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    FED to Revise Information Collection; Congress to Scrutinize ESG Firms

    The Board of Governors of the Federal Reserve System (FED) is seeking comments, until January 03, 2023, on a proposal to revise and extend, for three years, the reporting, recordkeeping, and disclosure requirements associated with Regulation Q, which sets out the capital adequacy requirements for bank holding companies, U.S. intermediate holding companies, savings and loan holding companies, and state member banks. FED also approved the request of Columbia Banking System Inc to acquire Oregon-based Umpqua Holdings Corporation and thereby indirectly acquire its state nonmember bank, Umpqua Bank. Additionally, the U.S. Senator Pat Toomey, a member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, published follow-up letters to 12 environmental, social, and governance (ESG) rating firms, calling on these firms to disclose information on their practices for calculating companies’ ESG scores.

    The U.S. Senator Pat Toomey, on September 20, 2022, had written to 12 rating firms, seeking information about how they calculate the ESG scores of companies. To date, six of the twelve firms (Arabesque S-Ray, Carbon Disclosure Project, FactSet, ISS, RepRisk, and Sustainalytics) have either ignored the letters or have provided incomplete responses. Thus, this week, the Senator sent follow-up letters asking the firms to preserve all documents, communications, and other information—including electronic information and metadata—potentially responsive to the September request. These documents will be critical for members of Congress to continue investigating ESG rating firms’ scoring and data collection practices come January. The original letter had requested the following information:

    • Any non-proprietary methodologies used to assign ESG ratings, including the specific E, S, and G factors measured and how those factors are weighed
    • How the firms determine the scope of industry sectors, including whether they employ analysts with sector-specific expertise
    • Reports intended to capture controversies faced by a company, such as pending litigation, negative press coverage, or shareholder resolutions
    • Whether companies have an opportunity to submit clarifying comments to their ratings for the benefit of investors
    • How the firms determine the credibility of the data sources used; how the firms approach ratings with respect to hot button political issues, including abortion and gun control; and how the firms deal with potential conflicts of interest, in cases where the firms also issue proxy vote recommendations or offer advisory services

    The letter states that the need for this arose because the use of ESG factors in capital allocation has raised bipartisan concerns among Congress and regulators alike. Legitimate bipartisan concerns have also been raised regarding the veracity of third-party data, the opacity of rating methodologies, the processes by which rating firms engage with rated entities, and the management of conflicts of interest. ESG rating firms are known to play a key role in the sustainable finance industry by providing third-party data and ratings on companies to investors. Given the above concerns and increased bipartisan interest in conducting oversight of the ESG industry, it is crucial that firms provide the requested information, notes the follow-up letter. 

     

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    Keywords: Americas, US, Banking, Regulation Q, Reporting, Disclosures, Regulatory Capital, Basel, ESG, ESG Ratings, ESG Scores, Credit Risk Mitigation, Third Party Data, ESG Data Product Providers, FED, US Senate

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