Monday, October 2

Climate politics at heart of state probes into big banks

A cadre of state attorneys general have launched probes into the environmental, social and governance policies of the country’s large banks, giving rise to concerns about state regulatory regimes ultimately being divided along red and blue political lines.

Led by Missouri Attorney General Eric Schmitt, 19 mostly Republican-controlled states said last week they’re investigating the ESG practices of Bank of America, JPMorgan Chase, Goldman Sachs, Citigroup, Morgan Stanley and Wells Fargo.

The move is seen by banks and outside advocacy groups — even some that have been critical of the financial industry for not doing enough to reduce its carbon footprint — as an effort by government officials to block certain banks from certain activities for political reasons.

“Fundamentally, it’s an intimidation tactic,” said Yevgeny Shrago, policy director for Public Citizen’s Climate Program. “It’s intended by these AGs to push these banks out of their commitments. In that sense, it’s really intended to force these banks back into climate denial, to not taking climate change seriously.”

Each state attorney’s office issued a civil investigative demand — effectively an executive subpoena — to each of the six banks, asking them to detail all of their affiliations with various climate- and ESG-related groups and pacts, as well as their related internal policies. Many of the inquiries were focused on the United Nations’ Net-Zero Bank Alliance, of which all six banks are members. 

“We are leading a coalition investigating banks for ceding authority to the U.N., which will only result in the killing of American companies that don’t subscribe to the woke climate agenda,” says Eric Schmitt, attorney general of Missouri, one of 19 states seeking information about big banks’ ESG practices.

Investigators are also asking the banks to explain their reasons for participating in climate pledges and their progress toward adhering to them to date. They are also seeking information about the groups within each bank that handle climate matters and the individual employees involved. 

Morgan Stanley declined to comment for this article. The other five banks did not respond to requests for interviews. 

The NZBA has been a source of confusion and concern among member banks and policymakers in recent months. In June, an affiliated U.N. program, the Race to Zero campaign, updated its criteria to call for members to restrict the development, financing and facilitation of new fossil-fuel assets. Based on those changes, some wondered if the NZBA banks would be forced to sever ties to the energy sector completely.

This week, Tracey McDermott, chair of the NBZA steering committee, wrote a letter to alliance members, telling them they were not obligated to follow the Race to Zero criteria. She followed that up with an interview with Bloomberg, in which she said global events — the war in Ukraine, in particular — are making it harder for banks to meet their climate goals.

“When you look at the environment around decarbonization and fossil fuels, the situation is more complex than it was even versus 2021,” McDermott told the publication.

Isaac Boltansky, a director at BTIG, said the banking industry is in the “very early innings” of defining its ESG objectives. Moments of confusion and adjustment should be expected, he said, as should opportunistic politics. 

“While policymakers and market participants will continue to work toward clarity and standardization, which will take years, we should be prepared for the political winds to continue whipsawing the discussion,” Boltansky said. “With Republicans highly likely to control at least one chamber of Congress next year, we will hear a considerable amount about ‘woke capitalism’ from Capitol Hill, and ESG is a centerpiece on that dinner table.”

The states have not leveled any charges against the banks or accused them of breaking specific laws, but Schmitt implied they were working together against certain industries. In a statement, he accused the NZBA and its member banks of seeking to “starve companies engaged in fossil fuel-related activities of credit on national and international markets.”

Earlier this year, Schmitt led a similar multistate investigation into the credit agency Morningstar and its subsidiary Sustainalytics, alleging that they incorporated an “anti-Israel bias” in their ESG ratings.

Along with Missouri, Arizona, Arkansas, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, Tennessee, Texas, Virginia and five other unnamed states are involved in the bank investigation.

“We are leading a coalition investigating banks for ceding authority to the U.N., which will only result in the killing of American companies that don’t subscribe to the woke climate agenda,” Schmitt said Wednesday. “These banks are accountable to American laws — we don’t let international bodies set the standards for our businesses.”

Legal experts in and around the banking industry are skeptical that the investigation will lead to legal action. One policy expert said the questions from attorneys general seem to indicate antitrust concerns regarding banks colluding against fossil-fuel companies. Such a claim would be hard to prove, the expert said, noting that all the banks in question still do business with energy companies.

Still, the exercise is likely to be long and arduous for the targeted banks, given the amount of information requested and the fact that they must comply with each state’s request individually. 

Regardless of what the investigation yields, some in the industry see it as further evidence of the politicization of regulatory policies, specifically those around ESG.

Divergent approaches to ESG are already fomenting at the state level. Seven states have adopted laws this year banning investment of public funds into companies with ESG mandates, according to the research group APM Research Lab, with five others considering legislation to do the same. Should this trend continue, it could lead to a patchwork regulatory system throughout the country that makes it harder and more expensive to operate across state borders.

Shrago said actions by the state attorneys general could have a chilling effect for banks considering new climate commitments. But, he said, the long-term risks of investing in fossil fuels are clear, so he does not see banks abandoning their ESG policies willingly.

“These attorneys generals are, I think, trying to force these banks to go against economic reality. I hope they’re not successful,” he said. “I doubt that the banks are going to be willing to cut into their profit margins to just meet political needs.”

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