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.