In a House Financial Services Committee hearing yesterday, committee members debated the merits of five draft bills that would require public companies to disclose information on several environmental, social and governance, or ESG, topics including climate change risk, political expenditures and human rights risk. Hosted by the Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, the hearing included witnesses representing CalPERS, Global Reporting Initiative (GRI), Ceres, Decatur Capital Management, an investment management firm, and Patomak Global Partners, a consulting firm for which former SEC Commissioner Paul Atkins serves as CEO.
Mandatory or Voluntary Disclosure? The committee memorandum prepared by the majority staff prior to the hearing stated that “investors have increasingly been demanding more and better disclosure of ESG information from public companies.” The target for improving this disclosure has been the SEC, which received an October 2018 petition from a coalition of investment managers, public pension funds and non-profit organizations requesting that the agency develop a robust ESG disclosure framework. Representative Juan Vargas (D-CA) noted in his remarks that this petition was the impetus for his draft legislation, ESG Disclosure Simplification Act of 2019, one of the bills considered at the hearing.
Several committee members on both sides of the aisle noted that, as interest in ESG disclosure rises, some public companies have responded by voluntarily adding these types of issues to their reporting efforts. However, debate ensued when considering that the draft bills would mandate this type of disclosure for all public companies. Issues raised during the question and answer period included:
- Whether mandated disclosure is necessary given current voluntary disclosure practices;
- The potential increased regulatory burden of these disclosures, which could negatively impact U.S. IPO markets; and
- Whether ESG issues qualify as material information for investors.
Relevant Political Context. This committee is not the first to discuss ESG issues in a hearing this year, as the Senate Committee on Banking, Housing and Urban Affairs held a hearing in April 2019 on the application of ESG principles in investing. Regulators also are considering these topics, with the Commodity Futures Trading Commission (CFTC) holding a Market Risk Advisory Committee meeting last month that focused on climate-related financial risks. On the SEC side, Commissioner Hester M. Peirce voiced her opinion on ESG efforts in a June speech, stating that they are a “scarlet letter phenomenon,” in which corporations are publicly shamed.
Whether the draft proposals discussed at this most recent hearing move forward is unclear, but interest in ESG and the disclosure of ESG issues is on the rise with U.S. lawmakers, regulators and investors alike.
Legal assistant Sarah Foster contributed to this post.