Securities Regulation Daily Witnesses, committee members offer contrasting opinions on mandated ESG disclosure
Friday, July 12, 2019

Witnesses, committee members offer contrasting opinions on mandated ESG disclosure

By Amanda Maine, J.D.

House Democrats pointed to climate change as an important environmental factor that should be disclosed, while Republicans voiced concerns about the costs of imposing ESG disclosures on public companies.

During what was at times a tense hearing of the House Financial Services Committee’s Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets, Democrats and Republicans weighed in on the use of environmental, social, and governance (ESG) factors in disclosures made by public companies. The ESG Disclosure Simplification Act of 2019 would require public companies to disclose certain ESG metrics which the SEC would establish in a rule.

ESG disclosure. Subcommittee chairwoman Carolyn Maloney (D-NY) said that surveys have shown that investors want companies to disclose ESG information. She advised that according to some studies, companies that perform better on ESG metrics also perform better financially. While many companies already make ESG disclosures voluntarily, the information is difficult to compare because it is not standardized, Maloney said.

Ranking Member Bill Huizenga (R-Mich) was less enthusiastic about mandating ESG disclosures, attributing such efforts to "activist shareholders and corporate gadflies." He observed that mandating ESG disclosures would discourage companies from going public during a time when many companies opt to raise money through private channels instead of a public offering. Companies themselves and their boards of directors are in the best position to determine which ESG factors are material and therefore should be disclosed, he said.

Environmental. Much of the testimony centered around the "E" in ESG and on climate change in particular. Mindy S. Lubber, president and CEO of Ceres, said that environmental risks are very real, pointing to PG&E’s bankruptcy stemming from the California wildfires. Representative Bill Foster (D-Ill) noted that there has been an increasing number of lawsuits related to climate change and inquired how mandating disclosure would impact litigation. According to Lubber, more clarity from the SEC would reduce litigation.

Former SEC Commissioner Paul Atkins, now CEO of Patomak Global Partners, was pressed by Rep. Juan Vargas (D-Cal) on whether he thought climate change is real. Atkins declined to answer definitively, stating that he knows that there have been studies on it, but he hasn’t come to a conclusion about it himself. Vargas, seemingly unimpressed with this response, said that nearly all scientists agree that climate change is real and added that when ozone depletion was a problem, the world invested in alternatives to CFCs to address it, a lesson to keep in mind when it comes to addressing climate change.

Representative Sean Casten (D-Ill) said that more than 200 of the world’s largest companies have forecasted that climate change will cost them a combined $1 trillion. He cautioned that the SEC was not created to allow businesses to hide information and protect their profits, but to compel businesses to disclose information and protect investors.

Several Republicans were critical of the proposed legislation to require ESG disclosure, stating that it would harm the already faltering IPO market. Representative Ann Wagner (R-Mo) expressed concern that while the U.S. is experiencing a slump in the number of public companies and IPOs, foreign markets are growing, especially in China. Atkins agreed, stating that more U.S. companies are choosing not to go public, opting for private capital raising instead.

If something is material, it should already be disclosed under the current rules, Rep. French Hill (R-Ark) stated. Congress shouldn’t have to compel something to be material if it is not material in the eyes of the board as fiduciaries, he advised. For example, SEC’s conflict minerals disclosure rule, enacted as part of the Dodd-Frank Act, imposed costs on companies despite few investors being interested in it, according to Hill.

Social and governance. Representative David Scott (D-Ga) asked Lubber to provide an example of a social factor in ESG. Lubber replied that human rights issues, such as using child labor, can result in harm to a company’s reputation. She also pointed to Nike’s advertisement featuring professional football player Colin Kaepernick: Nike initially experienced a slight drop in sales, but since then has seen a rise in sales, according to Lubber.

Huizenga seized on the Nike comment to bring up the company’s recent decision to pull shoes featuring the "Betsy Ross flag" from the market, stating that he thought it was a "stupid" decision, "but it was their decision." Huizenga added he did not want the SEC to decide what will be the "next Betsy Ross flag for social justice."

CalPERS. James Andrus of CalPERS was the target of some criticism from the committee’s Republicans. Representative Warren Davidson (R-Ohio) said that when CalPERS decided to divest from tobacco companies, it cost CalPERS billions in investment opportunities and now CalPERS is not fully funded. He pointed out that CalPERS’s former board president, an ESG advocate, had been ousted by a candidate who campaigned on putting less emphasis on ESG.

Atkins criticized. Atkins briefly came under fire from Rep. Katie Porter (D-Cal), noting that he was at the SEC just prior to the market crash of 2008. She said that Atkins has publicly railed against groups that challenged big banks through shareholder proposals and called companies who cave to social activism "weenies." She asked him what he charges in his work as a consultant and wondered why anyone would pay him "big bucks" when he didn’t stand up to banks and called him a "weenie," prompting fierce objections from Republicans. "I feel very confident that I have made my point," Porter concluded.

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