Tag: ESG

Is ‘Freedom-Washing’ the New Greenwashing, and What Are Its Legal Consequences?

Companies will often make representations about modern slavery as part of their environmental, social and governance (ESG) measures.

In this article, we consider whether potentially false or misleading claims about modern slavery (i.e., freedom-washing) may be further called out by Australian regulatory bodies.

‘Freedom-washing’ is a term that can be used to describe a false or misleading claim by an organisation about the positive work being done to identify, assess and combat its modern slavery risks.

Even an understatement or nonstatement of an organisation’s modern slavery risks in its supply chains and operations may be considered ‘freedom-washing’ if it has the intent or effect to mislead the reader (for example, if the organisation’s responses appear overall to be more positive than they would otherwise appear in that light).

‘Freedom-washing’ will not necessarily involve an overtly false action. In some circumstances, a claim may not be entirely accurate despite being partly accurate.

An organisation required to report under the Modern Slavery Act 2018 (Cth) (Modern Slavery Act) needs to carefully consider the information it releases about its modern slavery risks and responses and whether it is potentially engaging in ‘freedom-washing.’

Importantly for all current and future reporting organisations, the scrutiny continues to mount around the legislative framework combatting modern slavery (including in terms of reporting, offences and penalties).

This scrutiny is highlighted by the release of the following recent important reports and studies:

  • The statutory report of the Modern Slavery Act (see here);
  • The targeted review of Divisions 270 and 271 of the Criminal Code 1995 (Cth) (see here); and
  • The Modern Slavery Index (see here).

AUSTRALIAN COMPETITION AND CONSUMER COMMISSION (ACCC) / AUSTRALIAN CONSUMER LAW

As previously reported by K&L Gates, the ACCC has released long-anticipated guidance on environmental and sustainability claims (Guidance—see here), which sets out eight principles that businesses should follow when making environmental and sustainability claims and to comply with the Australian Consumer Law (ACL).

Although the Guidance was issued in the context of making environmental and sustainability claims, in our view, its eight principles can be applied equally to guide businesses in making ‘modern slavery’ claims without breaching the ACL. The Guidance encourages businesses to:

  • Make accurate and truthful claims.
  • Have evidence to back up claims.
  • Not leave out or hide important information.
  • Explain any conditions or qualifications on claims.
  • Avoid broad and unqualified claims.
  • Use clear and easy to understand language.
  • Remember visual elements should not give a wrong impression.
  • Be direct and open.

The ACL contains a broad prohibition against businesses engaging in misleading or deceptive conduct and prohibits the making of false or misleading representations about specific aspects of goods or services. As a result, claims that overstate an organisation’s modern slavery commitments generally, or inaccurately portray the working conditions within certain supply chains, may contravene the ACL.

We therefore recommend that organisations should also reflect on the Guidance when preparing a modern slavery statement or releasing information on modern slavery practices.

Breaches of the ACL incur very significant penalties. For corporations, the maximum pecuniary penalty per breach is the greater of:

  • AU$50 million;
  • Three times the value of the ‘reasonably attributable’ benefit obtained from the conduct; or
  • If this benefit cannot be determined, 30% of the corporation’s adjusted turnover during the breach turnover period (being a minimum of 12 months).

The ACCC will consider whether the following factors apply when determining whether to take enforcement action for a breach of the ACL:

  • The conduct is of significant public interest or concern;
  • The conduct results in substantial harm to consumers and detriment to business competitors;
  • Large businesses are making claims on a national scale;
  • The conduct involves a significant new or emerging market issue, or compliance or enforcement action is likely to have an educative or deterrent effect; or
  • ACCC action will help clarify aspects of the law, especially newer provisions of the ACL.

Furthermore, the ACCC will take into account the genuine efforts and appropriate steps that were taken by the business to verify the accuracy of any information they relied on.

But is there actually any appetite in the ACCC to seek to enforce the ACL with respect to ‘modern slavery’ claims?

To date, it has not given any indication that ‘modern slavery’ claims will be an enforcement priority. However, the ACCC has demonstrated a willingness to crack down on businesses that have sought to take advantage of increasingly environmentally and socially conscious consumers (e.g. greenwashing). Combined with growing scrutiny and broadening calls for tougher responses to be taken by government and business in combatting modern slavery, the possibility of ACCC action does appear to exist, if not now, then in the not too distant future.

AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION (ASIC) / FINANCIAL PRODUCTS AND DISCLOSURE OBLIGATIONS

General Provisions

The Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) both contain general prohibitions against companies:

  • Making statements or circulating information that is false or misleading; or
  • Engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service.1

ASIC released Report 763 earlier in the year (read it here), which expanded on its approach to ‘greenwashing’ outlined in Information Sheet 271 (read it here). It detailed ASIC’s recent interventions in response to growing claims from companies, managed funds and superannuation funds about their ESG credentials.

ASIC has expanded both its surveillance and enforcement activities in regards to ‘greenwashing.’ ASIC has pursued civil penalty proceedings and issued infringement notices to companies that are making statements that are false or misleading about ESG ‘greenwashing’ claims.

In light of these actions in the ESG space, we recommend companies be vigilant about the information they include in their modern slavery statements and be careful about the modern slavery disclosures they make in relation to a financial product or service.

Product Disclosure Statements

Under section 1013D(1)(l) of the Corporations Act, if a financial product has an investment component, its issuer must include in the product disclosure statement the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment. This is relevant in the modern slavery context where companies are releasing product disclosure statements that refer to modern slavery ESG considerations or make reference to previous market disclosures on modern slavery practices.

ASIC has undertaken reactive and proactive surveillance of product disclosure statements, advertisements, website and other market disclosures. ASIC is also progressing surveillance of the superannuation fund sector on ESG claims.

International Sustainability Standards Board (ISSB) Standards for Disclosure

In addition to ASIC’s enforcement powers, the ISSB has introduced two new standards, IFRS S1 and S2. The standards are likely to be substantially aligned to the mandatory climate-related disclosures in Australia being prepared by the Australian Accounting Standards Board and the Treasury.

Relevant to modern slavery, the new standard IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information requires an entity to disclose information about its sustainability-related risks and opportunities in its general purpose financial reports (read it here).

To achieve the required fair presentation of sustainability-related financial information, an entity is required to provide a complete, neutral and accurate depiction of those sustainability-related risks and opportunities. Additionally, any material information must be disclosed. Information can be material where it omits, misstates or obscures information that could reasonably be expected to influence the decision making of readers of such reports.

‘Sustainability-related risks and opportunities’ are broadly defined as risks and opportunities that could reasonably be expected to affect an entity’s cash flows or access to finance. Anything that impacts an entity’s value chain will be an opportunity or risk to its cash flows. The entity’s work force is an example of a sustainability-related risk and opportunity. Therefore, reporting entities may have to report modern slavery in their supply chains as a material risk to their value chain, particularly if they are operating in a sector where the risk of modern slavery is heightened (for example, renewable energy projects or garment manufacturing).

While compliance with the ISSB standards remains voluntary until codified under Australian law, it is expected that the standards will be widely adopted by companies internationally.

OTHER CONSEQUENCES OF FREEDOM-WASHING

There are many other potential legal consequences of freedom-washing. These include:

  • Criminal liability under section 137.1 of the Criminal Code Act 1995 (Cth): This offence applies where a person knowingly gives information that is false or misleading or omits any matter or thing without which the information is misleading, and the information is given to a Commonwealth entity;
  • Breach of directors duties: If directors are not appropriately managing and disclosing the company’s modern slavery risks, then they could be in breach of the duty to exercise skill, care and diligence;
  • Requisition resolutions: Shareholders may requisition a resolution at the company’s annual general meeting in regards to modern slavery and the company’s supply chain practices; and
  • Shareholder class action: Shareholders may start a class action if the company has breached continuous disclosure laws by not reporting a modern slavery issue correctly or accurately.

INTRODUCTION OF PENALTIES UNDER THE MODERN SLAVERY ACT

The report on the statutory review of the Modern Slavery Act was released on 25 May 2023.

Its recommendations included that the Modern Slavery Act be amended to provide that it is an offence for a reporting entity to:

  • Fail, without reasonable excuse, to give the minister a modern slavery statement within a reporting period for that entity;
  • Give the minister a modern slavery statement that knowingly includes materially false information;
  • Fail to comply with a request given by the minister to the entity to take specified remedial action to comply with the reporting requirements of the Modern Slavery Act; and
  • Fail to have a due diligence system in place that meets the requirements set out in rules made under section 25 of the Modern Slavery Act.

The Australian Government has signaled it will now consider Professor John McMillan’s review and will consult across government and with stakeholders in formulating its response to the recommendations. Companies operating business in Australia should watch this space carefully.

We acknowledge the contributions to this publication from our graduate Harrison Langsford.

FOOTNOTES

1 See sections 1041E, 1041G and 1041H of the Corporations Act 2001 (Cth), and sections 12DA and 12DB of the Australian Securities and Investments Commission Act 2001 (Cth).

Copyright 2023 K & L Gates
Article by Michael Hain , Ayman Guirguis , Clive Cachia of K&L Gates
For more articles on ESG, visit the NLR Environmental, Energy & Resources section.

European Commission Action on Climate Taxonomy and ESG Rating Provider Regulation

On June 13, 2023, the European Commission published “a new package of measures to build on and strengthen the foundations of the EU sustainable finance framework.” The aim is to ensure that the EU sustainable finance framework continues to support companies and the financial sector in connection with climate transition, including making the framework “easier to use” and providing guidance on climate-related disclosure, while encouraging the private funding of transition projects and technologies. These measures are summarized in a publication, “A sustainable finance framework that works on the ground.” Overall, according to the Commission, the package “is another step towards a globally leading legal framework facilitating the financing of the transition.”

The sustainable finance package includes the following measures:

  • EU Taxonomy Climate Delegated Act: amendments include (i) new criteria for economic activities that make a substantial contribution to one or more non-climate environmental objectives, namely, sustainable use and protection of water and marine resources, transition to a circular economy, pollution prevention and control, and protection and restoration of biodiversity and ecosystems; and (ii) changes expanding on economic activities that contribute to climate change mitigation and adaptation “not included so far – in particular in the manufacturing and transport sectors.” The EU Taxonomy Climate Delegated Act has been operative since January 2022 and includes 107 economic activities that are responsible for 64% of greenhouse gas emissions in the EU. In addition, “new economic sectors and activities will be added, and existing ones refined and updated, where needed in line with regulatory and technological developments.” “For large non-financial undertakings, disclosure of the degree of taxonomy alignment regarding climate objectives began in 2023. Disclosures will be phased-in over the coming years for other actors and environmental objectives.”
  • Proposed Regulation of ESG Rating Providers: the Commission adopted a proposed regulation, which was based on 2021 recommendations from the International Organization of Securities Commissioners, aimed at promoting operational integrity and increased transparency in the ESG ratings market through organizational principles and clear rules addressing conflicts of interest. Ratings providers would be authorized and supervised by the European Securities and Markets Authority. The regulation “provides requirements on disclosures around” ratings methodologies and objectives, and “introduces principle-based organizational requirements on” ratings providers activities. The Commission is also seeking advice from ESMA on the presentation of credit ratings, with the aim being to address shortcomings related to “how ESG factors are incorporated into methodologies and disclosures of how ESG factors impact credit ratings.”
  • Enhancing Usability: the Commission set out an overview of the measures and tools aimed at enhancing the usability of relevant rules and providing implementation guidance to stakeholders. The Commission Staff Working Document “Enhancing the usability of the EU Taxonomy and the overall EU sustainable finance framework” summarizes the Commission’s most recent initiatives and measures. The Commission also published a new FAQ document that provides guidance on the interpretation and implementation of certain legal provisions of the EU Taxonomy Regulation and on the interactions between the concepts of “taxonomy-aligned investment” and “sustainable investment” under the SFDR.

Taking the Temperature: As previously discussed, the Commission is increasingly taking steps to achieve the goal of reducing net greenhouse gas emissions by at least 55% by 2030, known as Fit for 55. Recent initiatives include the adoption of a carbon sinks goal, the launch of the greenwashing-focused Green Claims Directive, and now, the sustainable finance package.

Another objective of these regulatory initiatives is to provide increased transparency for investors as they assess sustainability and transition-related claims made by issuers. In this regard, the legislative proposal relating to the regulation of ESG rating agencies is significant. As noted in our longer survey, there is little consistency among ESG ratings providers and few established industry norms relating to disclosure, measurement methodologies, transparency and quality of underlying data. That has led to a number of jurisdictions proposing regulation, including (in addition to the EU) the UK, as well as to government inquiries to ratings providers in the U.S.

© Copyright 2023 Cadwalader, Wickersham & Taft LLP

For more financial legal news, click here to visit the National Law Review.

Is Biodiversity Emerging As A Unifying Concept That Can Help Ease The Political Polarization Surrounding ESG?

Highlights

    • In addition to global initiatives by the United Nations, G7, and the U.S., the need for protection against biodiversity loss has become a central focus of the business and investment communities
    • Biodiversity protection is emerging worldwide as a unifying concept that can mitigate the political polarization surrounding ESG and promote constructive dialogue about sustainability
    • A number of steps can be taken to capitalize on the unique attributes and appeal of biodiversity and leverage its potential to serve as a unifying concept

International Biodiversity Day, May 22, 2023, with its theme “From Agreement to Action: Build Back Biodiversity” was a powerful reminder that momentum for biodiversity conservation is accelerating globally. Biodiversity is increasingly being recognized as a potential unifying concept that can help alleviate some of the extreme political divergence over the term ESG.

ESG, which encompasses a broad range of environmental, social, and governance factors, has become politically charged and the subject of intense debate and varying interpretations. Biodiversity, on the other hand, is widely recognized as a critical aspect of environmental sustainability and it is increasingly acknowledged as a pressing issue by virtually all stakeholders, including scientists, policymakers, businesses, and communities.

Biodiversity represents the variety of life on Earth, including ecosystems, species, and genetic diversity. It is a tangible and universally valued concept that resonates with people from various backgrounds and ideologies. The preservation, protection and conservation of biodiversity are essential for the health and resilience of ecosystems, as well as for addressing climate change and ensuring the well-being of future generations.

By emphasizing biodiversity within sustainability discussions, stakeholders can find common ground and rally around a shared objective: protecting and restoring the Earth’s natural diversity. Biodiversity provides a unifying language and focus that transcends political divisions, as it highlights the interconnectedness of all life forms. It allows for a more tangible and universally valued point of reference, which can facilitate collaboration and drive collective action towards conservation efforts.

In addition to global initiatives by the United Nations, the Group of Seven (G7), and the U.S., the need for protection against biodiversity loss has also become a central focus of business and investment communities, and appears to be receiving a more favorable reception in the U.S. than the broader concepts associated with and motives attributed to ESG investing. This increased attention has, in turn, opened up a number of practical opportunities for action to leverage the potential of biodiversity as a unifying concept.

International Support for Biodiversity Protection

The United Nations formed the Convention on Biological Diversity (CBD) to promote nature and human well-being. The first draft was proposed on May 22, 1992, which was then designated as International Biodiversity Day. Since the Rio Earth Summit in 1992, nearly 200 countries have signed onto this treaty, which is a legally binding commitment to conserve biological diversity, to sustainably use its components and to share equitably the benefits arising from the use of genetic resources.

In December 2022, at the 15th UN Biodiversity Conference (COP15), the CBD adopted the Kunming-Montreal Global Biodiversity Framework that calls for protecting 30 percent of the planet’s land, ocean, and inland waters and includes 23 other targets to help restore and protect ecosystems and endangered species worldwide, and ensure that big businesses disclose biodiversity risks and impacts from their operations. The Kunming-Montreal framework also focused on increasing funding for biodiversity by at least $200 billion per year (with at least $30 billion per year to developing countries by 2030).

The U.S. is one of just a few countries worldwide that has not yet formally approved the CBD. While President Clinton signed the CBD in 1993, the Senate did not ratify it. Although the U.S. was on the sidelines at COP15 in late 2022, in parallel with the CBD approval of the Kunming-Montreal framework, the U.S. reiterated its support for an ambitious and transformative Global Diversity Framework, outlined in this State Department press release.

In addition to committing to conserve at least 30 percent of U.S. lands and waters by 2030, other U.S. leadership initiatives to mainstream and conserve nature that were announced or reaffirmed at that time include:

    • Conserving forests and combatting global deforestation
    • Prioritizing nature-based solutions to address climate change, nature loss, and inequity
    • Incorporating nature into national economic statistics and accounts to support decision-making
    • Recognizing and including indigenous knowledge in federal research, policy, and decision-making, including protections for the knowledge holder
    • Knowing nature with a national nature assessment that will build on the wealth of existing data, scientific evidence, and Indigenous Knowledge to create a holistic picture of America’s lands, waters, wildlife, ecosystems and the benefits they provide
    • Strengthening action for nature deprived communities by expanding access to local parks, tree canopy cover, conservation areas, open space and water-based recreation, public gardens, beaches, and waterways
    • Conserving arctic ecosystems through increased research on marine ecosystems, fisheries, and wildlife, including through co-production and co-management with Indigenous Peoples

The U.S. also spearheaded efforts to reverse the decline in biodiversity globally by advancing land and water conservation, combating drivers of nature loss, protecting species, and supporting sustainable use, while also enabling healthy and prosperous communities through sustainable development. The U.S. also affirmed its financial commitment to and support for international development assistance to protect biodiversity. Additionally, the U.S. made major policy and financial commitments to protect oceans and advance marine conservation and a sustainable ocean economy.

Of particular importance, the U.S. reaffirmed its commitment to advancing science-based decision making and its support for the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services.

Most recently, the G7 Hiroshima Leaders’ Communique issued at the close of their meeting on May 20 on the cusp of International Biodiversity Day, affirmed that G7 leadership (including the U.S.) welcomed “the adoption of the historic Kunming-Montreal Global Biodiversity Framework (GBF) to halt and reverse biodiversity loss by 2030, which is fundamental to human well-being, a healthy planet and economic prosperity, and commit to its swift and full implementation and to achievement of each of its goals and targets.”
G7 leadership also reaffirmed their commitment “to substantially increase our national and international funding for nature by 2025,” and “to supporting and advancing a transition to nature positive economies.” Notably, they also pressed companies to do so as well while at the same time voicing support for TNFD’s market framework for corporate nature related disclosures:

“We call on businesses to progressively reduce negative and increase positive impacts on biodiversity. We look forward to the publication of the Taskforce on Nature-related Financial Disclosures’ (TNFD’s) market framework and urge market participants, governments and regulators to support its development.”

Similarly, multilateral development banks (MDBs) were urged by the leaders of G7 to increase their support for biodiversity by leveraging financial resources from all sources and “deploying a full suite of instruments.”

Increasing Focus On Biodiversity By The Financial Sector

The financial sector has taken note of the growing international support for biodiversity conservation and protection. A 2023 study by PwC found that “55% of global GDP—equivalent to about US $58 trillion—is moderately or highly dependent on nature.” In its report The Economic Case for Nature, the World Bank found that a partial collapse of ecosystem services would cost 2.3 percent of global GDP ($2.7 trillion) in 2030. Conversely, the report found that implementing policies beneficial to nature and biodiversity conservation (including achieving the “30×30” goal subsequently approved by the CBD in the Kunming-Montreal framework and by Executive Order in the U.S.) could result in a substantial increase in global real GDP by 2030.

According to a 2020 report by the World Economic Forum, protecting nature and increasing biodiversity could generate business opportunities of $10 trillion a year and create nearly 400 million new jobs by 2030. Given this economic potential, it comes as no surprise that a growing number of investors are focusing on deploying capital for nature-based opportunities, and trying to assess whether and to what extent companies are susceptible to biodiversity related risks.

Toward those ends, the financial sector has been monitoring and supporting the development of TNFD’s market framework for nature related disclosures that was most recently endorsed by G7. That private global effort was launched in 2021 in response to the growing need to factor nature into financial and business decisions. The fourth and final beta version was issued in March 2023:

“The TNFD is a market-led, science-based and government supported initiative to help respond to this imperative. The Taskforce is nearing the end of its two-year framework design and development phase to provide market participants with a risk management and disclosure framework to identify, assess, respond and, where appropriate, disclose their nature-related issues. The TNFD framework, including TCFD-aligned recommended disclosures, will be published in September 2023 ready for market adoption.”

While the TNFD framework is not legally binding, the final version will be coming on line just in time for use as a guide for compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD), which was effective in April 2023. It will require a substantial number of European companies and others operating in the EU, to start making disclosures regarding biodiversity and nature in coming years.

One of the more significant catalysts for investment in the protection of biodiversity and nature was the establishment of the Natural Capital Investment Alliance as part of the United Kingdom’s Sustainable Markets Initiative announced in 2020 and the Terra Carta sustainability charter launched by King Charles a year later. The Alliance is a public/private venture that aims to invest $10 billion in natural capital assets. Speaking at the One Planet Summit on biodiversity where the Alliance was announced in January 2021, King Charles stated “… I have created a Natural Capital Investment Alliance to help us arrive at a common language on Natural Capital Investment so that we can start putting money to work and improve the flow of capital.”

According to research by Environmental Finance, total assets held in thematic biodiversity funds more than tripled in 2022, and it is anticipated that momentum and growth will accelerate in response to COP 15 in December 2023, and approval of the Kunming-Montreal framework.

Positioning Biodiversity As A Unifying Concept

While biodiversity is not replacing ESG, it is gaining more attention within the broader ESG framework. Biodiversity conservation is supported by a vast body of scientific research and has a broad consensus among stakeholders. Many companies are incorporating biodiversity considerations into their sustainability strategies, and setting goals for conservation, habitat restoration, and responsible land use. Investors are also factoring biodiversity into their decision-making processes, looking for companies that demonstrate strong biodiversity conservation efforts.

Given the universal importance of biodiversity, it can serve as a focal point for mutual understanding for stakeholders with varying perspectives. Biodiversity conservation provides a unifying language that encourages collaborative efforts towards shared goals of environmental stewardship and the preservation of natural resources. Protection against biodiversity loss is not an ideological issue. To the contrary, it is fundamental, practical, and existential: the need to preserve the natural systems that support life on Earth. Emphasizing the importance of biodiversity shifts the focus to concrete and tangible actions required globally and locally, such as species preservation, and ecosystem protection, which can garner broader support and participation and help bridge political divides.

While biodiversity protection is by no means a panacea, there are further steps that can be taken to capitalize on its unique attributes and appeal that can improve the potential for biodiversity to serve as a unifying concept that can help reduce the current political polarization in the U.S. over ESG and promote more constructive dialogue around sustainability:

    • Universal concern – Biodiversity loss affects every individual and society, regardless of political affiliation. It is a shared concern that is oblivious to political boundaries, as the preservation of nature’s diversity is vital for the well-being of all life on Earth. By emphasizing biodiversity as a unifying concept, stakeholders can find mutuality and work together towards its conservation.
    • Inclusivity – Biodiversity requires inclusive engagement by diverse stakeholders and technical and scientific support from local communities, indigenous groups, governments, businesses, civil society organizations and the public. Such engagement fosters dialogue, understanding, and collaboration, breaking down political barriers.
    • Tangible and relatable – Biodiversity is a concrete and tangible concept that people can relate to, unlike some of the more complex ESG concepts, like Scope 3 greenhouse gas (GHG) emissions and Net Zero. It encompasses the variety of species, ecosystems, and genetic diversity, which are easily understandable and relatable to everyday experiences. This relatability can bridge political divides and foster broader support for conservation efforts.
    • Interconnectedness – Biodiversity underscores the interconnectedness of ecosystems and species emphasizing that actions in one area can have cascading far-reaching consequences on others, including ecological, social, and economic effects. Recognizing this interconnectedness can encourage stakeholders to collaborate across sectors and ideologies to address biodiversity loss collectively.
    • Co-benefits and shared values – Biodiversity conservation often aligns with other societal values and goals, such as climate change mitigation, sustainable development, and human well-being. By emphasizing the co-benefits that arise from biodiversity conservation, such as ecosystem services and resilience, stakeholders can rally around shared values and work towards a common vision.
    • Economic implications – Biodiversity loss can have significant economic implications for industries like agriculture, tourism, and pharmaceuticals. It can also have impacts on supply chains and market access. Recognizing the economic value of biodiversity and the potential risks associated with its decline can bring together diverse stakeholders, including businesses and investors, who recognize the importance of integrating biodiversity considerations into their strategies and decision-making processes.
    • Science-based approach – Biodiversity conservation relies on scientific knowledge and research. Emphasizing the scientific evidence on the importance of biodiversity helps build consensus and transcends political biases, providing a foundation for constructive discussions.
    • Local and global perspectives – Biodiversity conservation is relevant at both local and global scales. It allows for discussions that incorporate local knowledge, values, and practices, while recognizing the need for global cooperation to address biodiversity loss and protect shared resources.

To leverage biodiversity as a unifying concept, it is crucial to promote open dialogue, knowledge sharing, and collaboration. Stakeholders should engage in inclusive decision-making processes that respect diverse perspectives and prioritize equitable and sustainable outcomes.

Takeaways

Biodiversity is emerging as a potential unifying concept that can help mitigate the political polarization surrounding the term ESG. While ESG has become a politically charged and debated topic, biodiversity is widely recognized as a critical aspect of environmental sustainability and has broad support across different stakeholders.

By focusing on biodiversity, stakeholders can find common ground in recognizing the importance of preserving nature’s diversity and ensuring the long-term sustainability of ecosystems. Biodiversity loss is a global challenge that affects everyone, irrespective of political affiliation, and it is increasingly acknowledged as a pressing issue by scientists, policymakers, businesses, and communities.

It is important to note that while biodiversity can be a unifying concept, there will still be debates and differing opinions on specific approaches and trade-offs involved in biodiversity conservation. Different stakeholders may have differing priorities, perspectives, and proposed means and methods to address biodiversity loss. The complexity of biodiversity issues, such as balancing conservation with economic development or navigating conflicts between different stakeholder interests, requires careful consideration and dialogue.

© 2023 BARNES & THORNBURG LLP

For more Financial Legal News, visit the National Law Review.

Biden Administration Sets New Course on ESG Investing in Retirement Plans

In late 2022, the Department of Labor finalized a new rule titled “Prudence in Selecting Plan Investments and Exercising Shareholder Rights,” largely reversing Trump-era guidance that had strictly limited the ability of plan fiduciaries to consider “environmental, social, and governance” (ESG) factors in selecting retirement plan investments and generally discouraged the exercise of proxy voting. In short, the new rule allows a fiduciary to consider ESG factors in selecting investment options, provided that the selection serves the financial interests of the plan and its participants over an appropriate time horizon, and encourages fiduciaries to engage in proxy voting.

The final rule moves away from 2020 Trump-era rulemaking by allowing more leeway for fiduciaries to consider ESG factors in selecting investment options. Specifically, the rule states that a “fiduciary’s duty of prudence must be based on factors that the fiduciary reasonably determines are relevant to a risk and return analysis and that such factors may include the economic effects of climate change and other ESG considerations on the particular investment or investment course of action.” The rule makes clear, however, that there is no requirement to affirmatively consider ESG factors, effectively limiting its scope and effect and putting the onus on fiduciaries to determine whether they want to incorporate ESG factors into their assessments of competing investments.

Overview

  • Similar to the Trump-era guidance, there is no definition of “ESG” or an “ESG”-style fund. Debate continues over what kinds of funds can be considered ESG investments, especially in light of the fact that some companies in industries traditionally thought to be inconsistent with ESG conscious investing are now trying to attract ESG investors (e.g. industrials, energy).
  • Fiduciaries are not required to consider ESG factors in selecting investment options. However, the consideration of such factors is not a presumed violation of a fiduciary’s duty of loyalty or prudence. Unlike the prior rule, which suggested that consideration of ESG factors could only be considered if all other pecuniary factors between competing investments were equal (the “tiebreaker” approach), the new rule allows a fiduciary to consider potential financial benefits of ESG investing in all circumstances.
  • Plan fiduciaries may take into account participant preferences in constructing a fund lineup. Therefore, if participants express a desire for ESG investment options, then it may be reasonable for plan fiduciaries to add ESG funds or to consider ESG factors in crafting the fund lineup.
  • ESG-centric funds may be used as qualified default investments (QDIAs) within retirement plans, reversing the prior outright prohibition on use of such funds as QDIAs.
  • In some situations, fiduciaries may be required to exercise shareholder rights when required to protect participant interests. It is unclear whether the exercise of such rights is only limited to situations that have an economic impact on the plan, or applies to additional situations. The clarification suggests that the exercise of proxy voting is not disfavored as an inefficient use of fiduciaries’ time and resources, as the prior iteration of the rule suggested.

Effective Date and Challenges to the Regulation

The new rule became effective in January 2023, except for delayed applicability of proxy voting provisions. However, twenty five state attorneys general have joined a lawsuit in federal court in Texas that seeks to overturn the regulation. The court is in the Fifth Circuit, which historically has been hostile to past Department of Labor regulations (including Obama-era fiduciary rules overturned in 2018, though the ESG rule is less far-reaching than the fiduciary rule and may survive a challenge even in the Fifth Circuit). Congressional Republicans have also introduced a Congressional Review Act (CRA) review proposal to repeal the regulation that has gained the support of Joe Manchin (D-WV). Although CRA actions are not subject to Senate filibuster rules, they are subject to presidential veto, which President Biden is sure to do if the repeal reaches his desk.

Action Steps

Employers should assume that the ESG rules will remain in effect and engage with plan fiduciaries, advisors, and employees and determine the extent to which ESG considerations should (or should not) enter into fiduciary deliberations when considering plan investment alternatives. Some investment advisors have already begun to include separate ESG scorecards for mutual funds and other investments in their regular plan investment reviews. Fiduciaries should also consider whether and how the approach that is ultimately taken should be reflected in the plan’s investment policy statement. Plans that delegate full control over investments to an independent fiduciary (an ERISA 3(38) advisor) should engage with their advisor to determine whether and the extent to which ESG considerations will be part of that fiduciary’s process, and whether that is consistent with the desires of the plan fiduciaries and participants.

Article By Alex H. Glaser and Timothy Brechtel of Jones Walker LLP

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© 2023 Jones Walker LLP