ESG in Spotlight after COVID-19

As the COVID-19 pandemic trigged an economic and social crisis in the U.S., the debate over Environmental, Social & Governance (ESG) policies has taken center stage.

From the urgency around economic recovery, global supply chain shortages and social inequality exposed by the pandemic, to the need to address other pressing challenges, like climate change, there is growing demand from consumers, investors, employees, and other stakeholders for companies to disclose strong actions around ESG.

In addition, there has been a notable shift in the Administration and on Capitol Hill regarding ESG policies. President Biden has issued executive orders encouraging regulators to assess climate-related financial risk and to advance diversity, equity, inclusion, and accessibility in the Federal workforce. Securities and Exchange Commission (SEC) Chairman Gary Gensler has made reform of ESG disclosures regarding climate change risk and human capital a top priority. Furthermore, the U.S. House recently passed a legislative package on ESG disclosures and is considering other legislation related to climate change and diversity and inclusion. At the same time, there are others who support voluntary ESG disclosure based on a company’s materiality but caution against government and regulatory mandates.

With a growing focus on ESG among the public, investors and in the nation’s capital, many believe that there will be widespread implementation of ESG-related practices across industries and jurisdictions over the next decade. What that will look like remains to be seen.

In this edition, we will explore ESG trends, policies, and issues in 2021 and beyond.

Gloria Story Dittus, Chairman, Story Partners

BPC and ESG: What We’re Doing to Make an Impact

Environmental, social, and governance, or ESG, is a framework increasingly used to measure factors beyond the balance sheet that impact the financial performance and long-term sustainability of a corporation.

That’s why, this past March, the Bipartisan Policy Center, together with S&P Global, announced a new ESG Task Force to inform policymakers about the ESG debate, discuss how companies are responding, and lay out the issues that are likely to demand their attention moving forward.

Comprised of industry leaders that bring real world experience and a shared commitment to advancing and implementing ESG goals, this task force serves as an objective, bipartisan forum to discuss pertinent issues while also helping inform public debate on how best to proceed. We began by looking at some basic questions that had yet to be adequately answered; how ESG is defined, how ESG information is disclosed, how that information is used, among others.

As investors are increasingly considering ESG factors in their investment decision-making, this has led to an increased need for data, analysis, investment products, and standards, which has ultimately led to a series of complex regulatory questions. There are concerns among many about “greenwashing,” too, and the demand for definitional clarity among policymakers is high.

While ESG efforts have been underway for years in the private sector, government – and particularly Congress – has relatively little experience working on these issues. The Biden administration has already demonstrated interest in a larger government role in guiding, regulating, and potentially mandating a range of ESG frameworks and obligations. Additionally, U.S. companies already have an eye toward Europe, which has moved farther down the road of new corporate governance rules.

Additionally, the Biden Administration is likely to push for increased government action on ESG issues, including mandating disclosure through the SEC. Congress also seems poised to act on a wide range of ESG issues. These factors add an urgency to help properly define ESG for policymakers, companies, stakeholders, and the investment community.

However, there is confusion surrounding the role ESG plays and how it can help companies mitigate risk and meet the increasing demands of their shareholders. The corporate response to the COVID-19 crisis and subsequent economic downturn has brought these issues even more to forefront.

BPC is uniquely positioned to create the collaborative, bipartisan forum required for substantive discussion of these complex issues, and we continue to work on a variety of ESG-related topics, including climate concerns, ESG-related disclosures, ESG rating and ranking systems, and shareholder proposals.

Dane Stangler, Director of Strategic Initiatives, Bipartisan Policy Center

ESG Disclosures: A Market Driven Initiative

Companies have a moral and ethical imperative to ensure that their business operations positively impact the communities in which they serve. To adequately assess a business’ local and national impact, corporations should be required to disclose ESG related metrics to the U.S. Securities and Exchange Commission (SEC). ESG metrics generally include issues relating to environmental sustainability, such as climate change; social issues, such as human rights and labor practices; and governance issues, such as gender, racial, and ethnic diversity at both executive and board levels.

ESG disclosures are a market-driven initiative to increase investor education and corporate transparency. Information from ESG disclosures will help investors gain greater insight into what companies are doing to reduce their carbon footprints and to address important issues like climate change, diversity, and labor rights. Investors understand that ESG issues are material and need to be accounted for when assessing market opportunities and risks. In market economics, this is called complete information – when investors have all the needed metrics to make well-informed, ethical, and sustainable financial decisions.

Investors in my district and across the country have increasingly been demanding public companies disclose ESG information. Since 2018, state treasurers, academics, labor unions, and national financial institutions have petitioned the SEC to conduct a rulemaking to standardize ESG disclosures. As a result, the SEC has received thousands of comments from economists, market advocates, and investors requesting that companies and banks file ESG disclosures to protect investors; ensure fair, orderly, and efficient markets; and facilitate capital formation. Industry giants have already taken note. Just last year, 77 percent of Fortune 100 companies disclosed key ESG-related metrics.

However, although some companies have increased their transparency on ESG issues, more action is needed. Now is the time for the SEC to create a standard definition of ESG metrics and require standardized ESG disclosures.

In June, the House of Representatives passed the Corporate Governance Improvement and Investor Protection Act, a legislative package that encourages corporate environmental and social responsibility. As the bill’s lead sponsor, the package includes my ESG Disclosure Simplification Act of 2021. This measure requires the SEC to create a standard definition of ESG metrics; requires security issuers to disclose the impact of ESG metrics on their long-term business strategy; and establishes a Sustainable Finance Advisory Committee within the SEC to identify the challenges and opportunities for investors associated with sustainable finance and recommend policy changes to facilitate the flow of capital towards sustainable investments.

As we press towards a more ecologically conscious and inclusive economy, corporations must disclose ESG metrics to provide investors with the information needed to make sustainable and ethical decisions in the global financial market.

Congressman Juan Vargas, member of the House Financial Services Committee

Rep. Vargas represents California’s 51st Congressional District which includes the southern portion of San Diego County, all of Imperial County and California’s entire U.S.-Mexico border. Rep. Vargas was first elected to the U.S. House of Representatives in 2012 and is currently serving his fifth term in Congress. He serves on the House Financial Services Committee and House Foreign Affairs Committee.

Government Mandates Risk Undermining Meaningful ESG Disclosures and Responsible Corporate Governance

A growing number of companies routinely produce Environmental, Social and Governance (“ESG”) information. And for good reason: employees, investors, community partners, and other stakeholders want to better understand how companies are factoring ESG considerations into their corporate governance decision-making.

Today, there is not a standard ESG playbook because the challenges and opportunities in ESG vary widely depending on a company’s industry, footprint, and investor base. What is a meaningful environmental issue for one company can be entirely irrelevant for another.

ESG disclosures are sensitive and responsive to varying circumstances, making them different from the kinds of disclosures mandated by the government that primarily focus on financial performance, financially quantifiable risks, governance, and legal compliance. Revenue, expenses, and conflict of interest disclosures are material no matter what a company does, whereas what ESG metrics could be determined to impact investment decisions can vary significantly.

Materiality has been at core of the U.S. approach to mandatory investor disclosures for decades, because it ensures that investors are provided with decision-useful information and are not, in the words of the Supreme Court, “bur[ied] in an avalanche of trivial information.” The materiality standard also keeps corporate disclosure tied to the economic return and long-term performance of companies.

For years, the U.S. Chamber has worked closely with public companies and investors to promote a system of market-based disclosure standards for ESG and, in 2019, released a set of best practices for disclosing material ESG information.

But now, the Securities and Exchange Commission (SEC) may uproot the voluntary and discrete disclosure system to take a vastly different approach, mandating a full range of “one-size fits all” ESG disclosures. If done poorly, such a system could make ESG disclosures less meaningful for stakeholders and for responsible corporate governance.

First, the type of disclosure mandate being contemplated would put the government at the center of decisions about what information is important and meaningful for investors. This approach would go against what SEC Chair Gary Gensler himself said during his confirmation hearing: “it’s the investor community that gets to decide what is material to them. It’s not a government person like myself.”

Second, because companies can be held liable for what they say in SEC disclosures, a mandatory, top-down rule could result in ESG disclosures that are littered with legal caveats and turns of phrase that make it nearly impossible to understand what a company intends to achieve through its ESG goals. Ironically, a mandatory SEC disclosure may end up providing less information to stakeholders because companies may be forced to communicate less openly and less clearly about future developments.

For example, many companies have made important commitments around reducing carbon emissions, but achieving these goals often relies on innovation in market segments that a company does not control. Because these company goals look to the future, attaching liability to them could actually discourage companies from making internal strategies available to stakeholders, shareholders, and the public.

A survey conducted earlier this year by the U.S. Chamber and seven other organizations found that public companies have significantly increased the amount of climate change information they disclose: 59% say they are disclosing more information regarding climate change than they were a decade ago, while nearly two-thirds regularly communicate with their shareholders about the evolving risk of climate change. A “government-knows-best” rule could undermine this progress.

The Chamber will continue to work with public companies, investors, the SEC, and Congress on these critical issues to foster a system of corporate disclosure that is based on materiality and the needs of the investor while also ensuring that companies share important ESG information with a broad range of stakeholders. Such a system will help maintain U.S. leadership in global capital markets for years to come.

Tom Quaadman, Executive Vice President of the U.S. Chamber Center for Capital Markets Competitiveness and Senior Advisor to the President and CEO

Problems with ESG

The new chairman of the Securities and Exchange Commission (SEC), Gary Gensler, wants the SEC to become America’s climate regulator by mandating environmental, social, and governance (ESG) disclosures for both public and private companies. In my view, however, the SEC is drifting into an area that is far afield of its statutory mission. To be clear, I have no problem if a company wishes to provide climate or other ESG information to investors. Further, if such ESG factors are material to an investment decision, the company would already be disclosing it in their SEC filings. No regulatory mandate is necessary.

ESG is a framework that allows investors to consider environmental, social, and governance factors alongside financial factors in the investment decision-making process. The SEC under Chair Gary Gensler is now attempting to make ESG metrics a required part of corporate disclosures, despite many ESG factors not being material to shareholder decisions. Even if something is ethically or socially significant to investors, if it is financially insignificant, it cannot be material. A company’s fiduciary responsibility to its shareholders cannot be secondary to the various, changing political and social views of unelected government officials at the SEC.

However, the problems with ESG go beyond the lack of nexus to materiality, especially when investors are harmed. The “ESG industrial complex” being pushed by Wall Street often misleads investors by labeling and advertising investment funds as “green” while charging higher fees, yet making no discernible, sustainable changes to the funds’ portfolio allocation. Can a self-proclaimed ESG fund that invests in oil and gas companies really be “sustainable”?

Earlier this year, House Democrats attempted to pass a partisan bill that would mandate public companies annually disclose ESG metrics. When I introduced an amendment to the bill to require the SEC to carefully identify and describe inconsistencies in the methodologies related to ESG metrics before requiring public companies to disclose these metrics, Democrats voted it down alongside other commonsense changes. I also led a letter to Chair Gensler with over 20 House Republicans questioning whether climate risk meets the materiality standard and how the SEC should steer clear from dictating environmental policy, as well as a letter to Chair Gensler questioning the Commission’s statutory authority to mandate ESG disclosures for privately-held businesses.

Republicans will continue to fight attempts to mandate ill-conceived approaches to ESG and climate-risk disclosures while encouraging a continuation of the materiality standard, which has served investors well for decades. The SEC should stop politicizing the Commission to advance a liberal social agenda and instead focus on its statutory mission to maintain fair, orderly, and efficient markets, and to facilitate capital formation.

Congressman French Hill, member of the House Financial Services Committee

Congressman French Hill represents the second district of Arkansas and is a senior Republican on the House Financial Services Committee.