ESG concerns in banking

DWS will pay $25 million to resolve two investigations — one focused on environmental, social and governance-related misstatements and another that found shortcomings in the Deutsche Bank-owned asset manager’s anti-money laundering efforts, the Securities and Exchange Commission said in September.

The $19 million that DWS is due to pay over the ESG probe ranks as the largest “greenwashing” penalty regulators have ordered thus far. But it’s hardly a surprise. DWS disclosed in July that it had set aside more than €20 million to settle the ESG allegations, which had encircled the asset manager for more than two years.

DWS marketed itself as a leader in ESG, the SEC said. But it failed — between August 2018 and late 2021 — to implement controls for incorporating ESG factors into research and investment recommendations as it had led clients and investors to believe, the regulator said. Further, DWS failed to ensure its public statements about ESG-integrated products were accurate, the SEC said.

“DWS advertised that ESG was in its ‘DNA,’ but … its investment professionals failed to follow the ESG investment processes that it marketed,” Sanjay Wadhwa, the SEC’s deputy director of enforcement and head of its climate and ESG task force, said in a statement. “Investment advisers must ensure that their actions conform to their words.”

A DWS spokesman defended the company’s efforts, in part, saying the SEC order found “no misstatements in relation to our financial disclosures or in the prospectuses of our funds.”

“The order also makes clear that there was no intent to defraud,” the spokesman told Bloomberg, adding that DWS is “pleased that the SEC recognized our cooperation in the investigation and our remediation efforts.”

In a separate penalty, DWS will pay $6 million over SEC allegations that the asset manager failed to adopt and implement policies and procedures to prevent money laundering and terrorism financing in some of its mutual funds.

DWS neither admitted nor denied wrongdoing in connection with either the ESG or AML allegations. The spokesman, however, told The Wall Street Journal the company has taken steps to improve its AML processes since 2020, adding that DWS is “committed to maintaining a robust risk management framework.”

DWS’s former chief sustainability officer, Desiree Fixler, accused the asset manager of falsely claiming in its 2020 annual report that €459 billion of its assets were “ESG integrated.”

DWS’s then-CEO, Asoka Wöhrmann fired Fixler in March 2021, telling staff in a memo that her unit hadn’t made enough progress, according to Bloomberg. Fixler sued DWS for unfair dismissal but lost.

But the company changed its criteria, in its 2021 annual report, such that just €115 billion in assets were given the “ESG” label, according to the Financial Times.

Wöhrmann resigned in 2022, after police raided DWS’s Frankfurt offices in connection with their own greenwashing probe. 

DWS’s current CEO, Stefan Hoops, said in July that the company’s marketing “may have been overly exuberant” in the past when it came to ESG. Resolving the investigations would reduce the amount of time “competent people spend on the past versus the future,” he said at the time, according to Bloomberg.

Fixler, after hearing of the SEC penalty, said she “really commends” regulators for their actions.

“Greenwashing is harmful — to investors, communities and overall financial stability,” she told the Financial Times.

DWS’s penalty in connection with the greenwashing allegations far exceeds previous fines for ESG misstatements. BNY Mellon agreed to pay $1.5 million in May 2022, after the SEC found the bank’s investment adviser division misstated how it applied ESG criteria when making investment decisions for some of its mutual funds. The SEC in November fined Goldman Sachs $4 million for failing to follow ESG policies and procedures.

St. Petersburg, Florida-based Climate First Bank is considering moving out of state, following the passage of a bill that penalizes state-registered banks from denying services to certain industries, such as oil and gas, or weapons manufacturers.

The environmentally focused de novo, which launched in 2021, bills itself as a “values based-bank,” focused on promoting sustainable business practices by providing banking services and loans to firm’s with a strong environmental, social and governance mission.

In response to the state’s new Government and Corporate Activism Act, effective July 1, the bank nixed its exclusionary list, which outlined the sectors it has said it won’t do business with, such as the fossil fuel sector or other extractive industries.

To further comply with the law, signed by Florida Gov. Ron DeSantis, the bank eliminated all references to ESG on its website and in its internal dialogue, and replaced them with terms like “values, mission or corporate social responsibility,” CEO Ken LaRoe said.

The sweeping legislation, which also prevents state and local governments from factoring ESG in contract or investment decisions with specific businesses, has prompted extensive discussions at Climate First’s board and executive level about a possible relocation, LaRoe said.

“We can change to another state — different states have different requirements — so we'd have to investigate all of that. But yes, we're absolutely considering that,” LaRoe said.

Another option the firm is weighing is converting to a national charter, he said. The change would remove the bank from the purview of the Florida Office of Financial Regulation and place it under the Office of the Comptroller of the Currency.

Since the law’s signing, Climate First has yet to encounter a situation where it has been obligated to do business with a firm that doesn’t match the bank’s values, LaRoe said.

“No one's called and said, ‘Hi, gotcha. Now, you have to take this application.’ There's been none of that. And I really don't think there will be,” LaRoe said. “But if, for instance, a gun manufacturing company wants a loan, we now have to take the application and process it just like we would any other loan.” 

Climate First, which represents LaRoe’s second environmentally focused venture, has had to turn away one business in the past, based on conflicting values.

The bank last year denied a request for a loan from a sod farm, a business whose practices fell under the bank’s exclusionary list, LaRoe said.

“It's a terribly extractive industry. We did have a request and we turned them down. They basically said, ‘OK, we understand.’ But we won’t be able to do that anymore” under Florida’s law, he said.

LaRoe, however, said the bank still plans to execute its core mission.

“We're not going to change our DNA. We were founded on the premise of changing finance to finance change and doing good, while concurrently returning market leading returns for our investors,” he said. “And I think at the end of the day, we are still that.”

LaRoe recalled how, in the early days of crafting the bank’s business plan and charter application, his CFO questioned whether the name, Climate First, was too combative a moniker for the yet-to-be-launched de novo.

“I said, ‘Absolutely not. It defines the business, our mission and our values and everything,’” he said. “Here we are, with the name Climate First Bank, squarely in the crosshairs, and I'm kind of proud of it.” 

Climate First’s ESG stance has drawn flak in at least one other state. Kentucky placed the lender and 10 others, including JPMorgan Chase, Citi and BlackRock, on a divestment list — making it ineligible for new state contracts —over what Kentucky calls a “boycott” of energy companies.

Meanwhile, the bank has set its sights on several ambitious goals as it nears the end of its de novo period in June 2024.

Climate First, which completed a $35 million capital raise, plans to acquire a bank and pursue an initial public offering next year.

“We want to do an acquisition, operate the combined bank for a couple of quarters, and then go public,” LaRoe said.

Royal Bank of Canada is hiring a head of climate transition as the bank faces criticism over its position as the world’s top financier to fossil-fuel companies, according to a report released in April by the Rainforest Action Network.

The executive who fills the role is expected to “orchestrate, unify and advance” a federated set of climate-related activities, according to a posting on the bank’s job portal.

That means developing a climate strategy based on the bank’s ongoing transition to net-zero emissions, implementing responses to climate activism, raising the bank’s profile and reputation on green matters, and navigating relationships with industry groups, decision-makers and communities, the bank indicated.

The bank took applications for the role through August. It did not list a compensation range.

The move marks a shift in the bank’s strategy, Keith Stewart, senior energy strategist at Greenpeace Canada, told Reuters. Stewart added, though, that the lender needs to stop funding new oil, gas and coal projects if it wants activists “to stop pointing out their bad behavior.”

RBC, Canada’s biggest bank by asset total, supplanted JPMorgan Chase in 2022 as the world’s top funder of fossil-fuel companies, according to RAN. The activist group measured lending and underwriting of debt and equity in its calculations.

The bank’s fossil-fuel funding leaped 4.2% last year to $42.1 billion, catapulting the lender from fourth place on RAN’s list in 2021 to the top spot in 2022.

“RBC is moving in completely the wrong direction, dragging our climate ambitions backward and positioning Canadian banks as fossil fuels’ lenders of last resort,” Richard Brooks, climate finance director at Stand.earth, told the Financial Times in April.

RBC’s jump on the list comes as other banks are cutting back on their ties with fossil fuels. JPMorgan, which had held the top spot in RAN’s rankings each year since 2016, decreased its fossil-fuel funding by 41.7% to $39.2 billion in 2022. Other large U.S. banks made similar strides: Citi cut its fossil-fuel financing by 27.7% year-over-year, by RAN’s measure. Wells Fargo, likewise, saw a 21.8% decrease.

U.S. banks, however, occupy the next five spots on RAN’s list after RBC.

Climate activists and some Indigenous communities also criticized the bank’s funding of TC Energy Corp.’s Coastal Gaslink pipeline that is being constructed on the west coast of British Columbia, according to Reuters.

Environmental groups have demanded Canada’s Competition Bureau reject RBC’s proposed $10 billion acquisition of HSBC’s Canada operation — claiming the deal would increase climate risks while restricting sustainable choices for customers.

“At RBC, we believe the biggest impact we can make in addressing the climate change challenge is by helping our clients reduce their emissions and achieve their climate goals,” the lender said in a statement.

Citizens Bank aims to achieve carbon neutrality by 2035 and is targeting $50 billion in sustainable finance by 2030, the bank said in September.

The Providence, Rhode Island-based lender also pledged to engage with all of its clients in the oil and gas sectors by next year. 

That doesn’t involve pulling financing that’s tied to high-emissions industries. 

Rather, Citizens plans to encourage its commercial bankers to help clients develop tailored strategies to transition them to a slimmer carbon output — including steering them toward the bank’s recent sustainability-linked products, such as carbon offset deposit accounts.

“This announcement is about leaning into Citizens' role as a trusted adviser to look for ways that our clients can seize on the business opportunity related to the transition to a lower-carbon future," Rachel Greenberg, the bank's head of sustainability, told American Banker.

Efforts by the bank and its clients will be documented through “detailed disclosures and reporting” to ensure accountability, Beth Johnson, Citizens’ chief experience officer and head of ESG, said in a statement.

The $50 billion figure includes affordable housing, support for small businesses and community development projects, the bank said. Within that, Citizens highlighted $5 billion in financing and facilitation for renewable energy, clean technologies and green buildings.

For itself, Citizens set Scope 1 and 2 emissions targets in 2021 that it aims to achieve through ongoing energy conservation investments and energy reduction initiatives. The bank wants to incorporate high-quality offsets and renewable energy credits to winnow the remaining Scope 1 and 2 emissions, it said.

Citizens is hardly the only large bank to make a wide-ranging carbon-reduction pledge in recent years. PNC in 2021, laid out a five-year, $20 billion environmental finance goal, then bolstered its pledge to $30 billion in January. 

Goldman Sachs in 2019 detailed a 10-year, $750 billion “climate transition” commitment. A year later, the bank signaled it had put $156 billion into the effort.

JPMorgan Chase in 2021 pledged $2.5 trillion by 2030 to address climate change and advance sustainable development. Citi, meanwhile, pledged $500 billion to green goals in the same timeline. Bank of America, for its part, pledged $1 trillion to transition to a low-carbon future.

Citizens and its clients both stand to benefit from the pledge, Donald McCree, the bank’s head of commercial banking, told Bloomberg.

“It’s not only resulting in robust conversations,” McCree said. “It’s actually resulting in early-stage business opportunities for us.” 

The Securities and Exchange Commission has not yet released a final rule requiring disclosure on climate risk partly because of public concern that companies would need to report Scope 3 carbon emissions across their supply chains, the agency’s chair, Gary Gensler, said in September.

The SEC has received more than 16,000 public comment letters about the climate risk disclosure rule that it proposed in March 2022, with many asserting that Scope 3 reporting will prove onerous for small businesses, Gensler said. “We got a lot of comments around what’s called Scope 3 disclosures, and that’s what we’re trying to move forward on,” he said in testimony to the Senate Banking Committee.

Gensler declined to estimate when the SEC will adopt a final regulation, while noting that rule revisions can take from 12 to 24 months. “We try not to do things against the clock,” he said, adding “it’s really when the staff is ready and the [five-member agency] commission is ready.”

Republicans on the banking committee criticized Gensler for what they characterized as an extreme regulatory push by the SEC since his swearing-in as agency chief in April 2021.

“The regulations the SEC has proposed under your leadership are unjustified and are sowing discord and confusion for industry and market participants,” the panel’s chair, Sen. Tim Scott, R-SC, told Gensler. “The breakneck pace you're pumping out regulation should not be applauded.”

Gensler pushed back, saying that the 22 rules adopted so far under his leadership are fewer than those advanced by each of his three predecessors during their first 28 months.

Republicans on the House Financial Services Committee, during a series of hearings in July, stepped up their opposition to the climate risk disclosure proposal and to efforts by shareholders, Democrats and other stakeholders to promote environmental, social and governance best practices.

Republican lawmakers in the Senate and House have said that the SEC and ESG activists undermine capitalism, harm Main Street investors and thwart company efforts to increase shareholder value.

The SEC also plans to release rules on corporate board diversity and “human capital management disclosure.”

Referring to the proposed requirement that companies report carbon emissions and climate risk, Gensler said “many U.S. issuers are already disclosing climate risk information and investors are making investment decisions” based on the information. The SEC, for the sake of investors, aims to ensure the reports are consistent and comparable, he said.

“We have no climate agenda whatsoever,” he said. “We’re not climate regulators.”

Gensler came under fire, too, from the other side of the aisle, as Sen. Elizabeth Warren, D-MA, criticized him for not pushing through the disclosure rule sooner.

“When you were nominated two-and-a-half years ago, you said the giant corporation should not be able to hide their climate risks from investors,” Warren told Gensler. “Without a strong climate risk disclosure rule that is exactly what companies will continue to do.

“You have a mandate to protect investors, you have strong public support to do this, and I just want to say it is time for you to get this job done,” she said, echoing 80 House Democrats who urged Gensler last month to quickly secure adoption of the rule.

“You have drafted a well-reasoned proposal that is grounded in financial materiality, aligns with the demands of investors and market participants, and is clearly within the SEC’s mission, authorities, long-standing norms and responsibilities,” the lawmakers said in a letter. “We urge you to finalize and adopt a credible mandatory disclosure rule as quickly as possible.”

Gensler reiterated in his prepared remarks that the SEC considers crypto tokens to be securities and, despite recent setbacks in court, will seek to ensure that crypto intermediaries comply with securities laws.

“Given this industry’s wide-ranging non-compliance with the securities laws, it’s not surprising that we’ve seen many problems in these markets,” he said in prepared testimony.

“I’ve been around finance for 44 years now, I guess, and I’ve never seen a field that is so rife with misconduct,” Gensler said in response to a question from the committee. “It’s daunting.”

Sixty-one percent of U.S. companies expect the backlash against environmental, social and governance best practices to persist or intensify during the next two years, yet most firms do not plan to retreat from their ESG commitments, the Conference Board said in August.

Thirty-one percent of companies deem state-level officials and political candidates as the most outspoken ESG critics, the Conference Board found in a survey of 125 companies, half of which generate annual revenue exceeding $10 billion. One out of five companies (21%) view officials and political candidates at the federal level as the sharpest ESG opponents.

About half of the companies have faced a backlash, and 63% of those firms have more closely linked ESG to shareholder value, the Conference Board said.

Democratic lawmakers, Biden administration regulators and ESG activists have called in recent years for more transparency on climate risk and other points of sustainability, triggering opposition from Republican legislators, business organizations and several state governors.

ESG critics have primarily targeted financial services companies, the Conference Board said, noting that “asset managers in particular have been perceived as the gatekeepers of ESG investing.”

State officials in conservative states have directed capital away from asset management firms that promote sustainable investing. Florida, Oklahoma, Texas, West Virginia and several other GOP-controlled states have said some asset managers are pushing an ESG agenda at the expense of investor returns.

State officials say ESG principles are not relevant to investment decisions and have barred BlackRock and other asset managers that use ESG benchmarks from handling state pension funds.

Governors from 19 states pledged in March to use “state pension funds to force change in how major asset managers invest the money of hard-working Americans, ensuring corporations are focused on maximizing shareholder value rather than the proliferation of woke ideology.”

“The proliferation of ESG throughout America is a direct threat to the American economy, individual economic freedom and our way of life, putting investment decisions in the hands of the woke mob to bypass the ballot box and inject political ideology into investment decisions, corporate governance and the everyday economy,” the governors said in a joint statement.

Republican lawmakers in Washington stepped up their opposition to ESG activism last month, saying such pressure harms Main Street investors and thwarts company efforts to increase shareholder value.

In six hearings, the Republican-controlled House Financial Services Committee probed the relationship of proxy advisory firms to shareholder activism, how environmental and social policy may influence financial regulation and whether ESG activism drives up the costs for insurance and housing.

Responding to criticism, companies have focused on value creation and changed the terms they use when communicating about ESG, the Conference Board said.

For example, in an annual letter to shareholders, BlackRock CEO Larry Fink trimmed his use of the terms “climate,” “ESG,” “sustainability” and “purpose” to four this year from 32 in 2020, the Conference Board said.

“It is important for companies to avoid dramatic shifts in how they talk about ESG issues,” the Conference Board said. “Abrupt changes can create the perception that the company is either succumbing to political pressure or was not genuinely committed in the first place.”

Companies should consider handling opposition to ESG, the Conference Board said, by taking six steps:

1. Align ESG with business strategy. “The most effective response is to ensure the company’s ESG positions align with the company’s core business strategy, are supported by empirical data and serve the long-term welfare of the company, its stakeholders and society,” Paul Washington, executive director of the board’s ESG Center, said in a statement.

2. Reach out to policymakers. Companies should privately meet with state and federal policymakers to describe how their ESG strategies benefit constituents and advance business objectives.

3. Stay involved in the public conversation. Nearly one out of three companies that have faced an ESG backlash have muted external communication on environmental and social issues. “This runs the risk of forfeiting the opportunity of telling the company’s story to stakeholders who are focusing on ESG for the first time,” the Conference Board said.

4. Avoid big shifts in ESG messaging, explaining any changes. Nearly half (48%) of companies that have faced a backlash have altered their terminology, with many switching from ESG to “sustainability.”

5. Join forces with other companies to make the case for ESG. Cooperative efforts increase the volume and reach of ESG messaging.

6. Keep in mind that ESG principles remain valid. “There are strong forces in capital, labor, business-to-business and consumer markets that justify a continued focus on ESG,” the Conference Board said. Emerging disclosure and compliance obligations in the U.S. and Europe also require companies to devote resources to tracking ESG performance.

Oklahoma has placed BlackRock, JPMorgan Chase, Bank of America, Wells Fargo, State Street and eight other financial institutions on a list restricting them from state contracts valued at more than $100,000 “because they are engaged in boycotts of fossil fuel companies,” the state treasurer’s office said in a statement in May.

Oklahoma State Treasurer Todd Russ took office in January and, within his first month, sent a questionnaire to financial companies to determine the list, to align with a law the state passed last year. Nearly 160 companies responded, Russ said.

JPMorgan, in its own statement, called the restriction “baseless.”

"As the nation’s largest bank, we are among the top financers across the energy sector, including traditional energy sources," the bank said, according to Fox Business.

Oklahoma is hardly the first state to put banks on notice over their environmental, social and governance policies — and goals to taper their carbon footprint. Kentucky, in January, ordered its state pension funds and other governmental entities to divest from JPMorgan Chase, Citi, BlackRock and eight other financial institutions. West Virginia in July 2022 said it would stop awarding new state business to BlackRock, JPMorgan, Wells Fargo, Goldman Sachs and Morgan Stanley over the companies’ decisions to cut back on financing to coal companies.

Oklahoma’s neighbor, Texas, maintains a list of 11 restricted financial institutions, though many of the affected banks — HSBC, BNP Paribas and UBS, for example — are foreign-based. U.S. banks such as JPMorgan, Wells Fargo and Goldman Sachs reportedly were on early drafts of Texas’ list but were ultimately left off.

Also like Texas’ law, Oklahoma gives government entities 30 days to report their direct and indirect holdings tied to restricted companies. Restricted companies, meanwhile, have 90 days to convince Oklahoma they don’t belong on the list.

"We look forward to continued discussion with the Oklahoma Treasurer about the many ways we serve clients and communities in Oklahoma, including in the energy sector,” Bank of America wrote in a statement seen by American Banker.

BlackRock, the world’s largest asset manager, has found itself a common target in the ESG fight. Oklahoma’s list shows State Street’s profile is rising, too. Representatives of both companies testified at a December 2022 hearing in Texas that their institutions don’t discriminate against certain segments of the energy industry.

“We have one bias: to get the best risk-adjusted returns for our clients,” Dalia Blass, BlackRock’s head of external affairs, told the Texas Senate Committee on State Affairs. 

In a recent statement, BlackRock called itself a “leading investor in the Oklahoma energy sector.” 

"On behalf of our clients, we have invested over $15 billion in public energy companies based in Oklahoma and approximately $320 billion in public energy companies globally, including investments in both traditional energy sectors like oil and gas and in renewables,” a BlackRock spokesperson told Fox Business.

“We believe lists like these ultimately raise costs for Oklahoma taxpayers and reduce returns for firefighters, teachers and state employees seeking to retire with dignity,” the spokesperson added. “They also undermine free-market competition and choice for investors.”

The free-market concept plays prominently, too, in JPMorgan’s statement. 

"Our business practices are not in conflict with this anti-free market decision, and we look forward to continuing to serve customers and communities in Oklahoma,” the bank said. "Between 2021 and 2022 we provided over $2 billion in financing and other services to 40 Oklahoma companies in the oil and gas space.”

Russ, too, touched on the free market.

“It is essential for us to work with financial institutions that are focused on free-market principles and not beholden to social goals that override their fiduciary duties,” the treasurer said. “Our state's financial partnerships should reflect our priorities and values, and it is our responsibility to partner with companies that share our vision for a strong and prosperous Oklahoma economy, and that includes our energy sector.”

Companies may be added to or removed from the restricted list every 90 days as the state’s analysis continues, Russ said.

Other financial institutions placed on Oklahoma’s list are: Climate First Bank, Actis, Firstmark Fund Partners, GCM Grosvenor, Lexington Partners, Stepstone VC Global Partners, WCM investment Management and William Blair.

Republican backlash to ESG policies has gathered steam over the past year or so. Fourteen Republican state attorneys general launched investigations in October 2022 into whether the six largest U.S. banks, through their ESG practices, were blocking credit to oil companies. 

Twenty-one Republican AGs wrote Institutional Shareholder Services and Glass Lewis in January, demanding the proxy advisers stop making shareholder voting recommendations — particularly on climate and board diversity — that the attorneys general say contradict the ISS and Glass Lewis’ duty to get investors the best possible financial results.

The Federal Reserve expects, by the end of the year, to publish its pilot climate scenario analysis, it said in January.

The exercise will take data, submitted by July 31, from the nation’s six largest banks — detailing the impact two natural disasters — within the span of a year — would make on residential and commercial real estate lending portfolios.

The first, a severe hurricane affecting the Northeast, will be used as a baseline because each participating bank has substantial investment in the region. Banks also will choose a second event in another region of the country — flood, drought, wildfire and the like — to affect the same categories of holdings during the same year.

Banks must also gauge the 10-year impact of transition risks on their corporate and commercial real estate lending portfolios. That will take into account changes in policy and sentiment in the commercial and consumer sectors as a result of climate change. 

Unlike the Fed’s recurring stress tests, the exercise won’t have capital or supervisory implications for the banks. The central bank emphasized the climate pilot is “exploratory in nature.”  

The central bank’s findings won’t spotlight individual banks’ responses, data or projected impact. Rather, the focus will be aggregated.

Michael Barr, the Fed’s vice chair for supervision, stressed the central bank’s “narrow, but important, responsibilities regarding climate-related financial risks” — namely, “to ensure that banks understand and manage their material risks, including the financial risks from climate change.”

The Fed’s scenario announcement comes weeks after Fed Chair Jerome Powell said the central bank “[is] not, and will not be, a ‘climate policymaker.’”

The Fed in September 2022 said the exercise would launch in 2023, and named JPMorgan Chase, Bank of America, Citi, Wells Fargo, Goldman Sachs and Morgan Stanley as participants.

The exercise is meant to “better identify critical data, modeling and risk-management components” related to climate change, the Fed wrote in January.

The physical loss portion of the test compares the selected events’ 100-year impact with insurance coverage, 200-year impact with insurance and 200-year impact without insurance. 

The transition risk part contains a scenario with no change in climate policy, an increase in greenhouse-gas emissions through 2080 and 3-degree-Celsius increase in global temperature through 2100. Other scenarios adhere, in varying degrees, to the Network for Greening the Financial System’s NetZero 2050 framework.

A record number of shareholder proposals aimed at improving environmental, social and governance performance went to a vote this proxy season, with initiatives focused on climate change gaining a comparatively high approval rate, according to Diligent Market Intelligence.

As of June 30, 83 shareholders proposals focused on the environment were voted on compared with 69 for all of 2022, and 199 proposals concerning social issues went to a vote, the same number as in all of last year, Diligent said. 

At the same time, the approval rate for environmental proposals fell to 21.7% from 34.2% last year, Diligent said. Similarly, only 17.7% of social proposals gained shareholder support compared with 24.5% in 2022.

Shareholder proposals reflecting the extreme views of both advocates and opponents of tougher ESG standards increased this year and gained comparatively low support, eroding overall approval rates, Diligent Market Intelligence Editor-in-Chief Josh Black said.

Also, companies in 2023 have shown a higher tendency to accept proposals prior to a vote, he said in an email response to questions.

“The more extreme proposals, both pro- and anti-ESG, are dragging down the average support, while more companies are reaching agreements for the withdrawal of proposals that are acceptable or might go on to have high support,” Black said.

Debate has intensified during the past year over whether the Securities and Exchange Commission should require publicly traded companies to release detailed reports on their ESG performance, including workforce composition and their approach toward climate change.

The controversy has not undermined shareholder pressure for more information on the ways companies approach sustainability, according to Black.

“The fundamental desire of institutional investors to have access to better data from companies on their environmental and social impacts and policies remains consistent despite the noise,” he said.

The SEC has indicated that it plans this year to release a final rule mandating that companies describe on Form 10-K their strategy toward climate risk, including plans to achieve any targets they have set for reducing such risk.

Companies would need to disclose data on their greenhouse gas emissions, either from their facilities (so-called Scope 1 emissions) or through their energy purchases (Scope 2). They would also need to obtain independent attestation of their data.

In some of more than 15,000 comment letters on its proposed rule, the SEC has come under fire for planning to require companies to disclose so-called Scope 3 carbon emissions by suppliers and vendors across their supply chains.

The number of proposals focused on executive remuneration that went to a vote rose to 46 as of June 30, compared with 38 for all of last year, Diligent Market Intelligence said. Average support for the proposals fell to 26% from 35% in 2022.

“There is significant shareholder support for greater reporting on gender pay gaps within organizations and for long-term holding targets for equity-based incentives, as well as for tightening clawback policies,” Black said.

Also, “there has been a big increase in the number of proposals regarding severance pay for executives, with three proposals receiving more than 50% support in 2023 but many others receiving much lower support,” he said.

On a list of Community Reinvestment Act performance evaluations released in August by The Office of the Comptroller of the Currency, two banks received the second-lowest rating of “needs to improve” — including one whose proposed merger recently failed.

OceanFirst Financial Corp.’s rating fell from satisfactory to needs to improve “due to evidence of discriminatory or other illegal credit practices,” the OCC report states.

OceanFirst, of Red Bank, New Jersey, announced plans in November 2021 to merge with Partners Bancorp of Salisbury, Maryland. The deal, however, fell through a year later, when the banks agreed to terminate the $186 million transaction “after careful consideration ... and the progress made.”

Partners has since found a new marriage with Linkbancorp, announced in February. The closing of that merger, though, remains subject to regulatory approvals and other closing conditions.

OceanFirst’s CRA rating decline was disclosed Aug. 1, but the newly public documents are dated Nov. 1, 2021.

The possible ratings are outstanding, satisfactory, needs to improve, and substantial noncompliance; and of the 27 evaluations made public, 10 banks were rated outstanding, 15 were rated satisfactory, and two were rated needs to improve. No banks received the lowest rating.

The CRA evaluation and the initial merger announcement came within the same week, but it remains a question whether the results of OceanFirst’s evaluation were made available to Partners or were a consideration in the eventual dissolution of the deal.

Representatives for OceanFirst and Partners did not respond to a request for comment from Banking Dive.

In its report, the OCC said OceanFirst “engaged in a pattern or practice of unlawful discrimination in violation of the Fair Housing Act and its implementing regulations by failing to provide equal access to credit to borrowers seeking mortgages secured by properties in majority non-White or Hispanic census tracts.”

In Camden, a beleaguered New Jersey city not far from OceanFirst’s headquarters, qualified investments and community development services made by OceanFirst were “not effective and responsive in helping the bank address community needs,” the OCC found.

The bank made a limited number of investments, grants and donations under its programs; and conducted or supported very few community development services, the regulator’s report said.

The findings prompted the lower CRA rating, and the OCC said it “will consider any information that this institution engaged in discriminatory or other illegal credit practices, identified by or provided to the OCC before the end of the institution’s next performance evaluation in that subsequent evaluation, even if the information concerns activities that occurred during the evaluation period addressed in this performance evaluation.”

LinkBank, Partners’ soon-to-be, er, partner, received a satisfactory CRA rating in its most recent July 2021 report, according to the Federal Financial Institutions Examination Council.