Arnold & Porter Discusses State Attorneys General Probes of Banks with Net-Zero Pledges

On October 19, 2022, 19 Republican state attorneys general (the AGs) launched a coordinated investigation by issuing civil investigative demands (CIDs) to six major US banks. The CIDs seek information related to the banks’ membership in the United Nations’ Net-Zero Banking Alliance (NZBA) and other climate-related initiatives. The NZBA is an alliance of 120 banks from 41 countries representing 39% of global banking assets. According to the NZBA commitment statement, member banks commit to transitioning their own operational greenhouse gas (GHG) emissions and GHG emissions attributable to their lending and investment portfolios to align with pathways to net zero by 2050 or earlier, as well as interim reduction targets by 2030. According to several AGs leading the investigation, the NZBA is a “massive worldwide agreement” among member banks who “must” set GHG emission reduction targets in their lending and investment portfolios to reach net zero emissions by 2050. The AGs further allege that the banks are “ceding authority to a foreign body”—the United Nations—and “starving” US companies engaged in fossil-fuel related activities of credit.[1] The NZBA has publicly asserted that there are no binding reduction targets on its members. For example, two days before the AGs issued the CIDs, NZBA Steering Group Chair, Tracey McDermott, published an open letter reiterating that NZBA members “must continue to set their own individual targets and make independent decisions as to how to meet those targets.”[2]

Notwithstanding such statements from the NZBA about member independence, the AGs are likely to pursue these investigations vigorously. For one, while the AGs’ press releases focus on “collusion” and other anti-competitive activity, the AGs evidently are investigating possible violations of state deceptive trade practice and consumer protection laws.[3] Further, there has been mounting political backlash to financial institutions’ promotion of net zero pledges and other environmental, social and governance (ESG) objectives. As some of the political rhetoric challenging ESG initiatives continues to intensify, AGs in the 19 states investigating NZBA membership (and possibly others) may broaden their investigations and scrutinize other financial institutions whom they suspect of “starving” companies of credit in pursuit of net zero and other ESG-related goals. Indeed, the Texas CIDs seek information about the six banks’ participation not just in the NZBA but in other group initiatives focused on achieving climate-related goals through the financial system. Remarkably, the Texas CIDs also demand that the six banks identify all current, former and prospective members of such group initiatives.

Financial institutions belonging to net-zero and other climate-related alliances, and even financial institutions that publicly promote their ESG strategies regardless of membership in such bodies, should consider the parameters of these AG investigations and use them to inform disclosures and prepare for similar CIDs or subpoenas. Below, we provide some considerations.

First, financial institutions should be aware of the information the AGs are seeking, as these investigations could serve as a blueprint for future investigations into financial institutions’ net zero pledges. The Texas CIDs request all documents and communications related to, among other items:

  • The bank’s decision to join the NZBA or any other “Global Climate Initiative.”
    • “Global Climate Initiative” is defined as any public or private group whose purpose is to use the financial system to reduce or eliminate GHG emissions or otherwise pursue environmental goals. In addition to the NZBA, the CID specifically names the Glasgow Finance Alliance for Net Zero as an example of a Global Climate Initiative.
  • Any Global Climate Initiative, i.e., any documents the bank may have about a Global Climate Initiative to which it belongs, including, as mentioned above, documents that identify current, former and prospective members of such Global Climate Initiative.
  • Identification of all entities in the oil and gas sector, as well as the power sector, to which the bank provides banking services.
  • Each instance the bank declined to do business or exited a relationship with an entity due, either directly or indirectly, to ESG-related goals or commitments made to a Global Climate Initiative.
  • Any changes made by “Covered Companies” in response to the bank’s environmental goals, including net zero goals.
    • “Covered Companies” are defined to include any entity to which the bank provides banking services that may be impacted by any commitment the bank made or intends to make to any Global Climate Initiative.
  • Any ESG- or environmental-related conditions the bank imposed on a “Covered Company” in order for it to continue being a bank customer.
  • The bank’s GHG emission targets for certain customer sectors, specifically in the oil and gas and power sectors, and how the bank set those targets, including (a) how those targets were based on NZBA target-setting guidelines and (b) work conducted with any third party to set those targets.

Given that NZBA members have not terminated banking services with oil and gas or fossil fuel-dependent industries, and they have not agreed to be bound by specific GHG emission reduction targets in their lending portfolios, an antitrust case against the NZBA members faces significant challenges for the AGs. The AG’s public statements and CIDs, however, serve as a reminder that financial institutions that are members of, or are considering joining, financial industry climate initiatives should be mindful of antitrust considerations in adopting climate-related commitments that are encouraged by the initiative.

In this charged political atmosphere, financial institutions also should be particularly thoughtful in revising underwriting policies and guidelines to incorporate climate risk into the credit decision and making potentially adverse credit decisions with respect to current or prospective customers engaged in fossil fuel-related activities.[4] For those financial institutions that are members of climate initiatives or that have otherwise publicized GHG emission reduction targets, such credit decisions may be scrutinized by certain state enforcement agencies who also may request the institution’s documentation supporting the credit decision. Financial institutions therefore should consider documenting the business reasons for such credit decisions.

Before producing information in response to requests such as those in the Texas CIDs, financial institutions should consult with counsel and consider a variety of legal and regulatory issues, including: the state AG’s jurisdiction over the financial institution; the relevant state’s laws concerning the provision of customers’ financial records to the government; and regulations regarding the disclosure of confidential supervisory information regulations (to the extent responsive material involves communications with the institution’s supervisor). Financial institutions likely will also have strategic and reputational issues to consider in deciding how to respond.

Financial institutions are being forced to walk a tight rope on climate-related risk and other ESG matters. On the one hand, federal banking agencies and certain state banking agencies are increasingly encouraging financial institutions to enhance their climate-related risk management (see, e.g., footnote 4), and shareholders are increasingly demanding companies, including financial institutions, to implement net zero targets and other ESG-related objectives. Moreover, proposed US Securities and Exchange Commission (SEC) regulations would require detailed disclosures of financial institutions’ climate-related risks including Scope 3 emissions disclosures that would cover the institutions’ borrowers.[5] On the other hand, certain Republican AGs are now investigating financial institutions for implementing these objectives. And, certain Republican governors and state comptrollers are taking action against financial institutions perceived to be boycotting the oil and gas industry by prohibiting them from participating in state bond offerings or from managing state employee pension funds.[6]


[1] Arizona, Missouri, Kentucky, and Texas AGs are leading the investigations. Other AGs that issued CIDs include those from: Arkansas, Indiana, Kansas, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, Tennessee, and Virginia. Five other state AGs have joined the investigation but are prohibited by state confidentiality laws from disclosing the investigations.

[2] Tracey McDermott, COP27 and Beyond: An Open Letter from the NZBA Chair to Members, October 17, 2022, available here. McDermott’s letter also noted that the UN-backed group Race to Zero (RtZ) and the Glasgow Finance Alliance for Net Zero (GFANZ) likewise do not have the ability to impose emissions reduction targets on the NZBA or its members. Several of the US banks receiving the CIDs are members have of GFANZ and—citing potential legal concerns—recently have signaled that they may withdraw their membership from that body should membership entail binding fossil finance restrictions.

[3] The Texas AG’s CIDs state the investigation is into possible violations of the state’s deceptive trade practice and consumer protection laws. Most other AG offices have not published their CIDs.

[4] On March 30, 2022, the Federal Deposit Insurance Corporation (FDIC) approved a proposed Statement of Principles for Climate-Related Financial Risk Management for Large Financial Institutions (FDIC Principles). The FDIC Principles are substantially similar to the Office of the Comptroller of the Currency (OCC’s) draft Principles for Climate-Related Financial Risk Management for Large Banks, published in December 2021 (OCC Principles). The FDIC and OCC proposed principles state that board and management “should consider climate-related financial risks as part of the underwriting and ongoing monitoring” of their credit portfolios, as well as in determining their credit risk appetite.

[5] SEC Proposed Rule, The Enhancement and Standardization of Climate-Related Disclosures for Investors, March 21, 2022. While the SEC sought to publish the final rule by October 2022, given the volume of public comment, political pushback, and even a technical glitch requiring the SEC to re-open the comment period, it is unlikely that the SEC will publish the final rule before the end of 2022.

[6] On August 23, 2022, Florida Governor Ron DeSantis issued a resolution directing the state’s fund managers to make investment decisions without considering ESG factors. On August 24, 2022, the Texas Comptroller announced that state pension funds and other entities must divest from 10 major financial firms that he claims “boycott” energy companies. West Virginia also has declared certain banks ineligible for state banking contracts for allegedly boycotting fossil fuel industries, and Indiana Attorney General Todd Rokita issued an advisory opinion in September 2022 stating that Indiana law prohibits the state’s public retirement system from choosing investments or investment strategies to further general ESG goals.

This post comes to us from Arnold & Porter Kaye Scholer LLP. It is based on the firm’s memorandum, “State Attorneys General Take Aim at Banks with Net-Zero Pledges,” dated October 31, 2022, and available here. Ellen Kaye Fleishhacker and Michael Mancusi also contributed to the memorandum.