House Democrats are pushing forward on a legislative package that would establish a sweeping set of mandates for the SEC on climate risk, sustainability, outsourcing, corporate political spending, and executive pay raises.
H.R. 1187, the Corporate Governance Improvement and Investor Protection Act, is made up of bills that advanced out of the House Financial Services Committee in April and May. The package represents the most aggressive push this year by Democratic lawmakers looking to vastly expand the SEC’s environmental, social, and governance (ESG) disclosure regime, running parallel to ESG rulemaking efforts by new SEC Chair Gary Gensler.
“For years investors and market participants have been demanding more and better disclosures regarding ESG matters, which research shows have significant impacts on the short- and long-term values of companies,” House Financial Services Committee Chair Maxine Waters said during a June 14, 2021, House Rules Committee meeting.
House Republicans remain strongly opposed to the package, which “layer on requirement after requirement on public companies,” Rep. French Hill, an Arkansas Republican, said during the meeting.
“Instead of encouraging capital formation or protecting investors, this bill uses our securities laws to push a left-wing partisan agenda by naming and shaming public companies,” Hill said.
The package, which the House is slated to vote on this week, contains the text of the following bills:
- Climate Risk Disclosure Act, sponsored by Rep. Sean Casten of Illinois, mandating new corporate disclosures on the threat to public companies posed by climate change. Casten’s bill would amend the Securities Exchange Act of 1934 to require covered issuers to make annual disclosures on the “identification of, the evaluation of potential financial impacts of, and any risk management strategies relating to” the physical and transition risks posed by climate change. Public companies would also need to describe any established corporate governance processes and structures to address climate risks; and describe specific actions taken to mitigate those risks; among other disclosures.Also under the bill, the SEC would have two years to set out rules that establish, “in consultation with the appropriate climate principals,” climate-related disclosure requirements.Those rules would be specialized for industries that include finance, insurance, transportation, electric power, mining, non-renewable energy, and any other sector deemed appropriate by the SEC. The commission would also need to issue reporting standards for “estimating and disclosing direct and indirect greenhouse gas emissions” by an issuer and its affiliates, among other provisions.The SEC last issued climate guidance in 2010 in Release No. 33-9106 , Commission Guidance Regarding Disclosure Related to Climate Change. In the guidance, the commission said companies should inform investors about the risks they face from climate change, including lawsuits, business problems, regulatory supervision, or international treaties. The significant effects of climate change, such as severe weather, rising sea levels, loss of farmland, and the declining availability and quality of water, have the potential to affect a public company’s operations and financial results and should be disclosed.
- ESG Disclosure Simplification Act, introduced by Rep. Juan Vargas, of California. The bill sets out that ESG metrics are material and requires their disclosure, with the SEC in charge of establishing those metrics using recommendations from a newly created advisory panel. Public companies would also need to disclose their views “on the link between ESG metrics and long-term business strategy,” among other disclosures. The measure would establish an SEC Sustainable Finance Advisory Committee made up of no more than 20 members, with representation from experts on sustainable finance; operators of financial infrastructure; “entities that provide analysis, data, or methodologies that facilitate sustainable finance;” insurance companies, banks, pension funds, asset managers or credit unions; and other intermediaries in sustainable finance. Each SEC commissioner would select an equal number of committee members from the pool of applicants.
- Shareholder Political Transparency Act, sponsored by Rep. Bill Foster of Illinois, which would amend the Exchange Act to direct the SEC to issue rules requiring disclosure of expenditures for political activities in the preceding quarter, including a description of that expenditure, the date, the amount, and the name and party affiliation of the recipient. The reports must be made available over the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. Also under the bill, SEC would issue rules requiring public companies to include in annual reports a summary and description of each political expenditure in the preceding year above $10,000, and a forecast of the political expenditures for the coming year.The bill comes as Democratic lawmakers are looking to scrub a longstanding budget rider preventing the SEC from implementing a corporate political spending disclosure rule under its own authority. Congress has for years slipped riders into Financial Services and General Government (FSGG) appropriations bills, which fund the SEC, prohibiting the agency from launching the rulemaking, to the protest of political spending transparency activists. They say the rule is sorely needed following the Supreme Court’s 5-4 decision in Citizens United v. Federal Election Commission in 2010, which lifted restrictions on independent political expenditures by corporations and unions.
- Disclosure of Tax Havens and Offshoring Act, sponsored by Rep. Cindy Axne of Iowa, directing the SEC to make rules requiring large, multinational public companies to provide country-by-country disclosures of financial performance, an effort to bring transparency to offshoring practices and the use of tax havens. The bill, according to Axne, would provide investors with “consistent, comparable information” needed to understand the risks of investing in those companies. She has argued that, because the bill would only be making public information that is already provided to the IRS, the burden to companies would be minimal.The measure would apply to an issuer that is a member of a multinational enterprise group meeting a certain minimum revenue threshold set by the SEC “to conform to United States or international standards for country-by-country reporting.” The disclosures required under the bill include revenues, profit or loss, total income tax paid, total accumulated earnings, and total number of employees, all broken out on a jurisdiction-by-jurisdiction basis.
- Greater Accountability in Pay Act, sponsored by Rep. Nydia Velazquez of New York. The bill would set out new pay raise disclosures in public company annual reports for executives and for the company’s broader workforce, and require an issue to present a ratio comparing the former to the latter. The legislation comes less than six years after the SEC finalized its Dodd-Frank Act pay ratio disclosure rules in Release No. 33-9877 , Pay Ratio Disclosure, which require companies to disclose a ratio comparing the chief executive’s pay to that of the median employee. PL111-203
This article originally appeared in the June 15, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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