SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices

Washington D.C., May 25, 2022 —

The Securities and Exchange Commission today proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors. The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

Finally, to complement the proposed ESG disclosures in fund prospectuses, annual reports, and adviser brochures, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A, which are forms on which funds and advisers, respectively, report census-type data that inform the Commission’s regulatory, enforcement, examination, disclosure review, and policymaking roles.

The proposing release will be published in the Federal Register. The comment period will remain open for 60 days after publication in the Federal Register.

SEC proposed Names Rule and ESG Investment Practices Disclosure

SEC issues two new rule proposals for certain registered investment companies and investment advisers

On May 25, the SEC issued two new proposals applicable to certain investment companies and investment advisers:

The first proposal would amend the Investment Company Act of 1940 to improve and clarify the “names rule,” which requires certain funds to adopt a policy to invest at least 80% of their assets in accordance with the investment focus that the fund’s name suggests. The amendments would expand the scope of the rule to any fund name with terms suggesting that the fund focuses on investments that have, or investments whose issuers have, particular characteristics, such as ESG. It would also update the rule’s notice requirements, and establish recordkeeping requirements.

The second proposal would standardize ESG disclosures for registered investment advisers, certain advisers that are exempt from registration, registered investment companies, and business development companies. The proposed amendments include various disclosure and reporting requirements to provide shareholders and clients improved information from funds and advisers that consider one or more ESG factors. The amendments would also require funds and advisers to report census type information on their ESG investment practices in regulatory reporting to the Commission.

Biden-⁠Harris Administration Outlines Historic Progress on Environmental Justice in Report Submitted to Congress

Report Includes Formal Responses to Recommendations from First-Ever White House Environmental Justice Advisory Council, Details Actions Taken Across Federal Government to Implement Recommendations

Today, the White House Council on Environmental Quality (CEQ) released a report submitted to Congress, outlining the historic steps the Biden-Harris Administration has taken to implement recommendations from the first-ever White House Environmental Justice Advisory Council (WHEJAC). The report is a formal response to recommendations the WHEJAC provided on the Justice40 Initiative, the Climate and Economic Justice Screening Tool(CEJST), and revisions on Executive Order 12898 on Federal Actions To Address Environmental Justice in Minority Populations and Low-Income Populations. The report fulfills a statutory obligation under the Federal Advisory Committee Act to provide a report to Congress within one year of receiving recommendations from a federal advisory committee.

The WHEJAC was established by President Biden’s Executive Order 14008 on Tackling the Climate Crisis at Home and Abroad to fulfill his and Vice President Harris’s commitment to confronting longstanding environmental injustices and to ensure that marginalized, underserved, and overburdened communities have greater input on Federal policies and decisions.

“WHEJAC members devoted countless hours—sacrificing nights and weekends—to provide us with these formal recommendations, and we are grateful for all of their time, effort, and expertise,” CEQ Chair Brenda Mallory wrote in the report. “As the updates in this report make clear, Federal agencies are undertaking fundamental reforms—many of which are consistent with and pursuant to the recommendations of the WHEJAC—to deliver real results for families and communities who have been denied clean air, clean water, and a healthy environment for far too long.”

Chair Mallory continued, “I am encouraged by the progress we have made over the past year, clear-eyed about the scale of the work that still lies ahead, and confident that if we continue to listen to the voices and perspectives of the WHEJAC and other environmental justice leaders and communities, we will deliver a cleaner, healthier future for all.”

WHEJAC Recommendations Inform Ongoing and Future Federal Work

The Biden-Harris Administration has made achieving environmental justice a top priority—launching much-needed initiatives to deliver change in communities, including by creating the WHEJAC, the White House Environmental Justice Interagency Council, the Justice40 Initiative, and the CEJST. As part of the response to recommendations from the WHEJAC, today’s report outlines the scale and scope of efforts to deliver on the President’s commitments, including steps taken to embed environmental justice into agency practices, processes, policies, and procedures. While today’s report provides an update on progress being made, it also makes clear there is much work yet to be done. The pursuit of environmental justice will require ongoing and sustained work from agencies, deep cultural change across the government, Congressional and budgetary support, and ongoing input from the WHEJAC and environmental justice leaders and communities. As part of its review of steps taken over the past year, today’s report describes how, based on the recommendations of the WHEJAC and ongoing communications with Federal agencies, CEQ has been working diligently to develop recommendations for a durable, impactful, and effective approach for updating Executive Order 12898. It is anticipated that a draft executive order updating Executive Order 12898 will be ready for the President’s consideration and review in the summer of 2022.

Click HERE to read the entire Press Release.

Community Reinvestment Act Proposal - FRB, OCC, FDIC

The Federal Reserve Board (FRB), Office of the Comptroller of the Currency (OCC), and Federal Deposit Insurance Corporation (FDIC) have issued a joint Notice of Proposed Rulemaking to “strengthen and modernize” the regulations implementing the Community Reinvestment Act of 1977 (CRA). The agencies aim to achieve this by introducing greater clarity, consistency, and transparency in CRA evaluations, including standardized metrics and delineated eligible activities.

Key provisions in the proposal would:

• Retain the small, intermediate, large, and wholesale bank categories with higher asset size thresholds (small: less than $600 million; intermediate: equal to or greater than $600 million but less than $2 billion; large: equal to or greater than $2 billion).

• Retain “facility-based assessment areas” (FBAAs), delineated based on where the bank has physical locations (main offices, branches) or deposit-taking remote service facilities as well as the surrounding geographies where the bank has originated or purchased a substantial portion of its loans.

• Add a new requirement for large banks to also delineate “retail lending assessment areas” (RLAAs) in Metropolitan Statistical Areas (MSAs) or nonmetropolitan areas outside of the bank’s FBAAs where the bank has originated over 100 home mortgages or 250 small business loans in each of the preceding two years.

• Add a new requirement for large banks with total assets in excess of $10 billion to be evaluated based on the availability and responsiveness of their digital delivery systems (e.g., online and mobile banking) and other delivery systems (e.g., telephone banking, bank-by-mail, bank-at-work programs.)

• Clarify eligibility criteria for community development activities, incorporating information contained in the Interagency Questions and Answers.

• Expand the categories of qualifying community development activities, emphasizing activities that are responsive to community needs, including mission-driven entities that support minority, women, and low-income consumers; activities undertaken in Native Land Areas; and activities that assist individuals and communities to prepare for, adapt to, and withstand natural disasters, weather-related disasters, or climate-related risks. Credit would be available for eligible community development activities conducted regardless of location (i.e., outside of the bank’s traditional assessment areas.)

• Provide for a publicly available illustrative and non-exhaustive list of examples of qualifying activities along with a formal mechanism for banks to receive supervisory feedback on the eligibility of proposed activities in advance of undertaking the activity.

• Introduce four new performance tests the application of which would be tailored for performance standards and data requirements by bank size. All tests would apply to large banks though additional requirements would apply to banks with assets in excess of $10 billion. Small banks would be evaluated under the current CRA performance standards but could opt to be evaluated under aspects of the proposed framework.

• Adopt a metrics-based approach to evaluations of retail lending and community development financing.

• Emphasize smaller-value loans and investments that can have high impact and be more responsive to the needs of LMI communities.

• Largely rely on existing data except for large banks with assets in excess of $10 billion, which would be required to collect and report new information on deposit accounts, automobile loans, usage of mobile and online banking services, and community development loans and services. Existing large bank data requirements for small business and small farm lending would be replaced with CFPB section 1071 data once it is available.

Other considerations

The proposal would also:

• Update criteria used to determine whether a CRA rating should be downgraded for evidence of discrimination or other illegal practices to include root cause of any violations of law, the severity of any consumer harm resulting from violations, the duration of time over which the violations occurred, and the pervasiveness of the violations. The effectiveness of the bank’s compliance management system to self-identify risks and to take the necessary actions to reduce the risk of non-compliance and consumer harm would also be considered.

• Disclose in the CRA performance evaluation of a large bank the distribution of race and ethnicity of the bank’s home mortgage loan originations and applications in each of the bank’s FBAAs and RLAAs based on HMDA data. The agencies state this disclosure would have no direct impact on the conclusions or ratings of the bank.

• Not apply to nonbank financial institutions. CFPB Director Chopra notes that “This effort to update and modernize the Community Reinvestment Act’s framework is also a reminder that policymakers need to consider whether nonbank mortgage lenders should also be required to better meet the needs of communities they serve.”

The agencies will accept comment through August 5, 2022

Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

• E-mail: regs.comments@federalreserve.gov. Use this option to attach a comment letter via a PDF file. Include docket (R-1769) and RIN (7100-AG29) numbers in the subject line of the message.

• Agency Website: https://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

• FAX: (202) 452-3819 or (202) 452-3102.

• Mail: Ann E. Misback, Secretary, Board of Governors of the Federal Reserve System, 20th Street and Constitution Avenue, NW, Washington, DC 20551.

Justice Department Launches Comprehensive Environmental Justice Strategy

Attorney General Merrick B. Garland was joined by EPA Administrator Michael S. Regan today in announcing a series of actions to secure environmental justice for all Americans. In addition to launching a new Office of Environmental Justice within the Justice Department, Attorney General Garland also announced a new comprehensive environmental justice enforcement strategy to guide the Justice Department’s work and issued an Interim Final Rule that will restore the use of supplemental environmental projects in appropriate circumstances.

“Although violations of our environmental laws can happen anywhere, communities of color, indigenous communities, and low-income communities often bear the brunt of the harm caused by environmental crime, pollution, and climate change,” said Attorney General Garland. “For far too long, these communities have faced barriers to accessing the justice they deserve. The Office of Environmental Justice will serve as the central hub for our efforts to advance our comprehensive environmental justice enforcement strategy. We will prioritize the cases that will have the greatest impact on the communities most overburdened by environmental harm.”

“EPA and the Justice Department’s partnership to protect overburdened and underserved communities across America has never been stronger,” said EPA Administrator Regan. “This environmental justice enforcement strategy epitomizes the Biden-Harris Administration’s commitment to holding polluters accountable as a means to deliver on our environmental justice priorities. Critical to that is the return of Supplemental Environmental Projects as a tool to secure tangible public health benefits for communities harmed by environmental violations.”

Consistent with President Biden’s Executive Order on Tackling the Climate Crisis at Home and Abroad, Associate Attorney General Vanita Gupta issued a comprehensive environmental justice enforcement strategy to guide the Justice Department’s litigators, investigators, and U.S. Attorneys’ Offices nationwide to advance the cause of environmental justice through the enforcement of federal laws. Developed by the Environment and Natural Resources Division (ENRD) in partnership with EPA, the strategy will ensure that the entire Department is using all available legal tools to promote environmental justice.

The Justice Department also launched its first-ever Office of Environmental Justice (OEJ) within ENRD today. This new office will be a critical resource as the Justice Department implements the new comprehensive enforcement strategy. Assistant Attorney General Todd Kim named Cynthia Ferguson, an experienced ENRD attorney with more than a decade working on environmental justice issues, as Acting Director.

Finally, the Justice Department issued an Interim Final Rule today that will restore the use of supplemental environmental projects in appropriate circumstances and subject to guidelines and limitations set forth in a separate memorandum issued by the Attorney General today. For decades before 2017, EPA and ENRD relied upon such projects to provide redress to communities most directly affected by violations of federal environmental laws. For this reason, they are particularly powerful tools for advancing environmental justice. The Justice Department’s Interim Final Rule invites public comment on the new guidelines and limitations, including to inform any future changes to the Justice Department’s approach.

Source: US Department of Justice

SEC Proposes Rules to Enhance and Standardize Climate-Related Disclosures for Investors

The Securities and Exchange Commission today proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions, which have become a commonly used metric to assess a registrant’s exposure to such risks.

"I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers," said SEC Chair Gary Gensler. "Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers."

The proposed rule changes would require a registrant to disclose information about (1) the registrant’s governance of climate-related risks and relevant risk management processes; (2) how any climate-related risks identified by the registrant have had or are likely to have a material impact on its business and consolidated financial statements, which may manifest over the short-, medium-, or long-term; (3) how any identified climate-related risks have affected or are likely to affect the registrant’s strategy, business model, and outlook; and (4) the impact of climate-related events (severe weather events and other natural conditions) and transition activities on the line items of a registrant’s consolidated financial statements, as well as on the financial estimates and assumptions used in the financial statements.

For registrants that already conduct scenario analysis, have developed transition plans, or publicly set climate-related targets or goals, the proposed amendments would require certain disclosures to enable investors to understand those aspects of the registrants’ climate risk management.

The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions. These proposals for GHG emissions disclosures would provide investors with decision-useful information to assess a registrant’s exposure to, and management of, climate-related risks, and in particular transition risks. The proposed rules would provide a safe harbor for liability from Scope 3 emissions disclosure and an exemption from the Scope 3 emissions disclosure requirement for smaller reporting companies. The proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.

Under the proposed rule changes, accelerated filers and large accelerated filers would be required to include an attestation report from an independent attestation service provider covering Scopes 1 and 2 emissions disclosures, with a phase-in over time, to promote the reliability of GHG emissions disclosures for investors.

The proposed rules would include a phase-in period for all registrants, with the compliance date dependent on the registrant’s filer status, and an additional phase-in period for Scope 3 emissions disclosure.

The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 30 days after publication in the Federal Register, or 60 days after the date of issuance and publication on sec.gov, whichever period is longer.

Source: US Securities and Exchange Commission

SEC Proposes Rules on Cybersecurity Risk Management, Strategy, Governance, and Incident Disclosure by Public Companies

Washington D.C., March 9, 2022 —

The Securities and Exchange Commission today proposed amendments to its rules to enhance and standardize disclosures regarding cybersecurity risk management, strategy, governance, and incident reporting by public companies.

"Over the years, our disclosure regime has evolved to reflect evolving risks and investor needs," said SEC Chair Gary Gensler. "Today, cybersecurity is an emerging risk with which public issuers increasingly must contend. Investors want to know more about how issuers are managing those growing risks. A lot of issuers already provide cybersecurity disclosure to investors. I think companies and investors alike would benefit if this information were required in a consistent, comparable, and decision-useful manner. I am pleased to support this proposal because, if adopted, it would strengthen investors’ ability to evaluate public companies' cybersecurity practices and incident reporting."

The proposed amendments would require, among other things, current reporting about material cybersecurity incidents and periodic reporting to provide updates about previously reported cybersecurity incidents. The proposal also would require periodic reporting about a registrant’s policies and procedures to identify and manage cybersecurity risks; the registrant’s board of directors' oversight of cybersecurity risk; and management’s role and expertise in assessing and managing cybersecurity risk and implementing cybersecurity policies and procedures. The proposal further would require annual reporting or certain proxy disclosure about the board of directors’ cybersecurity expertise, if any.

The proposed amendments are intended to better inform investors about a registrant's risk management, strategy, and governance and to provide timely notification to investors of material cybersecurity incidents.

The proposing release will be published on SEC.gov and in the Federal Register. The comment period will remain open for 60 days following publication of the proposing release on the SEC's website or 30 days following publication of the proposing release in the Federal Register, whichever period is longer.

Link to PROPOSED RULE.

Link to FACT SHEET.

SEC - Environmental, Social and Governance (ESG) Funds – Investor Bulletin

Funds such as mutual funds and ETFs that focus on environmental, social, and governance principles (ESG Funds) have gained popularity with investors over time. Investors may hear about these funds from financial professionals, from investment-focused online sites, or even from popular media. The SEC's Office of Investor Education and Advocacy is issuing this bulletin to educate investors about ESG Funds, including important questions to ask if considering whether investing in them is right for you.

What is an ESG Fund?

Funds, like ETFs and mutual funds, may consider a wide range of factors that are consistent with their objectives and strategies when selecting investments. This can include ESG, which stands for environmental, social, and governance.

ESG investing has grown in popularity in recent years, and may be referred to in many different ways, such as sustainable investing, socially responsible investing, and impact investing. ESG practices can include, but are not limited to, strategies that select companies based on their stated commitment to one or more ESG factors —for example, companies with policies aimed at minimizing their negative impact on the environment or companies that focus on governance principles and transparency.  ESG practices may also entail screening out companies in certain sectors or that, in the view of the fund manager, have shown poor performance with regard to management of ESG risks and opportunities. Furthermore, some fund managers may focus on companies that they view as having room for improvement on ESG matters, with a view to helping those companies improve through actively engaging with the companies.

Funds that elect to focus on companies’ ESG practices may have broad discretion in how they apply ESG factors to their investment or governance processes. For example, some funds integrate ESG criteria alongside other factors, such as macroeconomic trends or company-specific factors like a price-to-earnings ratio, to seek to enhance performance and manage investment risks. Other funds focus on ESG practices because they believe investments with desired ESG profiles or attributes may achieve higher investment returns and/or encourage ESG-related outcomes. For example, some ESG funds select companies that have shown their commitment to a particular ESG factor, such as companies with policies aimed at minimizing their negative impact on the environment.  Some funds may implement shareholder voting rights in particular ways to achieve ESG goals, while others may only focus on selecting investments based on ESG criteria.

Fund managers focusing on ESG generally examine criteria within the environmental, social, and/or governance categories to analyze and select securities.

• The environmental component might focus on a company’s impact on the environment—for example, its energy use or pollution output. It also might focus on the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.

• The social component might focus on the company’s relationship with people and society—for example, issues that impact diversity and inclusion, human rights, specific faith-based issues, the health and safety of employees, customers, and consumers locally and/or globally, or whether the company invests in its community, as well as how such issues are addressed by other companies in a supply chain.

• The governance component might focus on issues such as how the company is run—for example, transparency and reporting, ethics, compliance, shareholder rights, and the composition and role of the board of directors.

An ESG fund portfolio might include securities selected in each of the three categories—or in just one or two of the categories. A fund’s portfolio might also include securities that don’t fit any of the ESG categories, particularly if it is a fund that considers other investment methodologies consistent with the fund’s investment objectives.

ESG investing is not limited to ETFs and mutual funds. Other types of investment products, like exchange-traded products that are not registered under the Investment Company Act of 1940, might also consider ESG factors in selecting an investment portfolio.

Be sure you understand what you are investing in.

If you are considering investing in an ESG Fund, you should know that all ESG Funds are not the same. It is always important to understand what you are investing in, and to be sure a fund, or any other investment, will help you achieve your investment goals. In addition, you will likely want to consider whether a fund’s stated approach to ESG matches your investment goals, objectives, risk tolerance, and preferences.

Here are some things to consider:

• Some factors are not defined in federal securities laws, may be subjective, and may be defined in different ways by different funds or sponsors. There is no SEC “rating” or “score” of E, S, and G that can be applied across a broad range of companies, and while many different private ratings based on different ESG factors exist, they often differ significantly from each other.

• Some funds may focus on ESG investing, while others consider ESG factors alongside other more traditional factors.

• Different funds may weight environmental, social, and governance factors differently. For example, some ESG Funds may invest in companies that have strong governance policies, but may not have the environmental or social impact you may want to encourage through your investment in the fund.

• Different funds may focus on different specific criteria within a factor. For example, one fund may focus on shareholder rights for “governance,” while another focuses on board of directors’ diversity.

• Some ESG fund managers may consider data from third party providers. This data could include “scoring” and “rating” data compiled to help managers compare companies. Some of the data used to compile third party ESG scores and ratings may be subjective. Other data may be objective in principle, but are not verified or reliable. Third party scores also may consider or weight ESG criteria differently, meaning that companies can receive widely different scores from different third party providers.

• You can find more information about how a fund incorporates ESG and how it weighs ESG factors in the fund’s disclosure documents. The fund’s prospectus contains important information about its investment objective and strategies, and its shareholder report contains both a list of its top holdings and a graphical representation of its holdings by category. These documents, and in some cases supplemental information, are available on funds’ websites.

• Some funds that don’t have “ESG” in the name may still incorporate elements of ESG investing into their portfolios. Consider comparing an ESG Fund’s portfolio to other fund portfolios to be sure you are investing in a fund that is consistent with your investment goals.

• Funds’ websites may also have policy statements that more fully explain their ESG practices, and other information such as customized statistics about the relevant ESG attributes or approaches used by the fund.

Understand What an ESG Investment Strategy Could Mean for You

As with any investment, you could lose money investing in an ESG Fund.

• A portfolio manager’s ESG practices may significantly influence performance. Because securities may be included or excluded based on ESG factors rather than other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices.

What this may mean for you: ESG funds may perform differently than other funds without the ESG parameters.

• Certain industries may be excluded from some ESG Fund portfolios. However, some ESG Funds may still invest in “best in class” companies within commonly excluded industries. For example, an ESG Fund could invest in a certain company within an industry where companies commonly have a large carbon footprint because that company demonstrated a commitment to improving its policies and practices on environmental issues. Moreover, companies which may score poorly on one ESG factor (such as carbon footprint) could be selected because they score well on another ESG factor (strong governance) or because the fund manager has plans to engage with the companies to improve their performance on ESG issues.

What this may mean for you: One of the most important ways to reduce the overall risk of investing is to diversify your investments. You should read the fund’s disclosure documents closely to be sure you understand what the fund is—and is not—invested in, and how its ESG orientation may affect its risk.

• Some funds that consider ESG may have different expense ratios than other funds that do not consider ESG factors.

What this may mean for you: You should always evaluate a fund’s expenses. Paying more in expenses will reduce the value of your investment over time.

Be sure to consider all of your goals when weighing any potential benefits and risks to making a particular investment.

Before you invest in an ESG fund

✓  Carefully read all of the fund's available information, including its prospectus and most recent shareholder report. You can get this information by looking at the fund’s filings on the SEC’s EDGAR database, from your investment professional, or directly from the fund.

✓  Understand the fees and expenses you will pay for the fund, and compare them to other investment options.

✓  Be sure that the fund’s investment strategy is consistent with your goals.

✓  Ask Questions:

• Is ESG a core component of the investment selection process, or is it one of many factors that are considered to select investments?

• To what extent does the fund focus on ESG factors versus more traditional factors?

• How does the fund weight each of the three ESG factors within its ESG portfolio holdings?

• What specific criteria within a factor does the fund use when determining its portfolio holdings?

• How do the fund’s fees and expenses compare to other investment options?

• What types of investments do you expect or desire the fund to be invested in, and what types of investments do you expect or desire the fund NOT to be invested in? Compare those expectations with published fund holdings to better understand whether the fund’s investment strategy is consistent with your preferences.

• How does the fund explain and discuss its ESG practices, and how do those practices affect the performance and risk of the fund?

• Is the fund employing an ESG practice that is of importance to you, such as voting proxies in a certain manner or engaging with issuers to influence their ESG practices?

SEC Proposes Cybersecurity Risk Management Rules and Amendments for Registered Investment Advisers and Funds

Washington D.C., Feb. 9, 2022 —

The Securities and Exchange Commission today voted to propose rules related to cybersecurity risk management for registered investment advisers, and registered investment companies and business development companies (funds), as well as amendments to certain rules that govern investment adviser and fund disclosures.

"Cyber risk relates to each part of the SEC’s three-part mission, and in particular to our goals of protecting investors and maintaining orderly markets," said SEC Chair Gary Gensler. "The proposed rules and amendments are designed to enhance cybersecurity preparedness and could improve investor confidence in the resiliency of advisers and funds against cybersecurity threats and attacks."

The proposed rules would require advisers and funds to adopt and implement written cybersecurity policies and procedures designed to address cybersecurity risks that could harm advisory clients and fund investors. The proposed rules also would require advisers to report significant cybersecurity incidents affecting the adviser or its fund or private fund clients to the Commission on a new confidential form. 

To further help protect investors in connection with cybersecurity incidents, the proposal would require advisers and funds to publicly disclose cybersecurity risks and significant cybersecurity incidents that occurred in the last two fiscal years in their brochures and registration statements.

Additionally, the proposal would set forth new recordkeeping requirements for advisers and funds that are designed to improve the availability of cybersecurity-related information and help facilitate the Commission’s inspection and enforcement capabilities.

The proposal will be published on SEC.gov and in the Federal Register. The public comment period will remain open for 60 days following the publication of the proposing release on the SEC’s website or 30 days following the publication of the proposing release in the Federal Register, whichever period is longer.

Link to PROPOSED RULE.

Link to FACT SHEET.

The California Climate Corporate Accountability Act

SACRAMENTO - Senator Scott Wiener’s (D-San Francisco) Senate Bill 260, the Climate Corporate Accountability Act (CCAA), passed the Assembly Judiciary Committee by a vote of 6-3. It will now head to the Assembly Appropriations Committee. SB 260 would be the first law in the country to require U.S.-based companies — those doing business in California and generating over $1 billion in gross annual revenue — to disclose all of their greenhouse gas emissions to the California Secretary of State’s office. The California Air Resources Board (CARB) will analyze this data and create a report for the Secretary of State to publish online.

This legislation is the first of its kind in the country, and will create more climate transparency and accountability from major corporations. It’s co-sponsored by Carbon Accountable, Sunrise Bay Area, and California Environmental Voters (formerly California League of Conservation Voters).

“We have no time to waste: we need to curb carbon emissions drastically, or we all but guarantee a full-blown climate apocalypse,” said Senator Wiener. “Transparency and accountability are an important piece of this puzzle – especially when it comes to corporate carbon emissions. It’s imperative we understand large corporations’ carbon footprint so we can begin to figure out how to reduce it. If SB 260 becomes law, it will be a major win for our planet.

Under SB 260, companies will make annual public disclosures with a complete carbon emissions inventory encompassing three scopes: first, the corporations’ direct emissions, including fuel combustion; second, their emissions from purchasing and using electricity; and third, indirect emissions stemming from a number of sources, mainly a corporation’s supply chain. This will be the broadest and most comprehensive set of emissions reporting requirements in place for corporations. The bill will impact the vast majority of the country’s largest corporations, who almost all conduct business in California. Currently, corporations can voluntarily disclose their emissions, but few do.

Companies subject to SB 260 will be required to use a CARB-approved third party auditor to review and verify their carbon emissions inventory.

Climate change is an existential threat to our planet. With wildfires in California getting worse every year and sea levels rising, the people of California are already experiencing serious impacts of climate change. We must act quickly and boldly to change course. Even in California, we have not made nearly as much progress on reducing carbon emissions as needed to reverse the impacts of climate change. SB 260 will help drastically reduce corporate pollution by providing an accurate representation of corporate emission data and thus creating more incentives for companies to lower their emissions.

Currently, many of the largest corporations doing business in California are not subject to GHG reporting laws, and those who do report their emissions usually do not report their full emissions footprint. This allows large corporations to “green wash,” meaning they present a green veneer while actually having a major carbon impact. Corporations who do currently report their emissions — in order to appear as though they have a smaller carbon footprint — may only report on some of their activities, leaving out critical aspects of their supply chain and operations. The lack of transparency from corporate polluters makes it more difficult to regulate emissions and set appropriate reduction targets.

The people of California have a right to know how much corporations are polluting, and how their activities may be irreparably damaging our planet. Additionally, this information can help consumers make informed decisions about the impact of their choices when purchasing, patronizing and making investments in corporations.

Senator Henry Stern (D-Calabasas) is a joint author of the legislation. Assemblymember Cristina Garcia (D-Bell Gardens) and Assemblymember Ash Kalra (D-San Jose) are principal co-authors. Senator Dave Min (D-Costa Mesa), Assemblymembers Al Muratsuchi (D-Torrance), Phil Ting (D-San Francisco), Robert Rivas (D-Hollister), Wendy Carrillo (D-Los Angeles), Laura Friedman (D-Glendale), Alex Lee (D-Fremont) and Mark Stone (D-Santa Cruz) are co-authoring the legislation.

Source: Scott Wiener, District 11 California

Trafficking and Money Laundering: Strategies Used by Criminal Groups and Terrorists and Federal Efforts to Combat Them

What GAO Found

Federal agencies and others have reported that money laundering strategies used by transnational criminal organizations and terrorist groups include sophisticated techniques such as phony trade transactions or purchase and resale of real estate or art. Such techniques can involve the services of professional money laundering networks or service providers in legitimate professions, such as complicit lawyers or accountants. For example, lawyers or accountants can create shell companies (entities with no business operations) to help criminals launder illicit proceeds. Transnational criminal organizations and terrorist groups also continue to smuggle cash in bulk or transmit money electronically across borders.

Federal efforts to combat trafficking and money laundering incorporate multiple collaborative and information-sharing mechanisms and include the private sector.

• Law enforcement agencies collaborate through task forces in which they share information and analytical resources to aid in the investigation and prosecution of drug and other trafficking-related crimes.

• Federal agencies share intelligence with foreign counterparts. For example, the Financial Crimes Enforcement Network (FinCEN), a bureau of the Department of the Treasury, shares information with more than 160 international financial intelligence agencies.

• FinCEN collaborates with law enforcement agencies to share information with financial institutions on “red flags” for trafficking, which institutions can use to identify and report suspicious transactions (see box below).

• FinCEN also coordinates a voluntary program that allows financial institutions to share information with one another to better identify and report suspicious activities that may be related to money laundering or other illicit financing.

Examples of Human Trafficking “Red Flag” Indicators Provided to Financial Institutions

• Involvement of a third party who speaks for the customer, insists on being present for transactions, or acts aggressively toward the customer.

• Frequent customer transactions from different U.S. geographical regions.

• Transactions that are inconsistent with a customer's expected activity.

• Customer accounts that share a telephone number or other identifiers with escort agency websites or commercial sex advertisements.

• Frequent sending or receipt of funds via cryptocurrency to or from internet addresses associated with illicit activity.

Source: GAO analysis of Financial Crimes Enforcement Network information. | GAO-22-104807

These mechanisms help address some of the challenges involved in combatting trafficking and money laundering, which include the increasingly sophisticated strategies of criminal and terrorist groups and the fragmentation of responsibility for anti-trafficking efforts among many federal agencies.

Why GAO Did This Study

FinCEN identified trafficking activity of transnational criminal organizations and terrorist groups as among the most significant illicit finance threats facing the United States in its 2021 Anti-Money Laundering and Countering the Financing of Terrorism National Priorities. Congress included a provision in the National Defense Authorization Act for Fiscal Year 2021 for GAO to review trafficking and related money laundering and federal efforts to combat them.

Among its objectives, this report describes what is known about the money laundering strategies of transnational criminal organizations and terrorists and information-sharing efforts among federal agencies to combat trafficking.

GAO reviewed documentation from Treasury and other federal agencies, international and nonprofit organizations focused on trafficking or money laundering, scholarly journals, and prior GAO work. GAO examined federal guidance to financial institutions and interviewed federal agency officials; experts in trafficking, money laundering, and use of data technology; and representatives of trade groups for lawyers and accountants. GAO also interviewed five groups of financial institution representatives about identifying trafficking-related suspicious activities.

For more information, contact Michael E. Clements at (202) 512-8678 or clementsm@gao.gov.

Principles for large bank climate risk management from OCC

The OCC released draft principles for large banks (i.e., total consolidated assets > $100 billion) to identify and manage climate-related financial risks. The announcement highlights six general principles and six risk areas outlined below.

General principles are intended to provide a high-level framework for the safe and sound management of climate-related financial risk (hereinafter, climate risk) exposures, consistent with existing risk management frameworks.

• Governance. To ensure effective risk governance frameworks:

  • Demonstrate sufficient acumen to assess the potential impacts of climate risks and address and oversee these risks within the bank’s strategy and risk appetite, including the potential ways these risks could evolve over various time horizons and scenarios

  • Assign and define climate risk roles, responsibilities, and interactions throughout the organization, integrating responsibility and accountability throughout these climate risk management structures

  • Allocate appropriate resources

  • Clearly communicate to staff regarding climate-related impacts to the bank’s risk profile

  • Regularly report to the board on the level and nature of climate risks to the bank

• Policies, procedures, and limits. Incorporate climate risks into policies, procedures, and limits to provide detailed guidance on the bank’s approach to these risks and should modify them when necessary to reflect changing risk characteristics or bank activities.

• Strategic planning. Consider material climate risk exposures when setting the bank’s business strategy; risk appetite; and financial, capital, and operational plans. The potential impact of these risk exposures should factor in geographic locations; stakeholder expectations; reputation risk; and LMI and other vulnerable communities, including physical harm and access to financial services. Public statements about the bank’s climate-related strategies and commitments should be consistent with their internal strategies and risk appetite statements.

• Risk management. Management should oversee the development and implementation of processes to identify, measure, monitor, and control climate risk exposures within existing risk management framework. To achieve this:

  • Employ a comprehensive process for identifying emerging and material climate risks

    • Across a range of scenarios and various time horizons

    • Considering input from stakeholders across the organization

  • Develop processes to measure and monitor material climate risks and inform the board and management about the materiality of those risks. This includes:

    • Defining material climate risk exposures, both physical and transition

    • Developing tools and approaches, such as exposure analysis, heat maps, climate risk dashboards, and scenario analysis, among others

    • Aligning with the bank’s risk appetite

    • Supporting appropriate metrics (e.g., risk limits and key risk indicators) and escalation processes

  • Incorporate climate risks into their internal control frameworks, including internal audits

• Data, risk measurement, and reporting. To facilitate the availability of relevant, accurate, and timely data for swift and sound decision-making across the bank:

  • Incorporate climate risk information into the bank’s internal reporting, monitoring, and escalation processes

  • Ensure effective risk data aggregation and reporting capabilities

  • Monitor developments in data, risk measurement, modeling methodologies, and reporting, and incorporate them into their climate risk management as appropriate

• Scenario analysis. Climate scenario analysis is emerging as an important approach to identifying, measuring, and managing climate risks. An effective climate scenario analysis framework should provide a comprehensive and forward-looking perspective to apply alongside existing risk management practices when evaluating the resiliency of strategies and risk management to the structural changes arising from climate risks. To establish an effective framework:

  • Develop and implement climate scenario analysis processes in a manner appropriate for the bank’s size, complexity, business activity, and risk profile

  • Develop oversight, validation, and quality control standards for climate scenario analyses, commensurate to their risk

  • Clearly define the objectives of the analysis framework, reflecting the overall climate risk management strategies

Management of risk areas

• Credit risk. Effective credit risk management practices should include monitoring climate-related credit risks across market sectors, geographies, and concentrations (including concentrations stemming from physical and transition risks and potential changes in correlations across exposures or asset classes).

• Liquidity risk. Incorporate climate risks into liquidity risk management and liquidity buffers.

• Other financial risk. Monitor interest rate risk and other model inputs for greater volatility or less predictability due to climate risks.

• Operational risk. Consider how climate risk exposures may adversely impact operations, control environments, and operational resilience. Effective operational risk management practices would include conducting an assessment across all business lines and operations, as well as consideration of third-parties, business continuity, and evolving legal and regulatory landscapes.

• Legal/Compliance risk. Consider how climate risks and risk mitigation measures affect the legal and regulatory landscape in which the bank operates.

• Other nonfinancial risk. Monitor the execution of strategic decisions and how the operating environment affects financial condition and operational resilience. Consideration should be given to:

  • The extent to which the bank’s activities may increase the risk of negative financial impact from reputational damage, liability, and litigation

  • Adequate measures to implement to mitigate these material risks

The OCC is seeking public comments on these draft principles and risk areas, while specific questions are directed to current practices; data, disclosure, and reporting issues; and scenario analysis. Feedback will be incorporated into subsequent guidance related to climate risk management. Comments are due on February 14, 2022.

Questions for Board Members from OCC

The OCC has outlined five key questions that boards of directors should be asking related to climate change and financial risks.

1. What is our overall exposure to climate change?

• Understanding overall exposure requires senior managers to develop a framework, risk taxonomy, key metrics, datasets, a balanced approach to scenario analyses, and expertise on the portfolio impacts of physical and transition risks.

2. Which counterparties, sectors, or locales warrant our heightened attention and focus?

• Climate change presents both physical and transition risks that could significantly impact the creditworthiness of some borrowers or sectors

• Physical risks include the increased frequency, severity, and volatility of extreme weather and long-term shifts in global weather patterns and their associated impact on the value of financial assets and creditworthiness

• Transition risks relate to the adjustment to a low-carbon economy and include associated changes in government policy, technology, and consumer and investor sentiment.

3. How exposed are we to a carbon tax?

• OCC states that while the United States is not likely to adopt a carbon tax in the near future, banks are recommended to perform scenario analyses where one is implemented, enabling the board to see significant exposures or concentrations of risk. OCC says, “the estimate itself, the exercise of coming up with a number will require processes, data, and calculations that will strengthen transition risk measurement practices more broadly.”

4. How vulnerable are our data centers and other critical services to extreme weather?

• Banks should update business continuity and disaster recovery plans to incorporate the full range of climate scenarios into risk assessment and mitigation measures, including consideration of impacts on third-party vendors

5. What can we do to position ourselves to seize opportunities from climate change?

• Optimize climate risk management systems and capabilities in order to better withstand climate change events and take advantage of opportunities that arise. For example, renewables, carbon capture, electric vehicles, and charging stations will create banking opportunities. Changes in agriculture, water infrastructure, consumer preferences, and investor sentiment will also create opportunities.

Forthcoming guidance

In addition to providing this guidance, the Acting Comptroller reported that the OCC is currently developing high-level supervisory expectations for large banks related to climate risk management and expects to issue framework guidance by the end of 2021. This framework will be followed with detailed guidance for each risk area in 2022.

You can download the original document here.

Climate risk recommendations from FSOC

The Department of the Treasury’s Financial Stability Oversight Council (FSOC) has released a report on Climate-Related Financial Risk, as required by Executive Order 14030 signed in May 2021.

The FSOC identifies climate change as an emerging threat to the financial stability of the United States and states that it is the responsibility of the FSOC to ensure the resiliency of the U.S. financial system to climate-related financial risks. The report is deemed a “first step,” representing an initial review of the current efforts by FSOC members to incorporate climate-related financial risk into their regulatory and supervisory activities, enhance climate-related disclosures, and assess climate-related risks to U.S. financial stability. Multiple recommendations under four overarching themes are intended to serve as a coordinated and accelerated agenda for the FSOC members as they work to promote resilience and help support an orderly, economy-wide transition toward the Administration’s goal of net-zero emissions by 2050.

The key recommendations include:

• Building capacity and expanding efforts to address climate-related financial risks. This includes:

• Forming a Climate-related Financial Risk Committee (CFRC) and underlying advisory committee to identify priority areas and serve as a coordinating body for information sharing, developing approaches and standards, and facilitating communications.

• Prioritizing members’ internal investments to expand capacity to define, identify, measure, monitor, assess, and report on climate-related financial risks and their effects on financial stability, including investments in staffing training, expertise, data analytics and modeling methodologies, and monitoring.

• Filling climate-related data and methodological gaps, by:

• Promptly identifying and taking the next steps to ensure consistent and reliable data for assessing climate-related risks, including inventorying currently collected and procured data and developing plans to obtain additional data.

• Developing consistent data standards, definitions, and relevant metrics.

• Coordinating with international regulatory counterparts regarding data gaps, definitions, standards, metrics, and tools.

• Enhancing public climate-related disclosures. FSOC recommends the members:

• Update disclosure requirements to promote consistency, comparability, and the decision-usefulness of information on climate-related risks and opportunities.

• Standardize data formats to promote comparabilities, such as the use of structured data using the same or complementary protocols.

• Consider building on the core elements of the Financial Stability Board’s Task Force on Climate-related Financial Disclosure (TCFD) “to the extent consistent with the U.S. regulatory framework and the needs of U.S. regulators and market participants.”

• Consider whether disclosures should include greenhouse gas (GHG) emissions.

• Assessing and mitigating climate-related risks that could threaten the stability of the financial system. This would include:

• Collaborating with external experts to identify climate forecasts, scenarios, and other tools necessary to better understand the exposure of regulated entities to climate-related risks and how those risks translate into economic and financial impacts.

• Coordinating with international regulatory counterparts.

• Using scenario analysis, taking into account supervisory and regulatory mandates and the size, complexity, and activities of the regulated entities.

Impact on vulnerable populations

The report highlights that adverse effects of climate change are likely to disproportionately impact financially vulnerable communities, including low-income communities, communities of color, and other disadvantaged or underserved communities. The FSOC specifically recommends that its members coordinate the analysis of climate-related financial risks conducted in their supervisory and regulatory functions with efforts to understand the impacts on communities and households. Further, the members are encouraged to evaluate climate-related impacts and the impacts of proposed policy solutions on financially vulnerable populations when assessing the impact of climate change on the economy and the financial system.

Net-zero emissions

The FSOC notes that the United States has committed to lowering U.S. GHG emissions by 50-52 percent by 2030 (from 2005 levels) and set a goal of net-zero emissions by 2050. It states that meeting these targets will require significant changes across the economy, especially in GHG-intensive sectors. The changes may require technological innovations and complementary policy actions to incentivize transitions to low-GHG methods of production, and may broadly affect households, communities, and businesses.

Statement on Nasdaq’s Diversity Proposals – A Positive First Step for Investors

Today, the Commission approved Nasdaq Stock Market LLC’s proposed rule changes related to board diversity and disclosure. The new listing standards will require each Nasdaq-listed company, subject to certain exceptions, to have at least two diverse board members or explain why it does not. The new listing standards also will require disclosure, in an aggregated form, of information on the voluntary self-identified gender, racial characteristics, and LGBTQ+ status of the company’s board. We support the proposal because it represents a step forward for investors on board diversity.

As we have noted in the past, investors are increasingly demanding diverse boards and diversity-related information about public companies.  Nasdaq’s proposal should improve the quality of information available to investors for making investment and voting decisions by providing consistent and comparable diversity metrics.

Nevertheless, there is more work to be done in improving both diversity and transparency at public companies and in our capital markets more broadly. For example, disability may be a relevant characteristic, as well as diversity among senior management and the workforce more broadly. There is a continued, harmful disparity in the representation of a wide range of communities in our capital markets. Because enhanced diversity is critically important for investors, the markets, and our economy, we hope this is a starting point for initiatives related to diversity, not the finish line.

Executive Order on Promoting Competition in the American Economy

By the authority vested in me as President by the Constitution and the laws of the United States of America, and in order to promote the interests of American workers, businesses, and consumers, it is hereby ordered as follows:

Section 1. Policy.
A fair, open, and competitive marketplace has long been a cornerstone of the American economy, while excessive market concentration threatens basic economic liberties, democratic accountability, and the welfare of workers, farmers, small businesses, startups, and consumers.
The American promise of a broad and sustained prosperity depends on an open and competitive economy. For workers, a competitive marketplace creates more high-quality jobs and the economic freedom to switch jobs or negotiate a higher wage. For small businesses and farmers, it creates more choices among suppliers and major buyers, leading to more take-home income, which they can reinvest in their enterprises. For entrepreneurs, it provides space to experiment, innovate, and pursue the new ideas that have for centuries powered the American economy and improved our quality of life. And for consumers, it means more choices, better service, and lower prices.
Robust competition is critical to preserving America’s role as the world’s leading economy.
Yet over the last several decades, as industries have consolidated, competition has weakened in too many markets, denying Americans the benefits of an open economy and widening racial, income, and wealth inequality. Federal Government inaction has contributed to these problems, with workers, farmers, small businesses, and consumers paying the price.
Consolidation has increased the power of corporate employers, making it harder for workers to bargain for higher wages and better work conditions. Powerful companies require workers to sign non-compete agreements that restrict their ability to change jobs. And, while many occupational licenses are critical to increasing wages for workers and especially workers of color, some overly restrictive occupational licensing requirements can impede workers’ ability to find jobs and to move between States.
Consolidation in the agricultural industry is making it too hard for small family farms to survive. Farmers are squeezed between concentrated market power in the agricultural input industries — seed, fertilizer, feed, and equipment suppliers — and concentrated market power in the channels for selling agricultural products. As a result, farmers’ share of the value of their agricultural products has decreased, and poultry farmers, hog farmers, cattle ranchers, and other agricultural workers struggle to retain autonomy and to make sustainable returns.
The American information technology sector has long been an engine of innovation and growth, but today a small number of dominant Internet platforms use their power to exclude market entrants, to extract monopoly profits, and to gather intimate personal information that they can exploit for their own advantage. Too many small businesses across the economy depend on those platforms and a few online marketplaces for their survival. And too many local newspapers have shuttered or downsized, in part due to the Internet platforms’ dominance in advertising markets.
Americans are paying too much for prescription drugs and healthcare services — far more than the prices paid in other countries. Hospital consolidation has left many areas, particularly rural communities, with inadequate or more expensive healthcare options. And too often, patent and other laws have been misused to inhibit or delay — for years and even decades — competition from generic drugs and biosimilars, denying Americans access to lower-cost drugs.
In the telecommunications sector, Americans likewise pay too much for broadband, cable television, and other communications services, in part because of a lack of adequate competition. In the financial-services sector, consumers pay steep and often hidden fees because of industry consolidation. Similarly, the global container shipping industry has consolidated into a small number of dominant foreign-owned lines and alliances, which can disadvantage American exporters.
The problem of economic consolidation now spans these sectors and many others, endangering our ability to rebuild and emerge from the coronavirus disease 2019 (COVID-19) pandemic with a vibrant, innovative, and growing economy. Meanwhile, the United States faces new challenges to its economic standing in the world, including unfair competitive pressures from foreign monopolies and firms that are state-owned or state-sponsored, or whose market power is directly supported by foreign governments.

To view the rest of the release, click HERE.

Executive Order on Climate-Related Financial Risk

By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered as follows:

Section 1.  Policy.  The intensifying impacts of climate change present physical risk to assets, publicly traded securities, private investments, and companies — such as increased extreme weather risk leading to supply chain disruptions.  In addition, the global shift away from carbon-intensive energy sources and industrial processes presents transition risk to many companies, communities, and workers.  At the same time, this global shift presents generational opportunities to enhance U.S. competitiveness and economic growth, while also creating well-paying job opportunities for workers. The failure of financial institutions to appropriately and adequately account for and measure these physical and transition risks threatens the competitiveness of U.S. companies and markets, the life savings and pensions of U.S. workers and families, and the ability of U.S. financial institutions to serve communities.  In this effort, the Federal Government should lead by example by appropriately prioritizing Federal investments and conducting prudent fiscal management.
      It is therefore the policy of my Administration to advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk (consistent with Executive Order 13707 of September 15, 2015 (Using Behavioral Science Insights to Better Serve the American People)), including both physical and transition risks; act to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color (consistent with Executive Order 13985 of January 20, 2021 (Advancing Racial Equity and Support for Underserved Communities Through the Federal Government)) and spurring the creation of well-paying jobs; and achieve our target of a net-zero emissions economy by no later than 2050.  This policy will marshal the creativity, courage, and capital of the United States necessary to bolster the resilience of our rural and urban communities, States, Tribes, territories, and financial institutions in the face of the climate crisis, rather than exacerbate its causes, and position the United States to lead the global economy to a more prosperous and sustainable future.

Sec. 2.  Climate-Related Financial Risk Strategy.  The Assistant to the President for Economic Policy and Director of the National Economic Council (Director of the National Economic Council) and the Assistant to the President and National Climate Advisor (National Climate Advisor), in coordination with the Secretary of the Treasury and the Director of the Office of Management and Budget (OMB), shall develop, within 120 days of the date of this order, a comprehensive, Government-wide strategy regarding:
      (a)  the measurement, assessment, mitigation, and disclosure of climate-related financial risk to Federal Government programs, assets, and liabilities in order to increase the long-term stability of Federal operations;
      (b)  financing needs associated with achieving net-zero greenhouse gas emissions for the U.S. economy by no later than 2050, limiting global average temperature rise to 1.5 degrees Celsius, and adapting to the acute and chronic impacts of climate change; and
      (c)  areas in which private and public investments can play complementary roles in meeting these financing needs — while advancing economic opportunity, worker empowerment, and environmental mitigation, especially in disadvantaged communities and communities of color.

Sec. 3.  Assessment of Climate-Related Financial Risk by Financial Regulators.  In furtherance of the policy set forth in section 1 of this order and consistent with applicable law and subject to the availability of appropriations:
      (a)  The Secretary of the Treasury, as the Chair of the Financial Stability Oversight Council (FSOC), shall engage with FSOC members to consider the following actions by the FSOC: 
            (i)    assessing, in a detailed and comprehensive manner, the climate-related financial risk, including both physical and transition risks, to the financial stability of the Federal Government and the stability of the U.S. financial system;
            (ii)   facilitating the sharing of climate-related financial risk data and information among FSOC member agencies and other executive departments and agencies (agencies) as appropriate;
            (iii)  issuing a report to the President within 180 days of the date of this order on any efforts by FSOC member agencies to integrate consideration of climate-related financial risk in their policies and programs, including a discussion of: 
                  (A)  the necessity of any actions to enhance climate-related disclosures by regulated entities to mitigate climate-related financial risk to the financial system or assets and a recommended implementation plan for taking those actions;
                  (B)  any current approaches to incorporating the consideration of climate-related financial risk into their respective regulatory and supervisory activities and any impediments they faced in adopting those approaches;
                  (C)  recommended processes to identify climate-related financial risk to the financial stability of the United States; and
                  (D)  any other recommendations on how identified climate-related financial risk can be mitigated, including through new or revised regulatory standards as appropriate; and
            (iv)   including an assessment of climate-related financial risk in the FSOC’s annual report to the Congress.
      (b)  The Secretary of the Treasury shall:
            (i)   direct the Federal Insurance Office to assess climate-related issues or gaps in the supervision and regulation of insurers, including as part of the FSOC’s analysis of financial stability, and to further assess, in consultation with States, the potential for major disruptions of private insurance coverage in regions of the country particularly vulnerable to climate change impacts; and
            (ii)  direct the Office of Financial Research to assist the Secretary of the Treasury and the FSOC in assessing and identifying climate-related financial risk to financial stability, including the collection of data, as appropriate, and the development of research on climate-related financial risk to the U.S. financial system.

Sec. 4.  Resilience of Life Savings and Pensions.  In furtherance of the policy set forth in section 1 of this order and consistent with applicable law and subject to the availability of appropriations, the Secretary of Labor shall:
      (a)  identify agency actions that can be taken under the Employee Retirement Income Security Act of 1974 (Public Law 93-406), the Federal Employees’ Retirement System Act of 1986 (Public Law 99-335), and any other relevant laws to protect the life savings and pensions of United States workers and families from the threats of climate-related financial risk;
      (b)  consider publishing, by September 2021, for notice and comment a proposed rule to suspend, revise, or rescind “Financial Factors in Selecting Plan Investments,” 85 Fed. Reg. 72846 (November 13, 2020), and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” 85 Fed. Reg. 81658 (December 16, 2020);
      (c)  assess — consistent with the Secretary of Labor’s oversight responsibilities under the Federal Employees’ Retirement System Act of 1986 and in consultation with the Director of the National Economic Council and the National Climate Advisor — how the Federal Retirement Thrift Investment Board has taken environmental, social, and governance factors, including climate-related financial risk, into account; and
      (d)  within 180 days of the date of this order, submit to the President, through the Director of the National Economic Council and the National Climate Advisor, a report on the actions taken pursuant to subsections (a), (b), and (c) of this section.

Sec. 5.  Federal Lending, Underwriting, and Procurement.  In furtherance of the policy set forth in section 1 of this order and consistent with applicable law and subject to the availability of appropriations:
      (a)  The Director of OMB and the Director of the National Economic Council, in consultation with the Secretary of the Treasury, shall develop recommendations for the National Climate Task Force on approaches related to the integration of climate-related financial risk into Federal financial management and financial reporting, especially as that risk relates to Federal lending programs.  The recommendations should evaluate options to enhance accounting standards for Federal financial reporting where appropriate and should identify any opportunities to further encourage market adoption of such standards.
      (b) The Federal Acquisition Regulatory Council, in consultation with the Chair of the Council on Environmental Quality and the heads of other agencies as appropriate, shall consider amending the Federal Acquisition Regulation (FAR) to:
            (i)   require major Federal suppliers to publicly disclose greenhouse gas emissions and climate-related financial risk and to set science-based reduction targets; and
            (ii)  ensure that major Federal agency procurements minimize the risk of climate change, including requiring the social cost of greenhouse gas emissions to be considered in procurement decisions and, where appropriate and feasible, give preference to bids and proposals from suppliers with a lower social cost of greenhouse gas emissions.
      (c)  The Secretary of Agriculture, the Secretary of Housing and Urban Development, and the Secretary of Veterans Affairs shall consider approaches to better integrate climate-related financial risk into underwriting standards, loan terms and conditions, and asset management and servicing procedures, as related to their Federal lending policies and programs.
      (d)  As part of the agency Climate Action Plans required by section 211 of Executive Order 14008 of January 27, 2021 (Tackling the Climate Crisis at Home and Abroad), and consistent with the interim instructions for the Climate Action Plans issued by the Federal Chief Sustainability Officer, heads of agencies must submit to the Director of OMB, the National Climate Task Force, and the Federal Chief Sustainability Officer actions to integrate climate-related financial risk into their respective agency’s procurement process (subject to any changes to the FAR arising out of the Federal Acquisition Regulatory Council’s review pursuant to subsection (b) of this section).  The Director of OMB and the Federal Chief Sustainability Officer shall provide guidance to agencies on existing voluntary standards for use in agencies’ plans.
      (e)  In Executive Order 13690 of January 30, 2015 (Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input), a Federal Flood Risk Management Standard (FFRMS) was established to address current and future flood risk and ensure that projects funded with taxpayer dollars last as long as intended.  Subsequently, the order was revoked by Executive Order 13807 of August 15, 2017 (Establishing Discipline and Accountability in the Environmental Review and Permitting Process for Infrastructure Projects).  Executive Order 13690 is hereby reinstated, thereby reestablishing the FFRMS.  The “Guidelines for Implementing Executive Order 11988, Floodplain Management, and Executive Order 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input” of October 8, 2015, were never revoked and thus remain in effect.

Sec. 6.  Long-Term Budget Outlook.  The Federal Government has broad exposure to increased costs and lost revenue as a result of the impacts of unmitigated climate change.  In furtherance of the policy set forth in section 1 of this order and consistent with applicable law and subject to the availability of appropriations:
      (a)  The Director of OMB, in consultation with the Secretary of the Treasury, the Chair of the Council of Economic Advisers, the Director of the National Economic Council, and the National Climate Advisor, shall identify the primary sources of Federal climate-related financial risk exposure and develop methodologies to quantify climate risk within the economic assumptions and the long-term budget projections of the President’s Budget;
      (b)  The Director of OMB and the Chair of the Council of Economic Advisers, in consultation with the Director of the National Economic Council, the National Climate Advisor, and the heads of other agencies as appropriate, shall develop and publish annually, within the President’s Budget, an assessment of the Federal Government’s climate risk exposure; and
      (c)  The Director of OMB shall improve the accounting of climate-related Federal expenditures, where appropriate, and reduce the Federal Government’s long-term fiscal exposure to climate-related financial risk through formulation of the President’s Budget and oversight of budget execution.

Sec. 7.  General Provisions.  (a)  Nothing in this order shall be construed to impair or otherwise affect:
            (i)   the authority granted by law to an executive department or agency, or the head thereof; or
            (ii)  the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.
            (b)  This order shall be implemented consistent with applicable law and subject to the availability of appropriations.
            (c)  This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.

US Department of Labor releases statement on enforcement of its final rules on ESG investments, proxy voting by employee benefit plans

WASHINGTON, DC – The U.S. Department of Labor’s Employment Benefits Security Administration today announced that it will not enforce recently published final rules on “Financial Factors in Selecting Plan Investments” and “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights.” The department released the announcement as an enforcement policy statement under Title I of the Employee Retirement Income Security Act of 1974.

Until the publication of further guidance, the department will not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights. The department will update the Employee Benefits Security Administration’s website as more information becomes available.

“These rules have created a perception that fiduciaries are at risk if they include any environmental, social and governance factors in the financial evaluation of plan investments, and that they may need to have special justifications for even ordinary exercises of shareholder rights,” said Principal Deputy Assistant Secretary for the Employee Benefits Security Administration Ali Khawar. “We intend to conduct significantly more stakeholder outreach to determine how to craft rules that better recognize the important role that environmental, social and governance integration can play in the evaluation and management of plan investments, while continuing to uphold fundamental fiduciary obligations.”

On Nov. 13, 2020, the department published a final rule on “Financial Factors in Selecting Plan Investments,” which adopted amendments to the “Investment Duties” regulation under Title I of ERISA. The amendments generally require plan fiduciaries to select investments and investment courses of action based solely on consideration of “pecuniary factors.” On Dec. 16, 2020, the department published a final rule on “Fiduciary Duties Regarding Proxy Voting and Shareholder Rights,” which also adopted amendments to the Investment Duties regulation to address obligations of plan fiduciaries under ERISA when voting proxies and exercising other shareholder rights in connection with plan investments in shares of stock.

The department heard from a wide variety of stakeholders, including asset managers, labor organizations and other plan sponsors, consumer groups, service providers and investment advisers that have asked whether these two final rules properly reflect the scope of fiduciaries’ duties under ERISA to act prudently and solely in the interest of plan participants and beneficiaries.

Stakeholders have also questioned whether the department rushed the rulemakings unnecessarily and failed to adequately consider and address the substantial evidence submitted by public commenters on the use of environmental, social and governance considerations in improving investment value and long-term investment returns for retirement investors. The department has also heard from stakeholders that the rules, and investor confusion about them, have already had a chilling effect on appropriate integration of ESG factors in investment decisions, including in circumstances that the rules may in fact allow. Accordingly, the department intends to revisit the rules.

Learn more about the Employee Benefits Security Administration and its work to protect employer-sponsored healthcare and retirement plans.

US Department of Commerce Equity Action Plan

Executive Order 13985, Advancing Racial Equity and Support for Underserved Communities Through the Federal Government was introduced on January 20, 2021. As a first action item in support of this executive order, Department of Commerce submitted the “Department of Commerce 200-Day Assessment Report” on August 9, 2021 – which was met with department-specific and general feedback from the Office of Management and Budget on September 22, 2021.

This document, per Executive Order 13985, contains the Department of Commerce Equity Action Plan to meaningfully address the barriers and opportunities identified through the cabinet-level agency’s equity assessment, which includes action items at the subcomponent level. This document will be used to help set public expectations and promote accountability as the agency develops its longer-term equity implementation strategy.

Click HERE to read the full text.

Executive Order On Advancing Racial Equity and Support for Underserved Communities Through the Federal Government

By the authority vested in me as President by the Constitution and the laws of the United States of America, it is hereby ordered:  

Section 1.  Policy.  Equal opportunity is the bedrock of American democracy, and our diversity is one of our country’s greatest strengths.  But for too many, the American Dream remains out of reach.  Entrenched disparities in our laws and public policies, and in our public and private institutions, have often denied that equal opportunity to individuals and communities.  Our country faces converging economic, health, and climate crises that have exposed and exacerbated inequities, while a historic movement for justice has highlighted the unbearable human costs of systemic racism.  Our Nation deserves an ambitious whole-of-government equity agenda that matches the scale of the opportunities and challenges that we face.

It is therefore the policy of my Administration that the Federal Government should pursue a comprehensive approach to advancing equity for all, including people of color and others who have been historically underserved, marginalized, and adversely affected by persistent poverty and inequality.  Affirmatively advancing equity, civil rights, racial justice, and equal opportunity is the responsibility of the whole of our Government.  Because advancing equity requires a systematic approach to embedding fairness in decision-making processes, executive departments and agencies (agencies) must recognize and work to redress inequities in their policies and programs that serve as barriers to equal opportunity.  

By advancing equity across the Federal Government, we can create opportunities for the improvement of communities that have been historically underserved, which benefits everyone.  For example, an analysis shows that closing racial gaps in wages, housing credit, lending opportunities, and access to higher education would amount to an additional $5 trillion in gross domestic product in the American economy over the next 5 years.  The Federal Government’s goal in advancing equity is to provide everyone with the opportunity to reach their full potential.  Consistent with these aims, each agency must assess whether, and to what extent, its programs and policies perpetuate systemic barriers to opportunities and benefits for people of color and other underserved groups.  Such assessments will better equip agencies to develop policies and programs that deliver resources and benefits equitably to all.  

Sec. 2.  Definitions.  For purposes of this order:  (a)  The term “equity” means the consistent and systematic fair, just, and impartial treatment of all individuals, including individuals who belong to underserved communities that have been denied such treatment, such as Black, Latino, and Indigenous and Native American persons, Asian Americans and Pacific Islanders and other persons of color; members of religious minorities; lesbian, gay, bisexual, transgender, and queer (LGBTQ+) persons; persons with disabilities; persons who live in rural areas; and persons otherwise adversely affected by persistent poverty or inequality. 

(b)  The term “underserved communities” refers to populations sharing a particular characteristic, as well as geographic communities, that have been systematically denied a full opportunity to participate in aspects of economic, social, and civic life, as exemplified by the list in the preceding definition of “equity.”   

Sec. 3.  Role of the Domestic Policy Council.  The role of the White House Domestic Policy Council (DPC) is to coordinate the formulation and implementation of my Administration’s domestic policy objectives.  Consistent with this role, the DPC will coordinate efforts to embed equity principles, policies, and approaches across the Federal Government.  This will include efforts to remove systemic barriers to and provide equal access to opportunities and benefits, identify communities the Federal Government has underserved, and develop policies designed to advance equity for those communities.  The DPC-led interagency process will ensure that these efforts are made in coordination with the directors of the National Security Council and the National Economic Council.  

Sec. 4.  Identifying Methods to Assess Equity.  (a)  The Director of the Office of Management and Budget (OMB) shall, in partnership with the heads of agencies, study methods for assessing whether agency policies and actions create or exacerbate barriers to full and equal participation by all eligible individuals.  The study should aim to identify the best methods, consistent with applicable law, to assist agencies in assessing equity with respect to race, ethnicity, religion, income, geography, gender identity, sexual orientation, and disability.  

(b)  As part of this study, the Director of OMB shall consider whether to recommend that agencies employ pilot programs to test model assessment tools and assist agencies in doing so.  

(c)  Within 6 months of the date of this order, the Director of OMB shall deliver a report to the President describing the best practices identified by the study and, as appropriate, recommending approaches to expand use of those methods across the Federal Government.

Sec. 5.  Conducting an Equity Assessment in Federal Agencies.  The head of each agency, or designee, shall, in consultation with the Director of OMB, select certain of the agency’s programs and policies for a review that will assess whether underserved communities and their members face systemic barriers in accessing benefits and opportunities available pursuant to those policies and programs.  The head of each agency, or designee, shall conduct such review and within 200 days of the date of this order provide a report to the Assistant to the President for Domestic Policy (APDP) reflecting findings on the following:  

(a)  Potential barriers that underserved communities and individuals may face to enrollment in and access to benefits and services in Federal programs; 

(b)  Potential barriers that underserved communities and individuals may face in taking advantage of agency procurement and contracting opportunities;

(c)  Whether new policies, regulations, or guidance documents may be necessary to advance equity in agency actions and programs; and

(d)  The operational status and level of institutional resources available to offices or divisions within the agency that are responsible for advancing civil rights or whose mandates specifically include serving underrepresented or disadvantaged communities.

Sec. 6.  Allocating Federal Resources to Advance Fairness and Opportunity.  The Federal Government should, consistent with applicable law, allocate resources to address the historic failure to invest sufficiently, justly, and equally in underserved communities, as well as individuals from those communities.  To this end:  

(a)  The Director of OMB shall identify opportunities to promote equity in the budget that the President submits to the Congress.

(b)  The Director of OMB shall, in coordination with the heads of agencies, study strategies, consistent with applicable law, for allocating Federal resources in a manner that increases investment in underserved communities, as well as individuals from those communities.  The Director of OMB shall report the findings of this study to the President.  

Sec. 7.  Promoting Equitable Delivery of Government Benefits and Equitable Opportunities.  Government programs are designed to serve all eligible individuals.  And Government contracting and procurement opportunities should be available on an equal basis to all eligible providers of goods and services.  To meet these objectives and to enhance compliance with existing civil rights laws:  

(a)  Within 1 year of the date of this order, the head of each agency shall consult with the APDP and the Director of OMB to produce a plan for addressing: 

(i)   any barriers to full and equal participation in programs identified pursuant to section 5(a) of this order; and 

(ii)  any barriers to full and equal participation in agency procurement and contracting opportunities identified pursuant to section 5(b) of this order.  

(b)  The Administrator of the U.S. Digital Service, the United States Chief Technology Officer, the Chief Information Officer of the United States, and the heads of other agencies, or their designees, shall take necessary actions, consistent with applicable law, to support agencies in developing such plans.

Sec. 8.  Engagement with Members of Underserved Communities.  In carrying out this order, agencies shall consult with members of communities that have been historically underrepresented in the Federal Government and underserved by, or subject to discrimination in, Federal policies and programs.  The head of each agency shall evaluate opportunities, consistent with applicable law, to increase coordination, communication, and engagement with community-based organizations and civil rights organizations.

Sec. 9.  Establishing an Equitable Data Working Group.  Many Federal datasets are not disaggregated by race, ethnicity, gender, disability, income, veteran status, or other key demographic variables.  This lack of data has cascading effects and impedes efforts to measure and advance equity.  A first step to promoting equity in Government action is to gather the data necessary to inform that effort.  

(a)  Establishment.  There is hereby established an Interagency Working Group on Equitable Data (Data Working Group).

(b)  Membership.  

(i)    The Chief Statistician of the United States and the United States Chief Technology Officer shall serve as Co-Chairs of the Data Working Group and coordinate its work.  The Data Working Group shall include representatives of agencies as determined by the Co-Chairs to be necessary to complete the work of the Data Working Group, but at a minimum shall include the following officials, or their designees:  

(A)  the Director of OMB; 

(B)  the Secretary of Commerce, through the Director of the U.S. Census Bureau; 

(C)  the Chair of the Council of Economic Advisers; 

(D)  the Chief Information Officer of the United States; 

(E)  the Secretary of the Treasury, through the Assistant Secretary of the Treasury for Tax Policy; 

(F)  the Chief Data Scientist of the United States; and

(G)  the Administrator of the U.S. Digital Service.

(ii)   The DPC shall work closely with the Co-Chairs of the Data Working Group and assist in the Data Working Group’s interagency coordination functions. 

(iii)  The Data Working Group shall consult with agencies to facilitate the sharing of information and best practices, consistent with applicable law.

(c)  Functions.  The Data Working Group shall:  

(i)   through consultation with agencies, study and provide recommendations to the APDP identifying inadequacies in existing Federal data collection programs, policies, and infrastructure across agencies, and strategies for addressing any deficiencies identified; and

(ii)  support agencies in implementing actions, consistent with applicable law and privacy interests, that expand and refine the data available to the Federal Government to measure equity and capture the diversity of the American people.

(d)  OMB shall provide administrative support for the Data Working Group, consistent with applicable law.

Sec. 10.  Revocation.  (a)  Executive Order 13950 of September 22, 2020 (Combating Race and Sex Stereotyping), is hereby revoked.

(b)  The heads of agencies covered by Executive Order 13950 shall review and identify proposed and existing agency actions related to or arising from Executive Order 13950.  The head of each agency shall, within 60 days of the date of this order, consider suspending, revising, or rescinding any such actions, including all agency actions to terminate or restrict contracts or grants pursuant to Executive Order 13950, as appropriate and consistent with applicable law.

(c)  Executive Order 13958 of November 2, 2020 (Establishing the President’s Advisory 1776 Commission), is hereby revoked.

Sec. 11.  General Provisions.  (a)  Nothing in this order shall be construed to impair or otherwise affect:  

(i)   the authority granted by law to an executive department or agency, or the head thereof; or

(ii)  the functions of the Director of the Office of Management and Budget relating to budgetary, administrative, or legislative proposals.

(b)  This order shall be implemented consistent with applicable law and subject to the availability of appropriations.

(c)  Independent agencies are strongly encouraged to comply with the provisions of this order.

(d)  This order is not intended to, and does not, create any right or benefit, substantive or procedural, enforceable at law or in equity by any party against the United States, its departments, agencies, or entities, its officers, employees, or agents, or any other person.