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House passes ESG, climate disclosure rules for public companies

SEC also has disclosure rules on its agenda

House Financial Services Chairwoman Maxine Waters says the ESG legislation would allow investors to hold companies accountable.
House Financial Services Chairwoman Maxine Waters says the ESG legislation would allow investors to hold companies accountable. (Tom Williams/CQ Roll Call file photo)

The House passed legislation Wednesday that would require public companies to report environmental, social and governance metrics, betting that shareholders will use the information to pressure corporations on climate risk and other issues important to Democrats.

The measure’s passage, on a 215-214 vote, marked the first time the chamber has passed sweeping legislation for transparency on sustainability issues. The package of bills would require disclosure of ESG metrics broadly and dictate specific reporting expectations on climate risks, political spending, CEO pay and taxation rates.

The package “will create clear, consistent disclosure standards for issuers and finally provide investors and our markets with the information they need to make the best investment decisions possible and to hold the companies they’re invested in accountable,” House Financial Services Chairwoman Maxine Waters, D-Calif., said Monday during a Rules Committee meeting on the measure.

Passage by the House comes as the Securities and Exchange Commission, which oversees corporate financial disclosures, says it is weighing transparency rules on climate risk, board diversity and workforce matters.

While the White House and congressional Democrats largely back ESG disclosure mandates and see the issue as aiding their goals, the effort faces opposition from Republicans and industry, who say it’s premature and too costly.

Rep. French Hill, R-Ark., said there’s no agreement on the best disclosure on ESG and the mandates are an attempt to “name and shame” companies.

The package from California Rep. Juan C. Vargas combines ESG proposals Democrats have put forward for years. Vargas first introduced the package’s primary bill in 2019, and other measures have been promoted by Democrats who won seats for the first time during the 2018 midterm elections.

The legislation would require publicly traded companies to disclose and define ESG metrics and their view on the link between ESG and long-term business performance. It would allow the SEC to consider independent, internationally recognized disclosure standards for reporting when creating rules to facilitate the ESG disclosure and establish a Sustainable Finance Advisory Committee at the agency.

The package would also require public companies to disclose industry-tailored climate information, including direct and indirect greenhouse gas emissions and fossil fuel-related assets.

Other provisions would mandate quarterly and annual reporting on political activities by companies and their trade associations, including the amount, date, candidate and party for contributions. Companies would have to report a ratio of the percentage pay increase for executives compared to the raise for a median worker each year, and taxes paid by jurisdiction.

Before passage, the House adopted amendments that would require disclosure of the race, ethnicity, gender, sexual orientation and veteran status of board members and executives; workforce-related information, including diversity, safety and pay; settlements or judgments connected to workplace harassment; board members’ cybersecurity expertise; and sourcing of materials from Xinjiang, China.

‘Big moment’

Proponents of ESG disclosure say that even if the Biden administration moves forward with reporting rules on its own, congressional action would help speed the process.

“We’re very encouraged that disclosure legislation is moving,” Bryan McGannon, director of policy and programs for US SIF, a group for sustainable funds whose members manage $5 trillion, said in an interview. “This is a big moment.”

A Statement of Administration Policy from the White House Office of Management and Budget this week expressed support for passage of the ESG bill, saying it would require important changes to how public companies account for and disclose certain risks.

“The Administration supports efforts to account for climate risk in financial services, empower and protect investors, and promote transparency, accountability and equity in corporate governance,” the statement said.

Last week, Democratic Reps. Dean Phillips of Minnesota and Chrissy Houlahan of Pennsylvania announced the formation of the Compassionate Capitalism Caucus to foster collaboration between House lawmakers and private sector leaders dedicated to environmental, social and governance principles.

Public Citizen, a consumer watchdog group, believes the legislation would speed regulatory rule-making on ESG and address possible litigation challenging final rules, said Yevgeny Shrago, policy counsel for the organization’s climate program. He said investors are seeking more ESG information.

“We need these disclosures as soon as we can get them,” Shrago said in an interview. “The U.S. is already behind on a lot of climate disclosure.”

The biggest lobbyist on behalf of U.S. companies, the U.S. Chamber of Commerce, asked lawmakers to reject the ESG package. Jack Howard, the senior vice president of its Congressional and Public Affairs Division, said in a letter Tuesday that the chamber will consider lawmakers’ decisions when scoring House members on their votes.

“While some of the underlying goals of [the ESG package] are laudable, the bill would likely result in significant costs for Main Street investors and it would fail to achieve its stated objectives,” Howard said in the letter.

The disclosure created by the bill would be “one-size-fits-all” and a barrier to companies becoming publicly traded, he added.

Divided Senate

The package now heads to the narrowly divided Senate, where Republicans on the panel overseeing these issues have objected to transparency rules in recent hearings.

Senate Banking Chairman Sherrod Brown will review the proposal now that it has passed the House, according to his office. The Ohio Democrat has supported ESG disclosure rules and this year convened the committee’s first-ever hearing on climate change and the financial system.

Brown believes standardizing disclosure rules would bring the SEC up to date with other requirements around the world, his office said.

The Banking panel’s ranking Republican, Sen. Patrick J. Toomey of Pennsylvania, opposes ESG reporting rules.

“Congress should reject any proposal to require publicly-traded companies to disclose financially irrelevant information on global warming, political spending, or other ESG-related data,” Toomey said in a statement to CQ Roll Call. “Doing so will ultimately harm investors both by discouraging companies from going public and by undermining the quality and reliability of the SEC’s disclosure framework.”

The SEC’s spring regulatory agenda released last week says the agency is considering disclosure rules on climate change, board diversity and human capital management, which refers to workforce-related matters. The agency is already collecting public input on climate-related reporting. Hundreds of letters have urged the agency to create disclosure rules.

While the agency’s plans indicate potential action this year on major areas of ESG, they also leave out categories on which Democrats and corporate shareholders are increasingly seeking information, such as political spending and human rights.

SEC and administration officials have expressed a desire for international collaboration on ESG transparency requirements. G-7 finance officials gave support to climate-related disclosure mandates earlier this month during a meeting in London. Some countries, including the U.K. and New Zealand, are moving forward with climate-related rules.

“Disclosure is here to stay,” John Kerry, the first U.S. special presidential envoy for climate, said at a virtual event in April held by sustainability group Ceres. “It’s going to be global. We are going to have to harmonize our understanding, which will take some negotiating.”

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