A big step forward:
Financial Services Committee passes ESG Disclosure Simplification Act
30 September 2019 - By Marjella Lecourt-Alma
There have been real movements on ESG disclosure regulations coming out of the United States in recent months. Wednesday 10 July marked the first ever congressional hearing on ESG issues in the US.
At the hearing, the Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets held a debate on five draft bills that would require public companies to reveal more information on topics including climate policies, political expenditure, and human rights. The proposed bills discussed were:
- ESG Disclosure Simplification Act of 2019
- Shareholder Protection Act of 2019
- Corporate Human Rights Risk Assessment, Prevention and Mitigation Act of 2019
- Climate Risk Disclosure Act of 2019
- Country by Country Tax Payment Disclosure.
We’re now seeing these draft bills progress. On 30 July, the US House of Representatives Committee on Financial Services voted to advance the Climate Change Risk Disclosure Act of 2019, which requires public companies to disclose information on their exposure to risks associated to climate change on an annual basis. It also requires the SEC to establish quantitative and qualitative climate-related disclosure metrics and guidance, in consultation with other relevant federal agencies.And on 27th September, in what proved to be a significant day for ESG disclosure – and coming, fittingly, during Climate Week – the Committee voted to pass HR 4329, the ESG Disclosure Simplification Act. This bill requires the SEC to define ESG metrics, and companies to disclose the metrics along with their audited financial statements. The Act will mandate the definition of ESG metrics and make these metrics auditable.
A summary of the ESG Disclosure Simplification Act
When passed, the Act will:
- Require public companies to disclose information on their ESG practices.
- Require the SEC to engage in rule-making to identify ESG information that would be required to be disclosed by public companies in their proxy statements.
The Act also allows the SEC to incorporate the Task Force on Climate-Related Financial Disclosures (TCFD) or other international standards when defining these metrics. Metrics-related disclosure should entail the following:
- “A clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer.”
- “A description of any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer.”
Could this move signal an alignment in international disclosure policies? Coinciding with the Act, the UK has obliged all listed companies and large asset owners to report on climate-related risks and opportunities in line with the TCFD recommendations by 2022. Unlike the Act, the UK legislation relates only to climate change and not to wider ESG issues. The UK will use the TCFD as a framework, while the SEC can incorporate other international standards. However, the passing of the ESG Disclosure Simplification Act is a further step not only towards universally mandatory ESG disclosure, but crucially, consistency.
The legislative foundations formed by the passing of these acts will provide the base for a comprehensive ESG disclosure structure for US public companies. Despite Republican control of the Senate and the Trump administration’s tendency towards deregulation, the US now has the opportunity to lead the way on disclosure.
Chris Burkett, Partner at Baker McKenzie – a multinational law firm – says:
"Under the current state of political affairs in the US, I think it's highly unlikely that this will become law in the near term. However, it is certainly a sign of progress that this is on the Congressional agenda. In my view, it is only a matter of time until ESG reporting is mandatory - the trend is clear and investors will ultimately demand it.”
It’s about building momentum. The first big step was seeing these topics discussed in the US Congress back in July; the passing of this act represents another significant stride forward on ESG disclosure. The next step now is to accelerate this momentum and generate a greater sense of urgency. One way governments can do this is by introducing legislation that focuses on specific challenges – like climate change, for example – which umbrella terms like ‘ESG’ or ‘sustainability’ simply do not capture. A specific risk is far more tangible, and its financial implications are clear to business leaders. It now remains to be seen whether future legislation will continue that momentum.
TCFD: An update on corporate disclosure following the second status report
In June 2019, the TCFD released its second status report, indicating increased adoption of its recommendations.
To coincide with its release, we are updating our previous analysis into the extent to which this adoption has been reflected in supporters’ corporate disclosure.
The analysis shows that, whether they’re supporters or non-supporters of the TCFD, companies are now talking about climate change more than ever before. More in detail, climate change is predominantly discussed through a risk rather than an opportunity lense – with 54% of FinServ TCFD supporters referring to the topic in relation to risk and 20% in relation to opportunity in 2018.
To read the full report, please fill in the form on the right.