Yesterday the House of Representatives passed by a narrow margin the Governance Improvement and Investor Protection Act (H.R. 1187), which is a package of bills broadly requiring disclosure of ESG metrics in business (including supply chain impacts) and setting specific reporting expectations on climate risks, political spending, executive pay, and taxation rates. The legislation comes amidst indications by the SEC that mandatory disclosures related to ESG and climate impacts are a priority. Our analysis of the supply chain impacts of the SEC’s recent ESG related announcements can be found here and here.

The Governance Improvement and Investor Protection Act requires the SEC to amend its regulations so as to define ESG metrics and require that all issuers disclose the following:

  1. ESG metrics as defined;
  2. a clear description of the link between ESG metrics and the long-term business strategy of the issuer;
  3. a description of the process used to determine the impact of ESG metrics on the long-term business strategy of the issuer;
  4. information regarding the identification of the evaluation of potential financial impacts of, and any risk-management strategies relating to:
    • physical risks posed to the covered issuer by climate change; and
    • transition risks posed to the covered issuer by climate change;
  5. a description of any established corporate governance processes and structures to identify, assess, and manage climate-related risks;
  6. a description of specific actions that the covered issuer is taking to mitigate identified risks;
  7. a description of the resilience of any strategy the covered issuer has for addressing climate risks when differing climate scenarios are taken into consideration;
  8. a description of how climate risk is incorporated into the overall risk management strategy of the covered issuer.

In addition, the bill mandates that to the extent practicable, the SEC tailor the required climate risk disclosures to the relevant industries as well as include specific reporting standards related to:

  1. direct and indirect greenhouse gas emissions;
  2. the total amount of fossil fuel-related assets owned or managed by the issuer;
  3. the percentage of fossil fuel-related assets as a percentage of total assets owned or managed by the issuer;
  4. the climate scenario analyses.

The bill’s prospects in the Senate are unclear, as it faces opposition from Republicans as well as business interest groups. One Republican has called the effort an attempt to “name and shame” companies in the ESG space, and another stated that “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.” The U.S. Chamber of Commerce noted that, while the “underlying goals” of the effort are “laudable,” the bill “would likely result in significant costs for Main Street investors” and “would fail to achieve its stated objectives.”

Key Takeaways:

Although the bill does not specifically reference supply chains, given the breadth and depth of corporate supply chains today any ESG and climate risk analysis must inevitably take into account ESG and climate impacts of entities and operations within the supply chain. Accurately measuring these risks requires companies to have a transparent view of their supplier and sub-supplier operations, and will require listed companies subject to any SEC disclosure operations to request and analyze ESG impact data from its non-listed suppliers both within and outside the U.S. The SEC under the Biden Administration has made it clear that development of ESG and climate impact disclosures will be one of its primary areas of focus, and thus increased scrutiny of these disclosures should be expected. Therefore, it remains important for companies to: (1) ensure they have risk-based responsible sourcing and ESG compliance programs in place to ensure accurate oversight and visibility into supply chain impacts; and (2) confirm that any existing risk assessment processes, policies and procedures provide companies with reasonably accurate data to report on ESG and climate impacts both in supply chains and in extended enterprise operations.