Recent ESG Developments: What Nonprofits Should Know

While none of the recent environmental, social, and governance (ESG) developments with respect to organizations under some sort of regulatory oversight—including public companies and retirement plans—is directly relevant to tax-exempt organizations, these developments do reflect a steadily changing landscape that has relevance by analogy. Changes at both the federal and state levels, when finalized, may provide new information for ESG-minded tax-exempt investors to consider. They may also help inform tax-exempt organizations that are considering voluntarily adopting, or have adopted, intentional ESG practices about issues to consider with respect to such practices.

First, in 2022, the US Securities and Exchange Commission (SEC) proposed significant new requirements for public companies with respect to their public disclosure of climate-related risks. The proposed rules would require public companies to disclose their overall greenhouse gas emissions, both on a direct basis (i.e., emissions directly generated by the company) and on an indirect basis, including emissions generated from both (1) the production of any inputs from their suppliers and (2) the use of their products/services.

Second, the SEC also proposed new rules with respect to how US mutual funds disclose their ESG programs, with increasing levels of detail depending on the level of ESG consideration. Funds that incorporate ESG considerations into their overall investment programs as one factor among many (i.e., Integration Funds) would have marginally increased disclosure obligations concerning how such factors are considered. Funds that consider ESG factors as the “significant or main” consideration (i.e., ESG-Focused Funds) and funds that seek to achieve a particular ESG impact would be subject to more granular disclosure obligations about their ESG considerations, including completing a standardized ESG disclosure in tabular format. In a separate rulemaking proposal, the SEC also proposed to prohibit Integration Funds from using ESG-related terms in their names. It is not clear how and whether these SEC proposals will be finalized, but it is likely that the SEC will address them in the coming year.

The US Department of Labor (DOL) was also active in the ESG space. In November 2022, the DOL finalized a proposed rule clarifying that retirement plan fiduciaries can consider ESG factors when they select plan investments. The new rule, in rolling back a rule adopted at the end of the Trump administration, allows plan fiduciaries to consider the potential financial benefits of investing in companies with positive ESG practices.

There were also “anti-ESG” developments at the state level. Led by a legislative effort by the State of Texas, several states adopted their own laws that sought to limit their ability to invest in or do business with firms that “boycotted” certain sectors (e.g., fossil fuel production and delivery) for ESG-related reasons. Other states and state pension plans adopted requirements or guidance restricting the ability of their state retirement plan managers to invest on the basis of ESG factors, unless the consideration of such factors was financially motivated.

The momentum behind this anti-ESG legislation continues into 2023, including, most recently, efforts to challenge the DOL’s ESG rules, and we expect more developments in this space at the state level.

As many tax-exempt organizations seek to incorporate an ESG focus in their investment portfolios, it is important for them, and their investment committees, to stay abreast of developments in the ESG arena that may impact their investment opportunities. This includes both regulatory developments that may enhance ESG opportunities, as well as efforts to challenge the use of ESG criteria by certain investors, such as public pension funds. In addition, as some tax-exempt organizations—perhaps influenced by public company governance practices—consider voluntarily adopting their own ESG practices, these developments may help inform such considerations.

For more developments, view our Corporate Sustainability, Climate Change & ESG resource page.