Unified Democratic Control with Narrow Margins

The 2021 Georgia Senate runoff elections resulted in a seismic shift on the federal policymaking front, cementing Democratic control of the Senate with a 50-50 divide and Vice President Kamala Harris able to cast the tie-breaking vote for Democrats. As a result, Democrats now have unified control in Washington—winning the White House and narrowly securing majorities in the House of Representatives and Senate.

While Democrats will be driving the agenda, close margins in the House and Senate will impact the entire policymaking landscape.

In Congress, bipartisanship will be critical to enacting legislation into law. In instances where that fails, Democrats will pursue “budget reconciliation” for high-priority issues. While the budget reconciliation process is cumbersome, time consuming and subject to considerable limitations on the scope of eligible policies, it would potentially allow Democrats to pass two legislative packages with a majority vote in the Senate this year, rather than the 60 votes required for other types of legislation. And while circumscribed by the Senate’s arcane budget rules, the process is flexible enough that reconciliation could easily carry matters related to tax, climate, health care and infrastructure.

Tight margins in Congress will likely contribute to a robust regulatory agenda, with the administration turning to agency-driven policy where congressional agreement is not possible. We can also expect Democrats in Congress to engage in active oversight to supplement and amplify the Biden administration’s policy agenda.

New Federal Momentum for Integrating ESG Considerations

With the transition from the Trump administration and divided government to a Biden administration with unified Democratic control, continued mitigation of the public health and economic consequences of COVID-19 will take center stage in Washington. The administration views this as a play in two acts: relief and recovery. Particularly in the recovery phase, core Biden-Harris campaign priorities will be integrated into agency policy agendas across the administration, including an agency-wide approach to addressing climate change, reducing racial inequality and leveling the playing field for consumers.

For public companies, this will translate into a sharp retreat from Trump-era regulations and a more aggressive agenda by the Securities and Exchange Commission (SEC), particularly as it relates to environmental, social and governance (ESG) disclosures on climate and diversity. Climate and diversity issues continue to be a top priority for Democrats, and given the current legislative dynamic, we can expect increased activity in this area.

Personnel is Policy: A New SEC Chair

The nomination of Gary Gensler to head the SEC provides a strong indicator of the road ahead—a shift towards more aggressive enforcement and increased transparency and accountability for investors.

A 20-year Goldman Sachs executive, Gensler served as Chair of the Commodity Futures Trading Commission (CFTC) in the Obama administration, winning the respect of progressive Democrats as he worked to reform the $400 trillion swaps market, regulate the over-the-counter derivatives market and actively pursue enforcement after the 2008 financial crisis.

Gensler’s confirmation is assured with the Senate’s new Democratic majority. Gensler’s work in helping to shape the Dodd-Frank legislation, his work at the CFTC and his generally aggressive approach toward the policing of Wall Street helped to endear him to progressives who initially viewed him with some skepticism. At the same time, following his confirmation, we can expect an ongoing dialogue between Gensler and more moderate congressional Democrats in order to help ensure that the SEC strikes the right balance on various policy priorities.

Government-wide Prioritizing of ESG

President Biden, Speaker Pelosi and Leader Schumer are speaking with one voice when they emphasize government-wide commitments to addressing climate change and economic/social inequities. We see these commitments in the linking of climate to infrastructure, international agreements and global financing, and in proposals for increased regulation of the private sector.

Once confirmed, Chairman Gensler will take the lead in developing and executing top-line priorities of President Biden’s corporate governance agenda, including company disclosures for climate change risks and boardroom diversity.

At the tail-end of 2020, the SEC adopted amendments to modernize the description of business (Item 101), legal proceedings (Item 103) and risk factor disclosures (Item 105) that registrants are required to make pursuant to Regulation S-K. These amendments touted improved disclosure tailored to reflect registrants’ particular circumstances and to reduce disclosure costs and burdens and were ultimately opposed by the Democratic members of the Commission.

Democratic SEC Commissioners Allison Herren Lee and Caroline Crenshaw specifically raised concerns that the amendments failed to adequately address ESG disclosures, including climate change risk, human capital and diversity. These ESG-related priorities were also central to President Biden’s corporate governance proposals, and we can expect concerted activity on the ESG front in the coming months.

Specifically, a Democratic-majority SEC will likely prioritize rules to require public companies to disclose climate-related financial risks and greenhouse gas emissions in their operations and supply chains. Similarly, President Biden’s racial equity agenda proposed that publicly traded companies disclose data on the racial and gender composition of their corporate boards in order to provide greater transparency for shareholders. Increased disclosure has been a long- standing priority for advocates calling for more diverse and inclusive corporate management structures.

The SEC will have broad administration buy-in on its ESG push, with other agencies similarly committed to these goals. For instance, the Biden administration will revisit the Department of Labor’s “Financial Factors in Selecting Plan Investments,” which called for fiduciaries of ERISA plans to prioritize financial goals over ESG considerations, only allowing consideration of “non-pecuniary” interests in limited instances. Treasury Secretary Janet Yellen has also indicated that she will seek avenues to promote a climate agenda from her position at Treasury and will continue to develop policies to support the administration’s efforts on climate.

Congressional Oversight on Climate and Diversity

The constellation of relevant Democratic committee chairs in the House and Senate will ensure that climate and diversity are central themes in congressional hearings, oversight and legislation. While on the campaign trail, President Biden agreed, “It is way past time we put an end to the era of shareholder capitalism. The idea the only responsibility a corporation has is with shareholders. That is simply not true.” In short, the Biden administration will, at a minimum, nudge corporate America and encourage initiatives to accelerate stakeholder capitalism.

Proposals to accelerate corporate diversity garnered increased support from congressional lawmakers during the 116th Congress, including from now-Vice President Kamala Harris. In February 2019, Sen. Robert Menendez (D-NJ), the highest-ranking Latino in Congress and longstanding advocate for greater corporate diversity; Sen. Cory Booker (D-NJ); and then-California Sen. Harris introduced the Improving Corporate Governance Through Diversity Act of 2019 (S.360). Rep. Gregory Meeks (D-NY), Chairman of the House Financial Services Subcommittee on Consumer Protection and Financial Institutions, introduced companion legislation (H.R.5084) in the House, and the House passed the bill in November 2019. This legislation would require certain issuers of securities to disclose the racial, ethnic and gender composition of their boards of directors and executive officers. As then-Sen. Harris explained, “We must do more to hold companies accountable for living up to their own diversity goals and make sure we have reliable data about their progress.”

This uptick in legislation is supported by findings from Sen. Menendez’s 2017 Corporate Diversity Survey, which concluded that “Although most Fortune 100 companies believe in the idea of increasing diversity among their senior leadership and corporate boards, few are making tangible progress on the matter.” Sen. Menendez will also continue to encourage companies to respond to his survey to ensure greater accountability and relevant data.

In the previous Congress, the House Financial Services Committee, led by Chairwoman Maxine Waters (D-CA), considered ESG disclosures through various hearings and legislative proposals. For instance, in 2019, the House Financial Services Committee held a hearing to examine proposals, including H.R.5084, to increase the diversity of America’s corporate boards, as well as a hearing to examine data and research about the social and economic benefits that can be achieved when organizations implement robust diversity and inclusion strategies. Further, the House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a hearing to examine proposals to improve ESG disclosures. The Subcommittee reviewed Rep. Sean Casten’s (D-IL) Climate Risk Disclosure Act of 2019 (H.R.3623), a bill that would require public companies to disclose in their annual reports information relating to the financial and business risks associated with climate change.

Ultimately, Congress moves slowly under the best of circumstances, and with a closely divided House and Senate, controversial legislation will be a challenge. However, at the margins, between ordinary appropriations efforts and agency oversight, more- progressive agency heads, and the administration itself, we should expect some movement over the next few years regarding boardroom diversity and disclosures related to climate change. And just as important, President Biden will be confident using his bully pulpit to move corporate America in this direction even in the absence of government action.