U.S. ESG Regulatory Update: Q3 2023

While European asset managers have been issuing periodic and entity-level reporting under the EU’s Sustainable Finance Disclosure Regulation and the UK’s TCFD-Aligned Disclosure reporting , U.S. asset managers have had to navigate a fast-changing sentiment towards ESG investing. U.S. legislation is showing increasing divergence on core principles, and the debate about the validity of ESG investing has been amplified by politicians and constituents across the country.

Despite the politicization and anti-ESG rhetoric in the U.S., ESG continues to be a priority for asset management firms with a global client base.  Current legal challenges seeking to clarify how fiduciaries may consider ESG are unlikely to result in outright bans on ESG considerations.  Furthermore, many asset owners have already begun taking the necessary steps to compile emissions data required by the SEC Climate Disclosure rules. Pension funds such as the New York City Employees’ Retirement System and the Teachers’ Retirement System of the City of New York have already set emission reduction targets encompassing Scope 3 emissions. The California Public Employees’ Retirement System completed tracking Scopes 1 and 2 emissions in its Real Estate portfolio in late 2022 and are in the process of capturing Scope 3 emissions.

Further state level reporting continues to drive increased transparency on climate risk reporting. The California Climate Accountability Package, if passed, will mandate public and private companies that operate in California, (whose total revenues exceed $1 billion), to disclose Scopes 1, 2 and 3 emissions starting 2026. Companies whose total revenues exceed $500 million will need to publish climate risk reports starting 2024. Similarly, the New York Climate Corporate Accountability Act, if passed, will require all companies that operate in New York whose total revenues exceed $1 billion to disclose Scopes 1, 2 and 3 emissions.

Accordingly, investment firms continue to invest in ESG/sustainability capabilities to tackle the data and reporting challenges associated with integrating new data sets, and retirement plan fiduciaries continue to consider ESG focused funds within their portfolios.

U.S. asset managers seeking to meet with growing levels of disclosure requirements are looking globally to lessons learned from asset managers that have been preparing for sustainability related disclosure in Europe. Firms subject to meeting the requirements of Sustainable Finance Disclosure Regulation (SFDR) and/or Task Force on Climate Related Financial Disclosure (TCFD) in the UK and Singapore are building valuable insights into scale and complexity challenges associated with entity and product level reporting. Sustainability risks, including mounting fears over greenwashing accusations is also driving a review of asset managers’ approach to enterprise risk management. Having a robust approach to ESG data and technology continues to underpin adherence to all of the above.