With the transition from the Trump Administration to the Biden Administration, the financial regulators heated up their efforts on climate change. The impetus to do so came by Executive Order.
As banking regulators heightened concern about the risks of climate change (e.g., The Federal Reserve Board and OCC), they directed banks to develop strategic plans. At year end, the Office of the Comptroller of the Currency issued a draft framework for the safe and sound management of climate change risks and transition risks. That action follows moves by the New York Department of Financial Services, which led the states in sounding the alarm about the risks of climate change, while warning insurance companies not to shy away from insuring impacted communities against those risks; and the Federal Funding Housing Finance Agency as it focused attention on climate and natural disaster risk management at Freddie and Fannie.
There were additional shifts in policy as a result of the Executive Order. The Department of Labor froze policies of the prior administration that would have required plans to focus solely on the monetary returns of an investment without consideration of social or political considerations, such as climate, and proposed its own plan to encourage ESG investment. And the CFTC established a special climate division and debated how the Commission might help in the transition of the energy economy.
The SEC threatened to bring the heat in 2021: there were warnings of enforcement both for insufficient disclosure of climate risk and for greenwashing by investment funds; the SEC Chair directed staff to prepare enhanced climate disclosure requirements for issuers; and the SEC proposed proxy rules intended to ensure investors and advisers consider issuer climate (and other social policy) initiatives.
Here is our forecast for climate-related financial regulation in 2022:
- Expect the Department of Labor to issue a final rule in the Spring that will encourage, or at least not discourage, fiduciaries from taking non-pecuniary factors into consideration when managing plan investments.
- Early in the year, the SEC will likely propose a new rule on climate-related disclosures. The SEC is more likely to propose its own new disclosure regime, rather than merely adopting existing approaches such as those of Task Force on Climate-Related Financial Disclosures or the Sustainability Accounting Standards Board. Any new proposal will likely be adopted by a party-line vote, given the very sharp disagreement between the Commissioners as to the true value of climate disclosures to investors. Similarly, the SEC will likely adopt additional proxy disclosure rules that heavily emphasize the disclosure of votes on matters considered to be ESG-related, particularly climate.
- More municipalities may adopt energy efficiency benchmarking and compliance regimes similar to New York City's Local Law 97.
- There will be no major Federal climate change legislation in 2022. Regulators will aggressively pursue administrative actions pursuant to Executive Order.
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