Greenwashing is when a company overstates its efforts towards its sustainability goals. In other words, a company engages in greenwashing when it deceptively advertises that its products, goals, and policies are environmentally friendly.

According to Frankfurter prosecutors, DWS engaged in greenwashing from mid-2020 to the end of January 2023. “The impression given to the capital market that DWS Group was supposedly the market leader in sustainable financial products was not, or not completely, fulfilled by the business’s organization itself,” the prosecutors said. DWS didn’t monitor the situation carefully enough and instead advertised itself as being a “leader” in the ESG field or incorporating ESG as an “integral part of our DNA.” They didn’t correspond to reality, according to prosecutors.

According to the investigation, the first documented instance of the alleged greenwashing occurred when DWS fired an executive who claimed that the company inflated its sustainability targets to investors. Shortly after, the firm was charged with similar greenwashing allegation by the Securities and Exchange Commission in which it agreed to pay a fine of $25 million. Specifally, DWS was charged for making “materially misleading statements” in connection to its ESG research and investments. The firm did not admit or deny the SEC’s findings.

DWS agreed to the terms of the settlement fine and said that it will not appeal. “We have already publicly stated in recent years that our marketing was sometimes exuberant in the past,” the firm said in a statement. “We have already improved our internal documentation and control processes and will continue to work on making further progress in this area.”  

The post Deutsche Bank’s DWS Group Fined for Greenwashing Allegations appeared first on Compliance Chief 360.

In February, acting SEC Chair Mark Uyeda requested that the court pause a lawsuit that challenged the validity of the disclosure rules in order for the SEC to assess whether it would like to proceed with its defense of the rules. Uyeda requested that the court give the SEC 45 days to decide whether it would like to move forward with the case. Now that the 45 days is up, Uyeda informed the court that the SEC decided to drop its defense of the climate disclosure rules.

“The rule is deeply flawed and could inflict significant harm on the capital markets and our economy,” according to Uyeda “The goal of today’s Commission action and notification to the court is to cease the Commission’s involvement in the defense of the costly and unnecessarily intrusive climate change disclosure rules.”

SEC’s Decision Faces Criticism from One Commissioner 

Although, a majority of the SEC Commissioners opposed the rules, Commissioner Caroline Crenshaw, who originally voted in favor of the rules, denounced the Agency’s decision to step away from the lawsuit. According to Crenshaw, the SEC’s decision to step away goes against the procedures set out by the Administrative Procedure Act in effectively rescinding the rules.

“In effect, the majority of the Commission is crossing their fingers and rooting for the demise of this rule, while they eat popcorn on the sidelines,” Crenshaw said in a statement. “We are now firmly in a period of policy-making through avoidance and acquiescence, rather than policy-making through open, transparent, and public processes. This approach does not benefit the markets, capital formation, or investors.”

Crenshaw now requests that the court appoint someone else to take the SEC’s former place in defending the rules. It is not clear whether the court will do so or if someone will voluntarily step up to the plate.

For now, the climate disclosure rules will not be defended in terms of their validity and legality. As a result, unless someone is appointed or voluntarily takes action, the rules will be rescinded, and companies will no longer be required to disclose the impact of climate change on their businesses.  

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The SEC announced its decision in a Staff Legal Bulletin, rescinding a previous bulletin that had restricted companies from excluding proposals with “broad societal impact.” Due to this rescission, the SEC is expected to take a more company-specific approach and as a result, companies are expected to be increasingly successful in excluding such proposals.

An Overview of Shareholder Proposal Exclusion Rules

The exclusion of shareholder proposals is governed by Rule 14a-8 of the SEC. Although this rule has many factors to it, the SEC’s announcement mainly focuses on Rule 14a-8(i)(5) and Rule Rule 14a-8(i)(7).

Rule 14a-8(i)(5), also known as the “Economic Relevance” rule, provides that a company may exclude a shareholder proposal if the proposal relates to operations that account for less than 5% of the company’s total assets at the end of its most recent fiscal year, and for less than 5% of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.

Under the former Legal Bulletin, the SEC was directed to analyze whether a proposal fell under this rule by focusing on whether the issue covered by the proposal has broad societal impact rather than the significance of the issue to the company. Under the new framework, proposals that raise issues of social or ethical significance may now be excludable, despite their importance in the abstract.

Meanwhile, Rule 14a-8(i)(7), also known as the “Ordinary Business” rule, provides that a company may also exclude a shareholder proposal if the proposal deals with a matter relating to the company’s ordinary business operations.

When analyzing whether a proposal fits such a description, the significant question is whether a proposal raises matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.”

With the SEC’s announcement, its staff will take a company-specific approach in evaluating significance, as opposed to focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally significant.

“A policy issue that is significant to one company may not be significant to another,” according to the bulletin. “The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.”

The SEC is seemingly shifting towards a pro-company approach when analyzing an exclusion of certain shareholder proposals. In support of its change in policy the Commission provided its interpretation of Rule 14a-8.

“Because the rule allows exclusion only when the matter is not ‘otherwise significantly related to the company,’ we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted,” the bulletin states. “That is, a matter significant to one company may not be significant to another. On the other hand, we would generally view substantive governance matters to be significantly related to almost all companies.”  

The post SEC Rescinds Guidelines, Easing Shareholder Proposal Exclusions appeared first on Compliance Chief 360.

Zeldin previously served in the New York State Senate from 2011-2014 and later represented New York’s 1st Congressional District in the United States House of Representatives from 2015-2023. He is now in 22^nd year of military service and serves as a Lieutenant Colonel in the Army Reserve.

During his confirmation hearing, Zeldin said that once confirmed he will “foster a collaborative culture within the agency, supporting career staff who have dedicated themselves to this mission. I strongly believe we have a moral responsibility to be good stewards of our environment for generations to come.”

“Under President Trump’s leadership, we will take great strides to defend every American’s access to clean air, clean water, and clean land,” Zeldin said in an EPA press release. “We will maintain and expand the gold standard of environmental stewardship and conservation that President Trump set forth in his first administration while also prioritizing economic prosperity.”

During his eight years in Congress, Zeldin worked across party lines to preserve the Long Island Sound and Plum Island. He supported key legislation that became historic success stories like the Great American Outdoors Act and Save our Seas Act to clean up plastics from the oceans. He also led the fight for Sea Grant, combated per- and polyfluoroalkyl substances (PFAS) in drinking water, voted for the Lautenberg Chemical Safety Act, and supported clean energy projects on Long Island.

Senators Divided Over Zeldin’s Confirmation at Hearing

Although Zeldin has led numerous projects aimed at protecting the environment, many expressed their disapproval of the EPA Administrator during his confirmation hearing.

“We need an EPA administrator who will take climate change seriously, treat the science honestly and stand up where necessary to the political pressure that will be coming from the White House, where we have a president who actually thinks (climate change) is a hoax, and from the huge fossil fuel forces that propelled him into office with enormous amounts of political money and who now think they own the place,” Senator Sheldon Whitehouse of Rhode Island said in a Senate speech. “The likelihood of [Zeldin] standing against that fossil fuel bulldozer that is coming at him is essentially zero. And in that context, this is very much the wrong guy.”

Whitehouse’s opinion falls in contrast to Senator John Barrasso of Wyoming who believes that Zeldin will “restore balance at the EPA.” “For the last four years, the so-called experts at the Environmental Protection Agency went on a reckless regulatory rampage,’’ Barrasso said, referring to the Biden administration. “They saddled American families and businesses with higher costs and heavy-handed restrictions. They bowed to climate extremism and ignored common sense,” Barrasso said.

Zeldin announced during his hearing that he wants to promote smart regulations that will allow American innovation to continue. He also said that he will aim to prioritize compliance as much as possible as he believes in the rule of law and [wants] to work with people to ensure they do their part to protect the environment.”

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lobal consulting firm McKinsey & Co. has agreed to pay $650 million to settle a Department of Justice investigation into the firm’s consulting work with opioids manufacturer Purdue Pharma. The DoJ had accused McKinsey of fueling the opioid epidemic with its aggressive sales and marketing advice to Purdue, including a 2013 engagement in which McKinsey advised on steps to “turbocharge” sales of OxyContin.

McKinsey has agreed to pay a penalty of over $231 million, a forfeiture amount of over $93 million and a payment of $2 million to the Virginia Medicaid Fraud Control Unit to resolve the criminal allegations.

The settlement marks the first time a management consulting firm has been held criminally responsible for advice resulting in the commission of a crime by a client and reflects the Justice Department’s ongoing efforts to hold those responsible for their roles in the opioid crisis to account. The resolution is also the largest civil recovery for such conduct.

“For the first time in history, the Justice Department is holding a management consulting firm and one of its senior executives criminally responsible for the sales and marketing advice it gave resulting in the commission of crime by a client,” said Attorney Christopher Kavanaugh for the Western District of Virginia. “This ground-breaking resolution demonstrates the Justice Department’s ongoing commitment to hold accountable those companies and individuals who profited from our Nation’s opioid crisis.”

McKinsey also has entered into a civil settlement agreement in which it will pay over $323 million to resolve its liability under the False Claims Act for allegedly providing advice to Purdue that caused the submission of false and fraudulent claims to federal healthcare programs for medically unnecessary prescriptions of OxyContin, as well as allegedly failing to disclose to the U.S. Food and Drug Administration conflicts of interest arising from McKinsey’s concurrent work for Purdue and the FDA. This brings the total payments under the global resolution to $650 million.

McKinsey’s Criminal Liability for Misbranding

The criminal misbranding charge was based on McKinsey’s advice to the titan opioids manufacturer. Between 2004 and 2019, McKinsey contracted with Purdue on 75 different occasions in the United States. In 2007, a Purdue affiliate pleaded guilty to misbranding OxyContin, from 1996 through 2001, by falsely marketing it as less addictive, less subject to abuse and diversion, and less likely to cause dependence and withdrawal than other pain medications, and Purdue entered into a five-year corporate integrity agreement with the Department of Health and Human Services Office of Inspector General. After the 2007 guilty plea, McKinsey partners maintained close contact with Purdue, and in 2009, worked with Purdue to enhance “brand loyalty” for OxyContin and protect market share.

In 2010 McKinsey worked with Purdue to obtain FDA approval for a version of OxyContin that was reformulated with abuse-deterrent properties. Following the introduction of reformulated OxyContin in August 2010, OxyContin sales immediately began to decline. Purdue studied the drivers for this decline and attributed it, in large part, to a drop in prescriptions for individuals abusing OxyContin and increases in regulatory safeguards intended to hinder medically unnecessary prescribing of OxyContin.

In May 2013, Purdue retained McKinsey to conduct a rapid assessment of the underlying drivers of OxyContin performance, identify key opportunities to increase near-term OxyContin revenue and develop plans to capture priority opportunities. This 2013 effort was called Evolve to Excellence, or “E2E,” and included McKinsey advising Purdue on how to “turbocharge” the sales pipeline for OxyContin by, among other strategies, intensifying marketing to High Value Prescribers, included prescribers who were writing opioid prescriptions for uses that were unsafe, ineffective, and medically unnecessary.

McKinsey consultants spoke with Purdue about the concerns and increasing reluctance of pharmacists and pharmacy chains to fill prescriptions for OxyContin as abuse of the drug rose. McKinsey consultants also went on several “ride-alongs” with Purdue sales representatives in the field, as these sales representatives called on prescribers and pharmacists. In notes about one of these ride-alongs, a McKinsey consultant wrote, in part, “Pharmacist; [had] a gun and was shaking; abuse is definitely a huge issue[.]”

In August 2013, McKinsey partners met with certain members of the Purdue Board of Directors to present McKinsey’s findings and proposal; as one McKinsey partner reported afterwards, “[b]y the end of the meeting the findings were crystal clear to everyone and they gave a ringing endorsement of ‘moving forward fast.’” McKinsey also described for Purdue the financial value at stake: “hundreds of millions, not tens of millions.”

For Purdue and McKinsey, E2E was a financial success. Their targeting of High Value Prescribers slowed OxyContin’s declining sales and kept Purdue’s profits flowing at the expense of public health. After the conclusion of McKinsey’s work for Purdue on E2E, McKinsey performed additional work with Purdue that also sought to maximize OxyContin sales by further targeting sales efforts to High Value Prescribers.

False Claims to Federal Healthcare Programs and the FDA

The department’s civil False Claims Act settlement relates to allegations that, from 2013 to 2014, McKinsey, by advising Purdue to turbocharge OxyContin marketing to High Value Prescribers as a means to increase OxyContin sales, and despite its awareness of the opioid crises, knowingly caused false and fraudulent claims for OxyContin to be submitted to Medicare, Medicaid, TRICARE, the Federal Employees Health Benefit Program and the Veterans Health Administration.

The large $650 million fine also settles allegations that, from 2014 to 2017, McKinsey knowingly misled the FDA by assigning consultants to concurrently work on both FDA projects and competitively sensitive Purdue projects, contrary to McKinsey US’ conflict of interest policy. While soliciting a contract from the FDA, McKinsey US represented to the FDA that it had a conflict-of-interest policy in which its consultants serving the FDA would not be assigned to a competitively sensitive project for a significant period of time following an assignment for FDA.

The FDA then awarded McKinsey US the first in a series of contracts on a project relating to the monitoring of the safety of FDA-regulated products. McKinsey US admitted that it did not inform the FDA that its consultants worked on the Purdue projects around the same time those consultants also worked on the FDA project.

McKinsey’s Remedial Measures

As part of the resolution, McKinsey has agreed to implement a significant compliance program, including a system of policies and procedures designed to identify and assess high-risk client engagements. As part of this compliance program, McKinsey will implement new document retention procedures and training for all partners, officers and employees who provide or implement advice to clients. This compliance program is in addition to the provisions negotiated between McKinsey and the DoJ in a concurrent resolution with McKinsey & Company Africa that was announced on December 5^th.

McKinsey has also agreed that it will not do any work related to the marketing, sale, promotion or distribution of controlled substances during the five-year term of the DPA. The settlement requires McKinsey’s Managing Partner to certify, on an annual basis, the firm’s compliance with its obligations under the DPA and federal law.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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nvesco Advisers is paying the price for misleading clients and investors about how much of its assets were truly aligned with environmental, social, and governance principles. The Atlanta-based investment firm has agreed to pay a $17.5 million civil penalty to settle the Securities and Exchange Commission’s charges that it issued misleading statements on ESG.

According to the SEC’s order, from 2020 to 2022, Invesco told clients and stated in marketing materials that between 70 and 94 percent of its parent company’s assets under management were “ESG integrated.” However, in reality, these percentages included a substantial amount of assets that were held in passive ETFs that did not consider ESG factors in investment decisions. Furthermore, the SEC’s order found that Invesco lacked any written policy defining ESG integration.

“As stated in the order, Invesco saw commercial value in claiming that a high percentage of company-wide assets were ESG integrated. But saying it doesn’t make it so,” said Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, in a statement. “Companies should be straightforward with their clients and investors rather than seeking to capitalize on investing trends and buzzwords.”

The order charges Invesco with willfully violating the Investment Advisers Act of 1940. Without admitting or denying the order’s findings, Invesco agreed to cease and desist from violations of the charged provisions, be censured, and pay the aforementioned $17.5 million civil penalty.  

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Gartner predicts that by 2025, over 50% of major enterprises will use AI and machine learning to perform continuous regulatory compliance checks, up from less than 10% in 2021. This illustrates how dynamic the current GRC landscape is and how vigilant teams must be to prepare for further shifts. Fill out the form at right and hit “Submit” to get the report.

This report presents the key trends in GRC for 2024, highlighting the dual need to adapt to rapidly changing regulations while maintaining the highest standards of ethical conduct across industries.

The emphasis this year is on several pivotal areas: the impact of Artificial Intelligence (AI) on regulatory and ethical frameworks, increased demands for data privacy and protection, and the expanding scope of Environmental, Social, and Governance (ESG) criteria. Each of these areas presents distinct challenges and opportunities for GRC professionals, demanding new approaches to secure.

As organizations prepare to tackle these challenges, the report aims to equip GRC professionals with the knowledge and tools needed to navigate the complexities of the modern regulatory and operational environment. In this report, you’ll learn:

• AI in GRC: Its impacts, challenges, and the road ahead
• GRC in the new data privacy landscape
• The expanding reach of ESG and sustainability in GRC
• Data-driven compliance as the new foundation in GRC
• The close relationship between compliance and cybersecurity
• Ways to maintain compliance in remote workplace

Are Your GRC Frameworks Future-Proof? - Download

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In a landmark decision, the SEC voted to implement new regulations requiring public companies to disclose climate change risks and their greenhouse gas emissions. This long-awaited ruling marks a significant shift in corporate reporting, potentially impacting thousands of companies and bringing the U.S. closer to alignment with global efforts on climate transparency.

The SEC’s final rule follows a two-year process that included a proposed rule in March 2022 and culminated in a vote split along party lines. The new regulations aim to address investor concerns about the financial implications of climate change on businesses.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” said SEC Chair Gary Gensler in a statement. “The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

The Final Rules in Detail

Specifically, the final rules will require a public company to disclose:

• Climate-related risks that have had or are reasonably likely to have a material impact on the registrant’s business strategy, results of operations, or financial condition;
• The actual and potential material impacts of any identified climate-related risks on the registrant’s strategy, business model, and outlook;
• If, as part of its strategy, a registrant has undertaken activities to mitigate or adapt to a material climate-related risk, a quantitative and qualitative description of material expenditures incurred and material impacts on financial estimates and assumptions that directly result from such mitigation or adaptation activities;
• Specified disclosures regarding a registrant’s activities, if any, to mitigate or adapt to a material climate-related risk including the use, if any, of transition plans, scenario analysis, or internal carbon prices;
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the registrant’s material climate-related risks;
• Any processes the registrant has for identifying, assessing, and managing material climate-related risks and, if the registrant is managing those risks, whether and how any such processes are integrated into the registrant’s overall risk management system or processes;
• Information about a registrant’s climate-related targets or goals, if any, that have materially affected or are reasonably likely to materially affect the registrant’s business, results of operations, or financial condition. Disclosures would include material expenditures and material impacts on financial estimates and assumptions as a direct result of the target or goal or actions taken to make progress toward meeting such target or goal;
• For large accelerated filers (LAFs) and accelerated filers (AFs) that are not otherwise exempted, information about material Scope 1 emissions and/or Scope 2 emissions;
• For those required to disclose Scope 1 and/or Scope 2 emissions, an assurance report at the limited assurance level, which, for an LAF, following an additional transition period, will be at the reasonable assurance level;
• The capitalized costs, expenditures expensed, charges, and losses incurred as a result of severe weather events and other natural conditions, such as hurricanes, tornadoes, flooding, drought, wildfires, extreme temperatures, and sea level rise, subject to applicable one percent and de minimis disclosure thresholds, disclosed in a note to the financial statements;
• The capitalized costs, expenditures expensed, and losses related to carbon offsets and renewable energy credits or certificates (RECs) if used as a material component of a registrant’s plans to achieve its disclosed climate-related targets or goals, disclosed in a note to the financial statements; and
• If the estimates and assumptions a registrant uses to produce the financial statements were materially impacted by risks and uncertainties associated with severe weather events and other natural conditions or any disclosed climate-related targets or transition plans, a qualitative description of how the development of such estimates and assumptions was impacted, disclosed in a note to the financial statements.

Climate-Change Disclosure Light?

While these rules mark a significant change in U.S. climate disclosure regulations, they are narrower compared to the SEC’s 2022 draft, with the Commission reducing stringency in several areas.

For example, the SEC removed the Scope 3 disclosures requirement which, if it were in effect, would have obligated specific companies to provide data about the emissions generated by their suppliers and customers.

While the proposed rule required disclosure of Scope 1 (direct emissions from company operations) and Scope 2 (emissions associated with the purchase of energy) in all cases, the final rule requires this disclosure only if the company deems these emissions to be “material.”

The moves angered some proponents of stricter climate-change proposals. “While we are pleased to see the SEC issue its long-awaited climate disclosure rule, we are disappointed the final rule falls far short of what consumers and investors deserve: full, transparent, reliable, and comparable disclosure of greenhouse gas emissions through direct, indirect, supply chain, and product use,” said Cathy Cowan Becker, responsible finance campaign director at environmental advocacy group, Green America. “It’s unfortunate that the SEC would bend to pressure from corporate interests to significantly weaken its proposed rule.”

Others applauded the change. “While the SEC appears to have moved away from some of the most troubling provisions in the original proposal, questions remain about several aspects of the final climate disclosure rule, said Business Roundtable CEO Joshua Bolten in a statement. “The rule contains multiple, highly complex provisions that have not been subject to notice and comment. Business Roundtable will continue to evaluate the rule to better assess its impact and scope.”

The final rules will become effective 60 days following publication of the adopting release in the Federal Register, and compliance dates for the rules will be phased in for all registrants, with the compliance date dependent on the registrant’s filer status.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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The shareholder proposals specifically urge Exxon to diminish carbon emissions and broaden the range of emissions it monitors. “Investors face economy-wide risks from climate change,” Natasha Lamb, co-founder and chief investment officer at Arjuna Capital, said. “We have a fundamental right and duty to voice concern over climate risk, its impacts on the global economy, and shareholder value.”

According to Exxon, the proposals are “driven by an extreme agenda” and that the only reason why these activist organizations became shareholders was exclusively to campaign for change that is “calculated to diminish the company’s existing business.”

In its complaint, the energy giant said the Exxon shareholder proposals, “do not seek to improve [the company’s] economic performance or create shareholder value,” rather they are “trying to shrink the very company in which they are investing by constraining and micromanaging [its] ordinary business operation.”

Although Exxon has already demonstrated its efforts in reducing its greenhouse gas emissions, which includes those emissions that result directly from its business operations, the company has not implemented a plan to reduce emissions that result from the use of its products.

Exxon Sidesteps Traditional Proposal-Exclusion Procedure

When companies are faced with shareholder proposals that they would like to exclude from a proxy statement, they ordinarily file a “Rule 14a-8 no action request” with the SEC. A company can usually succeed in such a request if it can show that the proposal “relates to the company’s ordinary business operations.”

Although Exxon has asserted such a contention, the company did not do so with the SEC; instead, the oil giant sidestepped the agency and filed its lawsuit in a Texas federal court. The company addressed its decision to do so in its complaint: “The plain language of Rule 14a-8 supports excluding the 2024 Proposal, but current guidance by SEC staff about how to apply the rule can be at odds with the rule itself.”

In recent years, the SEC has raised the bar for companies seeking to challenge activist proposals by adopting a stricter standard. During this year, American Express and many other companies were denied in their requests to exclude certain shareholder proposals regarding environmental impacts, abortion, discrimination, and civil rights. Because of the SEC’s stringent view of “Rule 14a-8 no action requests,” Exxon opted for an unconventional approach in filing its lawsuit with the District Court in Northern Texas.

Although Exxon’s strategic sidestep may be unorthodox, it is not the first time that such a move has been used. Apache Corp. pushed the SEC to the side when it filed a similar lawsuit in the Southern District of Texas to strike activist shareholder proposals it saw as improper. The company prevailed in its lawsuit and set the stage for others to take the legal avenue.

From 2011 to 2014, three more companies followed suit and filed lawsuits in U.S. District Courts. All three companies prevailed in their lawsuits and were permitted to exclude certain shareholder proposals. However, in 2014, three more similar lawsuits were filed but were later dismissed for lack of jurisdiction.

Exxon hopes for a favorable ruling before March 19, anticipating two crucial deadlines in the upcoming spring. The company must submit its proxy statement by April 11, in preparation for its annual shareholder meeting scheduled for May 29.  

PHOTO BY HARRISON KEELEY, USED UNDER CREATIVE COMMONS LICENSE: CC BY 4.0

Jacob Horowitz is a contributing editor at Compliance Chief 360°

The post Exxon Takes Rare Move to Sue Shareholders Over Climate Change Proposals appeared first on Compliance Chief 360.

It specifically suggests that regulated financial firms establish a process for identifying, measuring, and controlling financial risks associated with climate change. These strategies should be reflected in the organization’s policies, procedures, and controls for the intention of providing boards and management with an understanding of how exactly to assess climate-related financial risks and their effects on their organizations. It also provides additional guidance on developing strategies for the effective management of climate-related risks and calls for the implementation of an internal control and risk management framework on climate change.

The new guidance is designed to support the efforts by New York financial firms to better manage their climate-related financial and operational risks, says the NYDFS. “To protect New Yorkers from financial harm, regulated institutions must anticipate and respond to new and emerging risks,” NYDFS Superintendent Adrienne Harris said in a NYDFS press release. “Today’s guidance provides these institutions with a balanced, data-driven approach to preserve safety and soundness and operational resiliency by addressing the risks posed by climate change.”

This newly adopted regulation addresses climate change components of risk management by banks—including corporate governance, internal control frameworks, risk management processes, and data collection and analysis—so that institutions will incorporate assessment of these risks into their existing risk frameworks.

“Regulated organizations should take a strategic approach to managing material climate- related financial and operational risks, considering both current and forward-looking risks and identifying actions required to manage those risks,” the guidance instructs. “Regulated organizations should consider questions such as: which business areas are or may in the future be exposed to these risks, what is the resiliency of the organization’s business models, what is the current or potential future materiality of the risks, and whether climate-related financial and operational risks require consideration across all business areas and processes, or only those areas or processes that are or may be particularly exposed.”

Climate-Related Internal Control Framework

The guidance also calls for the implementation of an internal control framework in order to “ensure sound, comprehensive, and effective identification, measurement, monitoring, and control of material climate-related financial risks.” The newly enacted regulation sets out “three lines of defense” in order to do so. The first line of defense advises that an organization consider climate-related financial risks when taking on new clients or reviewing a credit application. Such considerations include how climate-change risks may impacts its clients and their overall business environment. The second line of defense consists of a compliance system where an organization undertakes an assessment of climate-related financial risks. In this step, an organization should assess whether it is adhering to relevant climate-related rules and regulations. The third and final line of defense recommends that an organization conduct regular independent reviews and internal audits of its overall climate-related internal control framework.

The guidance also sets out a risk management framework that its regulated organizations are advised to implement. It recommends that this framework be designed for the purpose of identifying, measuring, and controlling climate-related financial risks. This includes the need to identify emerging and significant risks and how these risks may impact specific asset classes, sectors, and geographical locations as well as the need to establish, implement, and regularly review plans to mitigate exposure to climate-related financial risks.

Data Collection and Scenario Planning

The NYDFS guidance additionally suggests that its regulated organizations implement data aggregation processes that provide the ability to monitor significant climate-related financial risks. These processes should be designed for the purpose of producing information to the board in a timely manner in order for senior management to make well-informed and suitable decisions.

It also suggests that its organizations implement a “climate scenario analysis” into is internal risk assessment. By using a range of climate scenarios, organizations will be able to test the strength of their business models and strategies against climate-related financial risks. As a result of doing so, organizations will be better able to identify, anticipate, manage and measure such risks and adjust their strategies accordingly. Also, with such a tool, organizations will be able to identify and measure vulnerability to relevant climate-related financial risk factors, to estimate exposures and potential impacts, and to determine the overall significance of climate-related financial risks.  

Jacob Horowitz is a contributing editor at Compliance Chief 360°

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