Bills
| 3.23.22

Should Publicly-Traded Companies’ Regulatory Disclosures Include Info About ESG Activities, Country-by-Country Financials, Political Spending, and Raises? (H.R. 1187)

Do you support or oppose this bill?

What is H.R. 1187?

(Updated August 19, 2021)

This legislative package, the Corporate Governance Improvement and Investor Protection Act, contains five bills that would create new environmental, social, and governance (ESG) disclosure requirements, establish disclosure requirements for political activity spending by corporations, establish reporting requirements about pay raises, and require country-by-country reporting of corporate financials. Each bill in this package is summarized below.


ESG Disclosure Simplification Act of 2021

The ESG Disclosure Simplification Act of 2021 would require securities issuers to annually disclose certain environmental, social, and governance metrics and their connections to their long-term business strategy. 

Additionally, this bill would establish a twenty-member Sustainable Finance Advisory Committee. Among its other responsibilities, the committee would be responsible for recommending policies to facilitate the flow of capital towards environmentally sustainable investments to the Securities and Exchange Commission.


Climate Risk Disclosure Act of 2021

The Climate Risk Disclosure Act of 2021 would direct the SEC to require securities issuers to annually disclose information regarding climate change-related risks posed to its business. Additionally, the issuers would be required to describe their strategies and actions to mitigate climate change-related risks.

Specifically, issuers would be required to 1) report their direct and indirect greenhouse gas emissions and 2) to disclose their fossil fuel-related assets. 


Shareholder Political Transparency Act of 2021

The Shareholder Political Transparency Act of 2021 would establish reporting requirements for corporations that issue publicly-traded securities to disclose expenditures on political activities to the SEC. Political expenditures that would be required to be reported include: 

  • Expenses by a person expressly advocating the election or defeat of a clearly identified candidate that are not made in concert or cooperation with, at the request or suggestion of the candidate, their authorized political action committee or its agents, or a political party committee or its agents.
  • Electioneering communications including a broadcast, cable, or satellite communication.
  • Dues or other payments to trade associations and other 501(c) organizations.

Direct lobbying efforts through registered lobbyists or people hired by the corporation, communications by the corporation to its shareholders and executive or administrative personnel and their families, and the establishment and administration of contributions by a separate segregated fund for a corporation’s political activities wouldn’t need to be reported. Registered investment companies would be excluded from the definition of a securities issuer under this section.

The SEC would be required to amend its reporting rules within 180 days of this bill’s enactment to require publicly-traded companies to disclose political expenditures in a publicly-available, quarterly report that includes: a description of political expenditures for the prior quarter; the amount of the expenditure; whether it was made in support or opposition to a candidate, including the candidate’s name and political party affiliation; and the name or identity of trade associations or organizations. 

Additionally, the SEC would be required to issue a rule within 180 days of this bill’s enactment to require each issuer to include the following in the issuer’s annual report to shareholders: a summary of each political expenditure in excess of $10,000, and for political activities for a particular election if the expenditure is in excess of $10,000; a description of the nature of the political activity the issuer intends to make in the forthcoming year; and the total amount of expenditures intended to be made by the issuer for the forthcoming year.


Greater Accountability in Pay Act of 2021

The Greater Accountability in Pay Act would require companies (other than emerging growth companies) to file annual reports with the SEC to report the following information about pay raises:

  1. The percentage increase in the median of the annual total compensation of all executive officers over the last completed fiscal year.
  2. The percentage increase in the median of the annual total compensation of all employees, excluding executive officers, over the last completed fiscal year.
  3. The ratio of the percentage increase described in section 1 to the percentage increase described in section 2.
  4. A comparison of the percentage increase described in section 1 to the percentage change in the Dept. of Labor’s Consumer Price Index (CPI) for All Urban Consumers.
  5. The percentage increase described in section 2 to the percentage change in the CPI for All Urban Consumers.

Disclosure of Tax Havens and Offshoring Act

The Disclosure of Tax Havens and Offshoring Act would implement country-by-country reporting of large corporations’ financials. These reports would be required to include basic information on the company and its subsidiaries and country-by-country financial information summing together profits, taxes, employees, and tangible assets in each country.

Currently, companies with annual revenues above $850 million already report this information to the Internal Revenue Service (IRS), but that information is not publicly available.

Argument in favor

Environmental, social, and governance (ESG) metrics, political spending, raises, and tax structures are all important elements of a company’s business. Ensuring that investors have transparency into these issues will help them make better investment decisions. In the case of country-by-country reporting, this is also an important means of ensuring that American companies pay the taxes they owe to the U.S. government.

Argument opposed

While it’s true that ESG, political spending, raises, and tax structures are often important considerations for publicly-traded companies’ operations, they are not “material” considerations that investors usually take into account when investing in stocks. It’s therefore unnecessary to create burdensome reporting requirements on these topics that could mislead would-be investors into making decisions that end up hurting them financially.

Impact

Businesses; businesses’ annual SEC disclosures; the Internal Revenue Service (IRS); the Securities and Exchange Commission; a new twenty-member Sustainable Finance Advisory Committee; and tax havens.

Cost of H.R. 1187

A CBO cost estimate for this legislative package is unavailable. However, because the SEC can collect fees to cover its operating expenses, the ESG Disclosure Simplification Act, Shareholder Political Transparency Act of 2021, Climate Risk Disclosure Act of 2021, and Greater Accountability in Pay Act of 2021 are each estimated to have no net cost. A cost estimate for the Disclosure of Tax Havens and Offshoring Act is not available.

Additional Info

In-Depth: House Financial Services Committee Chair Maxine Waters (D-CA) says this legislative package responds to investors’ desire to know more about companies’ ESG policies and risks:

“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.”

The Biden administration supports this legislative package. In a June 14, 2021, Statement of Administration Policy, it said:

“The Administration supports House passage of H.R. 1187, the Corporate Governance Improvement and Investor Protection Act. This legislation would require important changes to the manner in which publicly traded companies account for and disclose certain activities and risks, including disclosures promoting greater equity, transparency, and enhanced investor protections. As our Nation builds a more equitable economic future, these measures will help safeguard the financial security of America’s families, businesses, and workers from risks including the climate-related financial risks they already face. These measures will help protect workers’ hard-earned savings… The Administration supports efforts to account for climate risk in financial services, empower and protect investors, and promote transparency, accountability and equity in corporate governance.”

Sponsoring Rep. Juan Vargas (D-CA) introduced the ESG Disclosure Simplification Act of 2021 to require public companies to disclose certain environmental, social, and governance (ESG) matters in annual filings with the Securities and Exchange Commission (SEC):

“We have seen how a company’s approach to the climate crisis, diversity among its leadership, and its receptiveness to social change have affected its business in the past, as well as its impact on the public’s well-being. This information is essential when deciding whether or not to invest in a company or how to vote on the company’s direction. These matters are real and they are relevant. Our bill, the ESG Disclosure Simplification Act, recognizes the materiality of environmental, social, and governance matters and would allow companies’ commitment to these issues to be more easily compared and evaluated by investors.”

The North American Securities Administrators Association (NASAA) supports ESG information’s inclusion in SEC filings. In an April 20, 2021 letter, NASAA President Lisa Hopkins wrote:

“Increasingly, investors view a company’s environmental, social, and governance, or “ESG” practices, as a material metric for determining whether to invest. To date, however, there are no uniform standards for the reporting of environmental and certain other ESG factors in the United States. In the absence of such standards, public companies lack clarity when making disclosures relating to ESG considerations, and, in some cases, may have incentives to make selective or potentially misleading disclosures about the benefits of their practices, products or services. H.R. 1187 seeks to remedy that problem… The time has come to provide investors seeking to understand factors relating to a company’s ESG profile with the ability to accurately understand and weigh ESG risks in their investment decisions, and Congress can play an important role in this regard.”

Generally speaking, legislators are divided along party-lines on ESG. Democrats have introduced numerous proposals to require companies to be transparent on ESG issues, while Republicans have opposed ESG reporting requirements as politically motivated and unnecessary.

Rep. French Hill (R-AR) says this legislative package would “layer on requirement after requirement on public companies.” He added:

“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.”

House Financial Services Committee Republicans opposed the ESG Disclosure Simplification Act of 2021 during its committee consideration. In their minority views report, they wrote:

“H.R. 1187, the ESG Disclosure Simplification Act of 2021 is yet another Democrat mandatory disclosure bill that will not provide useful information to investors, but will instead be costly for many public companies. This bill is an attempt by the Democrats to expand the jurisdiction of the U.S. Securities and Exchange Commission (SEC) over social policy and use our securities laws to push a left-wing partisan agenda. Committee Democrats have long called for a one-size-fits-all set of disclosure requirements for public companies on environmental, social, and governance issues. Like so many of the Democrat-sponsored mandatory disclosure bills, the bill has a greater appeal to social activists and ‘woke’ corporations than Main Street investors.”

Committee Republicans also criticized the ESG Disclosure Simplification Act of 2021 for “meddling” with the materiality standard. They argued that this would “[expand] the concept of materiality beyond its historical scope, which will bury investors in unnecessary or unhelpful disclosures and lead to poor investing outcomes.” Financial Services Committee Ranking Member. Patrick McHenry (R-NC) added that ESG reporting neither helps investors make better choices nor enables everyday Americans to achieve their financial goals.

The U.S. Chamber of Commerce “strongly opposes” this legislative package. In a June 15, 2021 letter, the Chamber criticized this legislation for creating unnecessary disclosure burdens:

“H.R. 1187 would result in an unworkable, one-size-fits-all disclosure regime for public companies on ESG issues including climate change, executive compensation, and pay practices. This misguided approach would impose enormous compliance costs on public companies. It would be especially harmful to small issuers and emerging growth companies (EGCs) without the same compliance resources as large companies. H.R. 1187 would create yet another barrier to going public in the United States, thus removing opportunities for retail investors to build wealth and contribute to the economy.”

The U.S. Chamber of Commerce, National Taxpayers Union (NTU), and Americans For Prosperity oppose this legislation.


Of Note: Environmental, social, and governance (ESG) matters generally include issues related to environmental sustainability (e.g., climate change), social issues (e.g., human rights and labor practices), and governance issues (e.g., gender, racial, and ethnic diversity at the executive and board levels).

Requiring ESG disclosures is a priority for SEC Acting Chair Allison Herren Lee. As Commissioner, she has moved to demonstrate the agency’s intention to focus on ESG disclosures generally and climate change disclosures in particular. In August 2020, then-Commissioner Lee criticized the SEC’s failure to address ESG in its 2020 amendments to regulation S-K:

“It has never been more clear that investors need information regarding, for example, how companies treat and value their workers, how they prioritize diversity in the face of profound racial injustice, and how their assets and business models are exposed to climate risk as the frequency and intensity of climate events increase.”

In a November 2020 speech, Lee reiterated that “regulatory involvement is needed to achieve standardized, comparable, and reliable disclosure in this critical area.”

Lobbying on ESG has increased during the Biden administration given the Democratic control of Congress and the White House. Groups lobbying on this issue include large trade associations, asset managers, financial services firms, insurers, pension-focused groups and at least two left-leaning organizations advocating ESG disclosure rules (Principle for Responsible Investment and Public Citizen). Among all filings mentioning ESG, about 29% specifically reported lobbying on this bill.

President Joe Biden’s Made in America Tax Plan proposes a country-by-country minimum tax on foreign profits, which would eliminate incentives created by the 2017 tax law that encourage U.S. companies to move jobs and investment overseas. Globally, there is a trend toward country-by-country reporting for corporations’ businesses. 


Media:

Summary by Lorelei Yang and Eric Revell

(Photo Credit: iStockphoto.com / manoonpan phantong)