Financial Services Blog

Welcome to the North America ESG Regulatory Newsletter! The goal of this newsletter is to inform practitioners about current and upcoming ESG regulations, and to provide other information helpful to navigating the rapidly evolving ESG regulatory landscape.

Trending Topics (in Collaboration with Fintech Studios)

Since the U.S. Securities and Exchange Commission’s (SEC) announcement of its proposed rules for climate-related disclosures on March 21, 2022, companies, investors, and other stakeholders have been focused on transparency, reliability, and comparability as it relates to climate disclosures and the pathway toward meeting climate-related goals.

North America Regulatory Updates

CALIFORNIA AIR RESOURCES BOARD 

What’s happening? California’s clean-air regulators unveiled a proposal requiring 35% of new cars, SUVs, and small pickups sold in California to be zero-emission starting in 2026, increasing to 68% in 2030, and 100% in 2035. If adopted, the regulations could pave the way for nationwide standards in the U.S., as at least 15 other states pledged to follow California’s lead on car standards on previous clean-car rules. 

Type: Proposed Rule (comment period through 5/31; Public Hearing (scheduled 6/09) 

Timing: Announced 4/13/2022 

Read more: Here | or Here 

SCIENCE BASED TARGETS INITIATIVE (SBTI) 

What’s happening? The SBTi, one of the key organizations that defines science-based target setting, announced the publication of “Foundations for Science-Based Net-Zero Target Setting in the Financial Sector,” which is aimed at establishing standards for setting and assessing financial institutions’ net zero goals. 

Type: Standard 

Timing: Announced 4/13/2022 

Read more: Here | or Here 

CANADA’S OFFICE OF THE SUPERINTENDENT OF FINANCIAL INSTITUTIONS (OSFI) 

What’s happening? According to Canada’s newly released Budget 2022, Canada’s financial regulator, OSFI, will require federally regulated financial institutions (e.g., banks, insurance companies, etc.) to publish disclosures on climate-related risks and exposures aligned with the TCFD framework. The OFSI will utilize a phased-in approach, requiring relevant institutions to comply beginning in 2024. Canada’s 2022 budget also outlines over $9 billion in proposed funding to invest in zero emissions vehicles, green buildings and homes, and green bond issuance. 

Type: Mandatory Disclosures 

Timing: Announced 4/08/2022 

Read more: Here 

CLIMATE-ALIGNED FINANCE WORKING GROUP                                                                          

What’s happening? A group of leading global financial institutions (Bank of America, BNP Paribas, Citi, Crédit Agricole CIB, Société Générale, and Standard Chartered), partnered with Rocky Mountain Institute’s (RMI) Center for Climate-Aligned Finance to create a new “Aviation Climate-Aligned Finance Working Group.” The working group aims to create a climate-aligned finance framework, targeted for launch by the end of this year, that will define common goals for action to decarbonize the aviation sector. 

Type: Working Group and Future Framework 

Timing: Announced 4/07/2022 

Read more: Here 

INTERNATIONAL SUSTAINABILITY STANDARD’S BOARD (ISSB) 

What’s happening? The ISSB, which was established at COP26 to develop a comprehensive global baseline of disclosure standards, published proposed draft “General Requirements for Disclosure of Sustainability-related Financial Information” and “Climate Related Disclosures.” The proposals respond to calls from primary users (investors, lenders, and others) of general-purpose financial reporting for more consistent, complete, comparable, and verifiable sustainability-related financial information to help them assess an entity’s enterprise value. 

Type: Exposure Drafts 

Timing: Announced 3/31/2022 

Read more: Here | and Here 

Spotlight Topic – Responsible Artificial Intelligence (RAI)

What is RAI: RAI is the practice of designing, building, and deploying AI in a manner that empowers people and businesses, and fairly impacts customers and society. Trust in AI is key to realizing value from this technology, but many stakeholders struggle to overcome the perceived risks associated with AI. Bias, discrimination, fairness, and explainability are areas of paramount concern. As AI decisions increasingly influence and impact people’s lives at scale, so does the associated responsibility on organizations to manage the potential ethical and socio-technical implications of AI adoption. In fact, Accenture’s 2022 Tech Vision research found that only 35% of global consumers trust how AI is being implemented by organizations, and 77% think organizations should be held accountable for their misuse of AI.  

RAI Regulations and Guidance:  

  • In March 2022, the National Institute of Standards and Technology (NIST) released its draft voluntary AI Risk Management Framework. The framework aims to foster the development of innovative approaches to address the accuracy, explainability and interpretability, reliability, privacy, robustness, safety, security, and mitigation of unintended and/or harmful bias and uses of AI. 
  • In December 2021, the New York City Council passed legislation requiring a bias audit to be conducted on automated employment decision tools prior to their use in company’s hiring processes. 
  • In July 2021, the State of Colorado signed a bill to ensure insurance companies are held accountable for the discriminatory practices of their AI systems. The rules will become effective in January 2023. 
  • In April 2021, the Federal Trade Commission (FTC) published a blog emphasizing that it will hold AI developers and companies using algorithms accountable for algorithmic decision-making under Section 5 of the FTC Act, the US Fair Credit Reporting Act, and the Equal Credit Opportunity Act. 
  • In April 2021, the Treasury Board of Canada Secretariat issued a Directive on Automated Decision-Making for federal institutions, outlining requirements to ensure the responsible and ethical use of automated decision systems, including those using AI. 

Other Notable Developments: 

  • In April 2022, U.S. Senators Cory Booker (D-NJ) and Elizabeth Warren (D-MA), along with 11 U.S. Congressmembers, sent a letter to the U.S. Department of Defense (DoD) detailing concerns with DoD’s use of potentially biased AI and other automated systems. The letter called for additional oversight to ensure that the use of AI technology does not exacerbate discrimination and bias. 
  • In April 2022, the U.S. Department of Energy (DoE) announced the establishment of its Artificial Intelligence Advancement Council, which will lead DoE’s AI governance, innovation, and ethics. 
  • In January 2022, the U.S. Chamber of Commerce announced the launch of its Artificial Intelligence (AI) Commission on Competition, Inclusion, and Innovation, which will provide U.S. policymakers with a roadmap to promote technological innovation and advocate for the economic and societal benefits of AI, and also examine questions of biases in algorithmic decision-making and potential consumer and investor protections. 
  • In September 2021, the U.S. Department of Commerce established a National Artificial Intelligence Advisory Committee to advise the President and other federal agencies on issues related to AI, including ensuring that AI technologies are developed and used in a trustworthy and responsible manner. 

For additional information on ESG regulations, please contact Aaron Mendelsohn, Amanda Gordon, and Sarah Johnson 

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