international regulatory enforcement
ESG Disclosure Gaining Momentum as Bill Passes the House of Representatives
By Tara Giunta, Dina Ellis Rochkind, Jeremy Gordon, Quinn Dang, Maggie Shields
In a mostly party-line vote on June 16, 2021, the House of Representatives passed landmark legislation titled the ESG Disclosure Simplification Act of 2021 that would require public companies to make a number of environmental, social and governance-related (“ESG”) disclosures in their Securities and Exchange Commission (“SEC”) filings. Several Democrats voted against the legislation, which passed by only one vote. ESG has been an increasingly significant focus of the House Financial Services Committee and the Senate Banking Committee, which have held multiple hearings and discussed a number bills on the subject. If passed by the Senate and signed into law – which is doubtful for reasons discussed further below – the bill would add new reporting requirements for public companies related to climate risk and impact, political spending, tax havens, executive pay, and corporate diversity, thereby standardizing ESG disclosures. Even if legislation does not pass, Congress’s involvement may have an impact on the rules coming out of the SEC and other agencies. (Further details of the ESG Disclosure Simplification Act are included at the conclusion of this post.)
Despite the legislation’s support in the House, it may be dead on arrival in the Senate, where it would mostly likely need bipartisan support since it faces a poor prospect of inclusion through budget reconciliation. Similar bills requiring climate, diversity, and political spending disclosures by public companies have languished in Senate committees, and Senate Republicans have staunchly opposed ESG reporting requirements. Sen. Pat Toomey (R-PA), the Senate Banking Committee’s ranking Republican, for example, has opposed mandating disclosure of ESG-related information, stating that such requirements will “harm investors by discouraging companies from going public and undermining the quality and reliability of the SEC’s disclosure framework.” All Republicans on the Senate Banking Committee recently joined together to sign a letter urging the SEC to reject proposals to implement climate-related disclosure requirements, arguing that the rules would harm retail investors and that “federal securities regulations are not the appropriate vehicle to advance climate change policy goals.”
While Congress is moving to address the growing priority ascribed to ESG by investors, shareholders, consumers, and the market more broadly, the SEC is concurrently moving forward with considering ESG disclosures and reporting requirements. As reflected in its semiannual regulatory agenda filed with the Office of Management and Budget last week, the SEC plans to propose new rules on ESG disclosures, including board diversity and climate risk, among a number of other initiatives addressing “hot button issues.” Earlier this week, the SEC closed the comment period on its request for input on the scope and approach to ESG disclosure rules. The expectation is that the SEC will initiate rulemaking by October, consistent with statements by SEC Chair Gary Gensler that the SEC under his leadership will focus on ESG issues. This development comes on the heels of the SEC’s Climate and ESG Task Force, formed in March, which will “proactively identify ESG-related misconduct,” with a focus (at least at the outset) on identifying material gaps or misstatements in issuers’ disclosures, particularly with regard to climate risks. Further, also in March, the Commodities Futures Trading Commission (“CFTC”) established its Climate Risk Unit, an interdivisional group focused on accelerating “industry-led and market-driven processes in the climate—and the larger ESG—space,” building on previous CFTC efforts to lead in the area of climate change and help shape the role that derivatives play in addressing climate-related risks and the transition to a low-carbon economy. Finally, just last month, President Biden issued an executive order directing Treasury Secretary Janet Yellen to utilize the Treasury Department’s Financial Stability Oversight Council (“FSOC”) to assess the risks climate change poses to the U.S. financial system, and consider regulatory actions.
While legislation addressing ESG disclosure still has a tortured path to passage by the U.S. Congress, momentum at the SEC, CFTC, Treasury and other executive branch agencies – and in the market more broadly – is accelerating. Investors, shareholders, employees and consumers are demanding transparency by companies as to their ESG risk profile and what they are doing to address those risks.
H.R. 1187 is unlikely to become law because unlike the House where legislation can pass by a simple majority, a supermajority (60 votes) is required in the Senate to overcome a filibuster. Even if the bill were to overcome procedural hurdles to be passed through budget reconciliation which requires only a simple majority, the prospects for passage are daunting as it would also require securing votes from moderate Democratic Senators. Nevertheless, it reflects the broad focus on corporate transparency and sustainability gripping not just Capitol Hill, but all of Washington. And legislative and regulatory movement in this area is likely to continue at a rapid pace over the next few years of the Biden Administration.
ESG Disclosure Simplification Act of 2021, H.R. 1187
The Act bundled five ESG bills that the House Financial Services Committee approved in recent months. In hearings and mark ups, Democrats supported provisions that went into H.R. 1187, while Republicans opposed them. Democrats have said that ESG disclosure requirements play an important role in corporate social accountability. But even with mandated disclosures, challenges would remain. Democrats stressed the need to develop numerical standards that would ensure that information public companies disclose is consistent, relevant, and useful.
The required disclosures would principally cover five topics:
ESG Metrics. The bill would require public companies to disclose “a clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer” and a description of “any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer.” H.R. 1187 would establish a permanent Sustainable Finance Advisory Committee, composed of individuals and entities with sustainable finance backgrounds or interests, to identify the challenges and opportunities for investors associated with sustainable finance and recommend policy changes to the SEC to facilitate the flow of capital towards sustainable investments.
Political Spending. Publicly traded companies would be required to report independent expenditures (expenditures for political advertisements and any communications supporting or opposing a specific candidate), electioneering communications (which runs prior to an election but does not take a specific position on a candidate), and dues or other payments to trade associations and organizations that are used for such political activities. However, the bill excludes from required reporting any direct lobbying through registered lobbyists.
Pay Raises. The bill would shine a light on the pay gap between top executives and employees, by requiring public companies to report the annual percentage increase in total compensation of the two groups each fiscal year, and the ratio between the increases for each.
Climate Disclosures. The bill would require public companies disclose the potential financial impacts or any risk management strategies relating to physical and transition risks posed by climate change; established governance processes and structures to identify, assess, and manage climate-related risks; and specific actions that the company is taking to mitigate identified risks. It would also require companies to describe the resilience of any strategy that the company has for addressing climate risks, and describe how climate risk is incorporated into the overall risk management strategy of the company. The bill also calls for the SEC to issue rules pertaining to this disclosure requirement and create specialized climate reporting rules for the financial, insurance, transportation, electric power, mining, and nonrenewable energy sectors.
Tax Havens and Offshoring. Multinational enterprises would have to disclose the jurisdictions in which each of its entities is resident for tax purposes, total income tax paid to all tax jurisdictions, and profit or loss before tax, among other metrics.
Two amendments adopted shortly before the bill’s passage added additional disclosure requirements, as well. One, introduced by Rep. Kim Schrier (WA-08), would require the SEC, in conjunction with the Office of the Advocate for Small Business Capital Formation and the Office of the Investor Advocate, to conduct a study and issue a report on the issues small businesses face in reporting ESG disclosures. Another, introduced by Rep. Maxine Waters (CA-43), added disclosure requirements related to the diversity of public companies’ board members and top executives; workforce health and safety, pay, diversity, turnover and promotion rates, training, and use of contractors and outsourcing; sexual harassment-related settlements and judgments; and the cybersecurity expertise of their governing bodies. The Waters amendment would also require the SEC to study coalitions among shareholders who wish to preserve and promote critical employment, environmental, social, and governance standards, and provide a related report to Congress; and direct the SEC to issue rules requiring public companies to disclose imports sourced from China’s Xinjiang Province
 See, e.g., Climate Risk Disclosure Act, S. 1217, 117th Cong. (2021); Improving Corporate Governance Through Diversity Act of 2020, 117th Cong. S. 374 (2021).
 Laura Weiss, House Passes ESG, Climate Disclosure Rules for Public Companies, CQ (June 16, 2021), https://www.rollcall.com/2021/06/16/house-passes-esg-climate-disclosure-rules-for-public-companies/.
 Letter from Republican members of the Senate Banking Committee to Gary Gensler, Chair, and Allison Herren Lee, Commissioner, SEC (June 13, 2021), available at https://www.banking.senate.gov/imo/media/doc/banking_committee_republicans_letter_to_sec_on_climate_disclosures.pdf.
 Executive Order on Climate-Related Financial Risk (May 20, 2021), https://www.whitehouse.gov/briefing-room/presidential-actions/2021/05/20/executive-order-on-climate-related-financial-risk/.
 Memorandum from H. Comm. on Fin. Servs. Majority Staff to Members of the H. Comm. on Fin. Servs. (Feb. 22, 2021), https://financialservices.house.gov/uploadedfiles/hhrg-117-ba16-20210225-sd002.pdf; Climate Change and Social Responsibility: Helping Boards and Investors Make Decisions for a Sustainable World: Hearing Before the Subcomm. on Inv’r Prot., Entrepreneurship and Capital Mkts. of the H. Comm. on Fin. Servs. (Feb. 25, 2021), https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=407109.
 Laura Weiss, Democrats Urge ESG disclosure, Stakeholder Consideration, CQ (Feb. 25, 2021).
 H.R. 1187 Sec. 103(a).
 H.R. 1187 Sec. 104.
 The bill’s political spending provisions incorporate those of H.R. 1087, approved by the House Financial Services Committee in April.
 H.R. 1187 Sec. 203.
 H.R. 1187 Sec. 203.
 The bill’s provisions related to pay information incorporate those of H.R. 1188, approved by the House Financial Services Committee in May.
 H.R. 1187 Sec. 302.
 The bill’s climate-related disclosure requirements incorporate those of H.R. 2570, which the House Financial Services Committee approved in May.
 H.R. 1187 Sec. 403.
 The bill’s tax haven and offshoring provisions incorporate those of H.R. 3007, approved by the House Financial Services Committee in May.
 H.R. 1187 Sec. 502.
 Amendment to the Rules Comm. Print 117-5, https://amendments-rules.house.gov/amendments/117rcp5_amd1_xml210614095411731.pdf.
 H. Rept. 117-59 (2021).