Delayed due diligence

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Feb 13, 2024 View in browser   By Jordan Wolman THE BIG IDEA Europe is hitting speed bumps on its way to due diligence. | Olivier Hoslet/AFP via Getty Images EU ESG BRAWL — U.S. companies that are bracing for forthcoming domestic climate-related disclosure mandates and navigating internal ESG dynamics might want to direct their attention across the pond to revolutionary legislation facing a make-or-break moment in Brussels. A landmark policy that would require large companies operating in the European Union to police environmental and social risks throughout their supply chains is barreling toward a final vote by member countries and the European Parliament. The so-called due diligence rules have attracted stateside attention because they would apply to foreign-based companies with a footprint on the continent that meet certain revenue and employee size thresholds, including U.S. corporations. After an agreement in principle was reached among negotiators late last year, Germany and other countries are balking — leading to two postponed final votes. The delays have fueled fears among green groups and sustainable investment organizations that the rules won’t be finalized ahead of European Parliament elections in June, essentially sinking them, Antonia Zimmermann reports. The policy’s demise would be welcomed by groups like the U.S. Chamber of Commerce, which has warned that due diligence would impose unmanageable burdens on companies and subject them to constant litigation risk. The Chamber has said that the extraterritorial nature of the policy “risks infringing international law principles” and “further removes decision-making authority for U.S. firms away from U.S. regulators.” That concern has even been echoed by the Biden administration, with Treasury Secretary Janet Yellen telling lawmakers at a House hearing last year that the rules could have negative unintended consequences for U.S. firms. “On several occasions, the Chamber has expressed our concerns about the legislation,” Marjorie Chorlins, the organization's senior vice president for European Affairs, said in a statement. “The Chamber’s concerns are consistent with those advanced by European business groups about the impact of overregulation on competitiveness and innovation.” Wall Street sounded the initial stateside alarm about the policy, but those concerns have been eased by a French-led decision by EU countries late last year to to carve out the financial sector from the policy — exempting banks, asset managers and insurers. Both the Bank Policy Institute and the Financial Services Forum declined to comment on the recent developments. SHAREHOLDER SCOREBOARD PROXY POSTURING — BlackRock, the world’s largest asset manager, is planning for the first time allow retail investors to decide how they want to vote on corporate shareholder proposals. The company announced Tuesday that it would expand its Voting Choice program to let more than 3 million shareholder accounts representing $200 billion in assets in its largest exchange-traded fund choose how to vote on a variety of issues on the proxy ballot. The move comes amid persistent criticism by Republican politicians over how large money managers vote shares on behalf of investors as part of the part of broader anti-ESG movement, Declan Harty and Allison Prang report. BlackRock has been a primary target of that movement. VERBATIM EXIT INTERVIEW — Graham Steele, the Treasury Department’s recently-departed assistant secretary for financial institutions, spoke with Avery Ellfeldt of POLITICO’s E&E News about the complexities surrounding today’s insurance market in an era of climate change. Here’s an excerpt of their conversation: Many property owners are having trouble finding and paying for insurance. What’s driving this trend?  The companies say that it's a mixture of the changing climate, increased costs of building materials and such to rebuild and the inflationary implications of that as well. I think one of the remaining questions that there needs to be more interrogation of is: Why are the companies making the decisions that they're making? Why are they raising costs or pulling out of certain specific regions? Because, at least anecdotally, some of the decision-making doesn't completely make sense if you're just looking at it as an outside observer. I met with the Texas bankers a few months ago. And what they told me was, insurers are pulling back from the Gulf Coast because of flooding and hurricanes. But really, the damage from the hail and winds in the Panhandle is equal to, if not worse than, [flooding and hurricanes in the Gulf Coast]. But they're not pulling out of there. Insurers say they need to be able to raise rates so they keep doing business in at-risk communities. But what happens to the people who live there? I understand the argument that if the risk is going up, that you have to be able to price that risk. But that's going to have real implications for certain populations, and it's going to have implications in certain communities. This is a place where risk-based pricing and goals like environmental justice and climate equity run into one another. Could climate-related volatility in property insurance markets threaten the stability of the broader financial system? Could it flow through into some of these other markets? I think absolutely. If insurers pull back from insuring mortgages in certain markets, and insurance is a precondition for mortgages, or something happens and a homeowner's property is wiped out, those are defaults [for banks]. EXTREMES HAZY FUTURE — Increases in wildfire smoke and particulate matter will cause millions more Americans to live with poorer air quality by 2054, according to new research from climate risk group First Street Foundation. The group says rising temperatures, fiercer droughts and more extreme wildfires threaten to erode decades of progress on improving air quality through more stringent pollution regulations, Zack Colman reports. First Street says its modeling is likely conservative given that it only factors wildfire smoke originating in the U.S. The report highlighted increases of dangerous pollutants from wildfire smoke in the Pacific Northwest, California, Idaho and the border between Florida and Georgia. Significant smog increases are seen across Illinois, Indiana, Michigan, Ohio, Connecticut and New York. The amount of Americans facing at least one “unhealthy” day of air quality will spike 51 percent by 2054, according to First Street Foundation. YOU TELL US GAME ON — Welcome to the Long Game, where we tell you about the latest on efforts to shape our future. Join us every Tuesday as we keep you in the loop on the world of sustainability. Team Sustainability is editor Greg Mott and reporters Jordan Wolman and Allison Prang. Reach us all at gmott@politico.com, jwolman@politico.com and aprang@politico.com. Sign up for the Long Game. It's free! WHAT WE'RE CLICKING — A Seattle-based startup is developing a process using sunlight and seawater to remove carbon dioxide from the atmosphere. Bloomberg has that story. — An Amsterdam-based material designer has launched a startup that aims to turn human hair into fabric for clothes, curtains, carpets and furniture. The Washington Post explains. — Florida lawmakers are considering a bill that would address global warming by removing most references to climate change in state laws,  the Tampa Bay Times reports.   Follow us on Twitter Debra Kahn @debra_kahn Greg Mott @gwmott Jordan Wolman @jordanwolman Allison Prang @AllisonPrang   Follow us

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