House-Approved Legislation Would Mandate ESG Disclosures

Ted Godbout, National Association of Plan Advisors

Publicly traded companies would be required to disclose to shareholders certain environmental, social, and governance (ESG) metrics under legislation narrowly approved by the House of Representatives.

The House approved the Corporate Governance Improvement and Investor Protection Act (H.R. 1187) June 16 as part of a package of bills on a near party-line vote of 215-214. No Republicans voted for the bill and four Democrats voted against it.

Advocates for the legislation argue that investors have been demanding more—and better—disclosure of ESG information from public companies, with many investors viewing ESG factors as important, not just for evaluating reputational risks, but for evaluating companies’ financial performance as well as long-term viability.

“This bill provides investors with critical information on ESG matters by requiring public companies to disclose key information to shareholders regarding corporate political spending, worker pay, CEO compensation, climate risk, and country-by-country tax reporting, and provides issuers with clear, consistent standards to disclose this information,” House Financial Services Chair Maxine Waters (D-CA) argued in support of the bill.

H.R. 1187 was originally introduced in February by Rep. Juan Vargas (D-CA), then known as the ESG Disclosure Simplification Act of 2021. It was approved by the House Financial Services Committee on April 21, also on a party-line vote.

ESG Disclosures

In general, the bill would require issuers to disclose to shareholders certain ESG metrics, the connection between those metrics and the issuer’s long term business strategy, and the method by which the issuer determines how ESG metrics affect its long-term strategy.

The Securities and Exchange Commission would also be required to adopt rules requiring issuers to disclose ESG metrics in filings that require audited financial statements. The legislation would also establish a Sustainable Financial Advisory Committee (SFAC) to provide the SEC with a report identifying policy changes that could facilitate sustainable investments.

“Information from ESG disclosures will help investors have greater insight into what companies are doing to reduce their carbon footprints and to address important issues like climate change, diversity, and labor rights,” Vargas said in a statement upon passage. “My bill will help ensure clarity and comparability in disclosure of companies’ practices, by developing a much-needed comprehensive ESG disclosure framework.”

Legislative Package

In addition to ESG disclosures, the legislative package also includes:

• The Shareholder Political Transparency Act requiring public companies to submit quarterly reports to the SEC on all political expenditures;

• The Greater Accountability in Pay Act requiring increased disclosures on the compensation of senior executives;

• The Disclosure of Tax Heavens and Offshoring Act requiring disclosures to discourage companies’ use of so-called tax havens and encourages repatriation of taxes to the U.S.; and

• The Climate Risk Disclosure Act requiring disclosures to encourage companies to plan for the impact of climate change on their company.

Several amendments were also added prior to approval of H.R. 1187. Those include, among others:

• increasing disclosures from public companies about their workforce, including information about health and safety, pay, diversity, turnover and promotion rates, and training, as well as companies’ use of contractors and outsourcing;

• requiring publicly traded companies to disclose the number of settlements, judgments, and aggregate settlement amounts in connection with workplace harassment in their annual SEC filings;

• requiring publicly traded companies to report annually on whether members of their governing bodies (such as general partners or board members) have cybersecurity expertise;

• requiring public companies to annually disclose the racial, ethnic, gender identity, sexual orientation, and veteran status of their board, nominees and senior executive officers;

• empowering the SEC’s Office of Minority and Women Inclusion to publish best diversity disclosure practices, and creating an advisory group that would study and report on increasing corporate diversity;

• requiring the SEC to study the emergence and viability of coalitions among shareholders who wish to preserve and promote employment, environmental, social, and governance standards (EESG); and

• requiring the Commission, in conjunction with the Office of the Advocate for Small Business Capital Formation and the Office of the Investor Advocate, to study and issue a report on issues small businesses face in reporting ESG disclosures with recommendations for the Commission to consider.

SEC Review

The House’s passage of H.R. 1187 comes as the SEC currently undertakes a regulatory review about whether current disclosures adequately inform investors. A public comment period requesting feedback about how the Commission can best regulate and guide climate change disclosures recently closed. In fact, the American Retirement Association extended its support for the SEC’s review of company disclosures relating to climate change-related information.

Additionally, the SEC’s newly released spring regulatory agenda confirms that the SEC plans to proceed with rulemaking in this regard with an October 2021 target date for release.

H.R. 1187 will now move to the Senate, where it faces a closely divided chamber and a less certain future.

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