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Rep. Sherman Calls for ‘Numerical’ ESG Standards

Bill Flook  Editor, Accounting and Compliance Alert

Bill Flook  Editor, Accounting and Compliance Alert

Rep. Brad Sherman, chair of the House Financial Services Committee’s influential Subcommittee on Investor Protection, Entrepreneurship and Capital Markets, on February 25, 2021, called for numerical standards to guide public companies’ environmental, social, and governance (ESG) disclosures.

The California Democrat made the remarks during a hearing on a raft of ESG bills proposed by newly empowered Democratic lawmakers.

“We don’t want to have an extra page or two added to the 10K loaded with greenwash and banal statements,” Sherman said. “We need to define and hopefully have numerical standards, measure, tabulate. We want to change the behavior of corporations both in causing them to prepare for climate change and hopefully minimize their effect on climate change.”

ESG is a sweeping, and today hazily defined, category of issues that encompass such topics as climate risk, human capital management, and political disclosures. But climate risk, especially, has been increasingly front-and-center in the minds of Democratic lawmakers who are seeking broader corporate disclosures on the systemic financial risks posed by a warming planet.

“These issues are material to shareholders,” Sherman said, citing a reputation risk that could affect corporate earnings. “So if you focus only on earnings per share, you are not going to be in a position to predict earnings per share.”

Republicans, who have long opposed prescriptive ESG disclosure mandates, concede the investors have increased their demand for ESG information. But those disclosures should remain voluntary, argued Rep. Bill Huizenga of Michigan, the subcommittee’s ranking Republican.

“These disclosures only name-and-shame companies…we all know, for some, naming-and-shaming what they perceive as corporate villains has been fun and trendy, and some even have profited from the practice.”

Among the bills up for debate during the hearing was the Climate Risk Disclosure Act, sponsored by Rep. Sean Casten of Illinois. The bill would broaden the information that issuers must disclose about both their contribution to climate change and the risks created by it. Also under the bill, the SEC would have two years to set out climate risk disclosure rules, “in consultation with the appropriate climate principals.”

Also scheduled for debate was the Paris Climate Agreement Disclosure Act, sponsored by Rep. Nydia Velazquez of New York. The bill would require public companies to disclose new information related to compliance with the Paris Climate Agreement, including “whether the issuer has set, or has committed to achieve, targets that are a balance between greenhouse gas emissions and removals, at a pace consistent with limiting global warming to well below 2 degrees Celsius and pursuing efforts to limit it to 1.5 degrees Celsius,” according to the bill text.

During the hearing, investor groups and activists voiced broad support for more extensive, standardized ESG disclosures, especially on climate risk.

“In particular, comprehensive, high-quality, consistent, and comparable disclosures of climate risk, charitable and political expenditures, human capital management, and board diversity are critical to the long-term success of capital markets, and more critically, of investors,” James Andrus, investor manager for Board Governance and Sustainability at the California Public Employees’ Retirement System (CalPERS), stated in his written testimony. “Disclosures of such information will help investors allocate capital to companies that best meet their investment criteria and will encourage market participants to operate with an eye on long-term business strategy.”

 

This article originally appeared in the February 26, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.

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