act and other banking laws; and
- Enacting legislation that requires the asset managers to vote at the instruction of the underlying investor instead of at their own discretion.
U.S.: Congressional Republicans Ask Federal Trade Commission Whether It Gives Weight to ESG Priorities When Reviewing Corporate Mergers
On December 5, 2022, Republican members of Congress sent a letter to Federal Trade Commission ("FTC") Chair Lina Khan questioning whether the FTC takes into consideration ESG as a factor in merger reviews.
The letter articulates two primary concerns related to the FTC's recent practices:
- First, that the FTC is altering its interpretation of its statutory mandate from rooting out unfair methods of competition to an interpretation that "relies on a much broader, more amorphous, reading of [its mandate] that can easily be manipulated by the political whims" of the members of FTC; and
- Second, that merging companies have reported inquiries from the FTC requesting information outside the traditional scope of whether consumers have been harmed including how a particular transaction might affect ESG issues.
The letter asserts that these practices could make it less likely that the FTC would "address collusive activities supporting ESG." The letter also expresses concerns that comments of Chair Khan during a September 20, 2022 Senate Judiciary Committee hearing - specifically, that "[ESG] 'cooperation or agreements, in as much as they can affect competition, are always relevant' left open the possibility that collusion on ESG initiatives may not be an enforcement priority."
The letter asserts that the Biden Administration's executive order on competition indicates that the use of ESG criteria "as a political tool has spread to other regulators such as the Federal Deposit Insurance Corporation or the Securities & Exchange Commission."
The letter requests a response from Chair Khan by December 19, 2022.
U.S.: Kentucky Bankers Sue State Attorney General over Investigation into Classifying Climate Risk as Financial Risk
Last month, the Kentucky Bankers Association and HOPE, a Kentucky-based nonprofit housing corporation, filed a lawsuit against the Kentucky Attorney General alleging that the AG exceeded his legal authority in requesting banks to produce materials related to their ESG activities. The lawsuit is a response to the civil investigations launched on October 19, 2022 by Kentucky and 18 other U.S. states (reported previously here) concerning whether some of the nation's largest banks have engaged in practices harmful to the energy industry, focusing on their participation in the United Nation's Net-Zero Banking Alliance.
The complaint alleges that the State Attorney General has "made an unreasonable and burdensome request," "exceeded his authority" and "violated the First Amendment Rights of the Kentucky Bankers Association." The Association argues that climate risk is a relevant consideration for its members' investment policies and that the Attorney General's interference with related risk management strategies is an unreasonable overreach of his authority. Additionally, the Association notes, a recent Kentucky anti-ESG measure (S.B. 205, passed earlier this year and highlighted in our Debevoise State-level ESG Tracker, which can be found here) made the State Treasurer, not its Attorney General, responsible for regulating bank behavior in this area.
In a motion to dismiss filed shortly after the complaint, the Attorney General argued that the plaintiffs lack standing and that the Attorney General's information requests are not improper because his office is cooperating with the State Treasurer's office to challenge ESG-focused investment practices related to state pensions. The Attorney General is seeking to have the case moved to federal court.
Global: Vanguard Group Withdraws from Net Zero Asset Managers Initiative
On December 7, 2022, Vanguard announced its exit from the Net Zero Asset Managers ("NZAM") initiative, a coalition of international asset managers committed to limiting the rise in global temperature and supporting the goal of fund firms of reaching net zero greenhouse gas emissions by or before 2050. Launched in 2020, the NZAM initiative was supported by 291 signatories with US$66 trillion of assets under management as of November 9, 2022. Vanguard's exit will diminish the alliance in form and substance: with US$7 trillion in assets, Vanguard's departure is the largest the program has seen to date.
Vanguard stated that the decision to withdraw related to a desire for greater independence, additional clarity for its investors and freedom from any investment restrictions arising from its participation in the initiative. It noted that its withdrawal "will not affect our commitment to helping our investors navigate the risks that climate change can pose to their long-term returns," and that it would continue to publicly report on its efforts with respect to climate risk.
Europe: EU Proposes Regulation Targeting Products Driving Global Deforestation
On December 6, 2022, the European Commission announced a provisional agreement between the European Parliament and European Council on the development of a proposed regulation that seeks to ensure that certain goods placed on the EU market will no longer contribute to global deforestation. The Commission estimates that the new rules will eliminate a significant share of global deforestation and forest degradation and consequently reduce greenhouse gas emissions and biodiversity loss.
Specifically, the new rules impact companies placing palm oil, cattle, soy, coffee, cocoa, timber, rubber and their derived products on the EU market or exporting from it.
The main elements of the proposed regulation include:
- Due diligence rules for targeted companies, which will have to prove that specific commodities are deforestation free and legal, that is, were produced on land not subject to deforestation after December 31, 2020, in compliance with the relevant applicable laws in force in the country of production;
- Requirement that companies collect precise geographical information regarding the farmland on which targeted commodities grow to facilitate compliance checks;
- Penalties for noncompliance as implemented by individual EU Member States; and
- A new benchmarking system to assess the level of risk of deforestation and forest degradation in various countries and regions. Targeted companies' obligations under the proposed regulation will depend on the level of risk identified through the benchmarking system.
Once the proposed regulation enters into force, targeted companies will have 18 months to come into compliance with the new rules with a longer adaptation period for micro and small enterprises.
U.S.: Debevoise Announces the Launch of an ESG Investigations Tracker
Recently, there has been an increase in investigations led by members of the House of Representatives and Senate into ESG-related practices of corporate and state bodies. The investigations target conduct or agreements that prioritize an ESG agenda.
The new tracker will be launched this week on the Debevoise ESG Resource Center page. It complements our State-Level ESG Investment Developments Tracker, which we launched last week. Both trackers will be updated periodically. To access the latest version, visit the Debevoise ESG Resource Center page.