The push on environmental, social, and governance (“ESG”) disclosures has increased in the past several years, with these disclosures becoming a particular focus of the Biden Administration, the Securities and Exchange Commission (the “SEC”), and now the United States Congress. On June 16, 2021, the House of Representatives voted 215-214 to pass H.R. 1187, the “Corporate Governance Improvement and Investor Protection Act,” a compilation of several new company disclosures and related studies. If signed into law, the bill would amend the Securities Exchange Act of 1934 to require public companies to make potentially significant disclosures regarding ESG issues and would empower the SEC to define the parameters of such disclosures.
While the legislation represents a significant movement toward standardizing ESG disclosure, it faces an uphill battle in the Senate. No House Republican members voted in favor of the bill and four Democrats voted against it. Nevertheless, the SEC may view the House’s action on new disclosures as a reason to accelerate its efforts with respect to ESG disclosures. Proponents of the bill’s individual titles and shareholder activists may also use the bill’s passage in the House as a basis for making proposals in the coming proxy seasons.
H.R. 1187 Summary
The bill has 11 titles that, if enacted, would require public companies (issuers) to make certain disclosures.
- Title I—ESG Disclosure Simplification Act of 2021. Title I requires issuers to make ESG disclosures and empowers the SEC to define disclosure parameters. Title I also requires the SEC to study shareholder collective action and the significance of shareholder coalitions that seek to promote ESG standards and report the results to Congress.
- Title II—Shareholder Political Transparency Act of 2021. Title II requires the SEC to issue rules requiring issuers to submit to their shareholders and the SEC both quarterly and annual reports detailing their political activity expenditures.
- Title III—Greater Accountability in Pay Act of 2021. Title III requires issuers that are not “emerging growth” companies to file annual reports detailing compensation increases of executive officers versus those of all employees.
- Title IV—Climate Risk Disclosure Act of 2021. Title IV requires issuers to make specific disclosures in their annual reports regarding climate change, including actions taken to mitigate climate-related risks.
- Title V—Disclosure of Tax Havens and Offshoring Act. Title V requires issuers to file an annual report with the SEC detailing the jurisdiction in which the company is resident for tax purposes.
- Title VI—Workforce Investment Disclosure Act of 2021. Title VI requires the SEC to promulgate a regulation that requires issuers to disclose in their annual reports information regarding workforce demographics, such as race, ethnicity, and gender, as well as workforce health and well-being.
- Title VII—Preventing and Responding to Workplace Harassment. Title VII requires the SEC to promulgate a regulation that requires issuers to publish an annual report detailing statistics with respect to workplace harassment, including sexual harassment and retaliation for reporting. Such statistics include the number of settlements the issuer reached, whether any judgments were entered against the issuer, and the total amounts the issuer paid in any such settlements and judgments.
- Title VIII—Cybersecurity Disclosure Act of 2021. Title VIII requires the SEC to issue rules requiring issuers to disclose in their annual reports whether any member of its governing body (e.g., board of directors, general partner) has experience in cybersecurity. If no governing body member has any such experience, issuers must disclose what aspects of the company’s cybersecurity were considered when evaluating governing body nominees.
- Title IX—Improving Corporate Governance Through Diversity Act of 2021. Title IX requires issuers to disclose demographic data, including the race, ethnicity, gender identity, sexual orientation, and veteran status, of the issuer’s board of directors, nominees for the board of directors, and executive officers. Title IX also requires issuers to disclose whether they have adopted a policy to promote racial, ethnic, and gender diversity among the board of directors, nominees for the board of directors, and executive officers.
- Title X—Uyghur Forced Labor Disclosure Act. Title X requires the SEC to issue rules requiring issuers to disclose in annual reports and proxy statements whether the issuer engaged with an entity to import manufactured goods from the northwest region of China known as Xinjiang Uyghur Autonomous Region (XUAR).
- Title XI—Other Matters. Title XI requires the SEC to study the issues small businesses face with respect to complying with ESG disclosure requirements and submit the study’s results to Congress.
ESG Disclosure Requirements
Titles I and IV of H.R. 1187 are the bill’s main titles that address ESG disclosures. Specifically, these titles require issuers to make specific ESG disclosures, empower the SEC to define the parameters of such disclosures, and call for the creation of a permanent SEC advisory committee on sustainable finance.
Title I requires issuers to disclose two types of information related to certain “ESG metrics,” as later defined by the SEC, in any proxy or consent solicitation material for an annual shareholder meeting. First, issuers would have 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[.]” Second, issuers would have to disclose “a description of any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer.”
Title IV also requires issuers to make five specific disclosures in annual reports: (1) an evaluation of potential financial impacts of, and strategies related to, risks posed by climate change to the issuer; (2) a description of corporate governance processes and structures to identify, assess, and manage climate-related risks; (3) the specific actions the issuer is taking to mitigate climate-related risks; (4) the resilience of any strategy the issuer has for addressing climate risks; and (5) a description of how climate risk is incorporated into the issuer’s overall risk-management strategy.
The SEC’s Role
The bill gives the SEC significant authority with respect to ESG disclosures. First, Title I gives the SEC the authority to enforce the required disclosures in that it allows the SEC to engage in rulemaking to define “ESG metrics” and require companies to make the necessary disclosures. Second, Title I requires the SEC to establish a permanent advisory committee, called the “Sustainable Finance Advisory Committee” (“SFAC”), a permanent body of no more than 20 members to advise the SEC on ESG metrics and required disclosures. The SFAC would issue a report identifying “challenges and opportunities for investors associated with sustainable finance” and recommend “policy changes to facilitate the flow of capital toward sustainable investments.”
Building on Existing Climate and ESG Policies
The bill builds on the SEC’s current efforts to create new rules geared toward comprehensive ESG disclosures and overseeing the intersection of climate change and the economy. For example, on February 1, 2021, the SEC announced Satyam Khanna as the first Senior Policy Advisor for Climate and ESG. Additionally, on March 4, 2021, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The 22-person task force will “develop initiatives to proactively identify ESG-related misconduct” and will initially focus on “identify[ing] any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules.” Finally, on March 15, 2021, then-Acting Chair Allison Herren Lee issued a public statement requesting public input on climate change disclosures, citing a “demand for climate change information.” In the request for comment, the SEC asked 15 questions targeting the types of information to be disclosed; the way in which the SEC could regulate, monitor and guide such disclosures; and the possibility of varying reporting standards by industry.
Most recently, on June 22, 2021, SEC Commissioner Elad Roisman noted in a speech that legislative bodies in other countries have taken different approaches to ESG disclosure that ultimately have “contributed to the creation of international ESG disclosure frameworks that many U.S. financial market participants are now following.” Commissioner Roisman noted, however, that the SEC has no legislative mandate to make rules for the U.S. financial markets to further these objectives. Still, Commissioner Roisman noted the recent passage of H.R. 1187 and stated that the SEC should not copy the requirements of the international standards, given the SEC’s mandate.
H.R. 1187 has been referred to the Senate Banking, Housing & Urban Affairs Committee, which is chaired by Senator Sherrod Brown (D-OH), who earlier this year convened the Committee’s first-ever hearing on climate change and the financial system. Nevertheless, the bill faces uncertainty as it moves to an evenly divided Senate. Even with public support from President Biden, partisanship makes it uncertain that the SEC will be able to use this bill to continue or perhaps accelerate its rulemaking efforts geared toward comprehensive ESG disclosure and transparency. The SEC has, nevertheless, made ESG disclosure a focal point of its 2021 agenda and intends to move forward with these initiatives as a top priority.