On June 23, 2022, the American Bankers Association and 51 state bankers associations released a letter to the federal financial regulators¹ that describes the principles the regulators should use when developing guidance and regulations on environmental, social, and governance (“ESG”) issues (“Industry Letter”).² These principles reflect the industry’s view on how the government can maintain a free-market financial system that also addresses national and global challenges.

The Industry Letter is driven by growing concern that new ESG regulatory requirements will impede banks’ ability to provide necessary products and services to customers. In this Legal Update, we provide background on new ESG requirements from the federal financial regulators and discuss the principles in the Industry Letter.

background

In recent years, many of the federal financial regulators have undertaken initiatives to address ESG issues. The OCC and FDIC have proposed climate risk management principles.³ The SEC has proposed ESG disclosure requirements for public companies and the investment management industry.⁴ The FHFA has added resilience to climate risk as one of its institutional assessment criteria and is considering other actions.⁵ There are other examples of similar actions and initiatives and, given the evident interest of policymakers in ESG—and climate risk in particular—more actions and initiatives can be expected.

Each of these initiatives was intended to address risks related to specific ESG issues and often was undertaken without coordination or even with regard to the actions that have or may be taken by other regulators. This approach can lead to duplicative, inconsistent, and burdensome demands on banking organizations. For example, the OCC recently asked the banks it regulates to identify which of six climate-related reporting frameworks they use, and some banks may be reporting under multiple frameworks because of supervisory and stakeholder demands.⁶

Further, ESG requirements can be used to implement policy goals that diverge from historical practice and push the limits of a regulator’s statutory authority. For example, the OCC recently considered imposing fair access requirements on the larger banks that it regulates, which would have prohibited a bank from setting caps on its lending to a particular geographic region or industry.⁷ This proposal was afterward abandoned by the agency but illustrates the risks involved with unchecked action by policy makers.

Industry Letters

The Industry Letter indicates that the bankers associations are concerned that ESG requirements will be used to allocate capital and implement unrelated policy preferences. This is in contrast to the historically neutral purposes that most bank supervision and disclosure requirements have served.

The Industry Letter puts forward the following five principles, which the associations believe will help to prevent banking organizations from being used as proxies to effectuate the ESG goals of government policy makers.

1. Banks should be free to (i) lend to, invest in, and generally do business with any entity or activity that is legal without government interference and (ii) choose not to engage in lending, investing or other interactions so long as they do not violate fair lending or other antidiscrimination laws.
2. ESG risks should not be considered separate categories of risk but, rather, viewed as part of the existing risk categories/stripes used by banking organizations.
3. Disclosure requirements should remain tied to the concept of materiality and focused on what is necessary to inform business and risk management decisions.
4. Regulatory efforts to ensure safety and soundness should be applied appropriately and not used intentionally or unintentionally to reallocate credit or carry out extra-prudential goals.
5. The federal financial regulators should work closely together to ensure that they use consistent definitions, do not exceed their statutory mandates, and avoid unintended consequences.

Conclusion

The principles in the Industry Letter are general and reflect longstanding views regarding appropriate regulation. Some of them may already have been adopted by regulators, such as the OCC’s and FDIC’s statements indicating that climate-related financial risk is part of the existing risk categories/stripes used by banking organizations. However, others are likely to vary in the eyes of the beholder, such as whether a new ESG requirement is carrying out a prudential or extra-prudential goal. In some cases, these disagreements may be resolved through the notice-and-comment rule-making process. In others, ESG requirements may face legal challenges.⁸

Further, the principles in the Industry Letter do not appear to include, or be based on, the principles for supervision of climate-related financial risks that were recently finalized by the Basel Committee on Banking Supervision (“BCBS”).⁹ While BCBS principles and standards do not bind US regulators, historically the US banking regulators have sought to align their actions with those of BCBS. In particular, the OCC and the FDIC incorporated several elements from the BCBS principles in their proposed climate principles. Therefore, the divergence between the Industry Letter and the BCBS principles may reduce the likelihood of US regulators explicitly adopting the Industry Letter.

¹ The federal financial regulators are the Board of Governors of the Federal Reserve System (“Federal Reserve”), Office of the Comptroller of the Currency (“OCC”), Federal Deposit Insurance Corporation (“FDIC”), Federal Housing Financial Agency (“ FHFA”), Securities and Exchange Commission (“SEC”), and Commodity Futures Trading Commission (“CFTC”).

² ABA, The impact of Environmental, Social and Governance guidance and regulatory proposals on banking (June 23, 2022), https://www.aba.com/advocacy/policy-analysis/ltr-esg-guidance.

³ See our Legal Updates on these proposals: https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/climate-related-risk-management-principles-released-by-us-fdic; https://www.mayerbrown.com/en/perspectives-events/publications/2021/12/climaterelated-risk-management-principles-released-by-us-occ.

⁴ See our Legal Updates on these proposals: https://www.mayerbrown.com/en/perspectives-events/publications/2022/05/us-sec-proposes-rules-regarding-esg-for-certain-funds-and- advisers; https://www.mayerbrown.com/en/perspectives-events/publications/2022/03/sec-proposes-climate-change-disclosure-rules-applicable-to-public-companies.

⁵ See our Legal Update on the FHFA statement: https://www.mayerbrown.com/en/perspectives-events/blogs/2021/12/fhfa-releases-statements-on-climate-change.

⁶ See our Legal Update on the OCC survey: https://www.mayerbrown.com/en/perspectives-events/publications/2022/01/us-occ-extends-climate-risk-survey.

⁷ See our Legal Update on the OCC’s proposed requirement: https://www.mayerbrown.com/en/perspectives-events/publications/2020/11/occ-proposes-fair-access-to-financial-services-requirements.

⁸ For example, see our Legal Update on the legal challenges that may be brought against the SEC’s climate risk disclosure proposal: https://www.mayerbrown.com/en/perspectives-events/publications/2022/04/us-secs-climate -risk-disclosure-proposal-likely-to-face-legal-challenges.

⁹ See our Legal Update on the BCBS principles: https://www.mayerbrown.com/en/perspectives-events/publications/2022/06/climate-risk-management-principles-finalized-by-basel-committee.