Lancee Whetman

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“Sustainability momentum—that’s where the magic is going to happen.” – Eddie Perkin[1]

Investors admonish major companies for “hiding” their environmentally related plans to deal with climate change.[2] In fact, worldwide trends indicate that investors have a strong interest in companies’ climate-related plans.[3] And some companies have “bowed to [these] investor demands” already.[4] However, despite this trend, some of the world’s largest and well-known companies still remain silent on how critical climate-related issues affect their business—including Berkshire Hathaway, Facebook, Netflix, PayPal, and even the electric-car maker, Tesla.[5] And, in recent years, fossil-fuel giants—BP, Exxon, and Chevron—have stopped disclosing their climate-related plans.[6] The reason: because disclosures on environmental, social, and governance issues (ESG) are a dollar-and-cents issue, and revealing climate-sensitive information could be bad for certain businesses.[7] In 2016, the Sustainability Accounting Standards Board (SASB) reported that out of 1,500 disclosures by 637 companies across different 72 industries, nearly 30 percent of the disclosures did not include any climate-related information.[8] Most corporations evade climate-related disclosure because companies do not consider the risks of climate change to be material or that the company does not have a duty to report. Further, in the United States, ESG disclosures are an entirely voluntary measure, so companies have no obligation to report it—for now that is. Despite this disclosure dilemma, tackling climate change must ultimately go beyond the corporate dollar-and-cent mentality.[9]

Acknowledging company-related climate effects on the markets, the United States House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets (Subcommittee)[10] met on July 10, 2019 to discuss “one of the most important topics in the [financial] markets right now.”[11] Being the first of its kind, this congressional hearing was one of “landmark” proportions.[12] The hearing covered public-company disclosures of ESG information—revealing the ever-increasing convergence of capitalism and climate change.[13] The Subcommittee proposed the ESG Disclosure Simplification Act of 2019 (ESG Act),[14] which would require public companies to disclose additional material information regarding their ESG practices.[15] A few months later, on September 20, 2019, the U.S. House Committee on Financial Services (Financial Services Committee) passed the ESG Act by a vote of 31–22.[16]

The ESG Act amends Section 14 of the Securities Exchange Act of 1934,[17] as well as 17 C.F.R. Section 210 regarding the regulations for the content of financial statements that companies must file with the Securities and Exchange Commission (SEC).[18] The ESG Act proposes four requirements.[19] First, public companies must disclose the SEC-established ESG metrics.[20] Second, companies must describe the impact between ESG and long-term business performance.[21] Third, the bill proposes the SEC-established ESG metrics would automatically be deemed “material” to investors, which in the context of the 1933 and 1934 Acts, ensures that companies disclose information that reasonable investors should be made aware of. Such required disclosers ensure that companies are liable if they fail to disclose information mandated by the governing securities laws. Lastly, the bill creates the Sustainable Finance Advisory Committee (SFAC) within the SEC.[22] The SFAC would have the following roles: recommend required ESG-metric disclosures by public companies to the SEC; submit a report to the SEC identifying challenges and opportunities for investors in sustainable finance; and recommend policies to encourage the flow of capital toward sustainable finance.[23]

This Note argues that ESG disclosures should be mandatory reporting requirements for companies[24] in the United States. Part I provides a brief background of the Securities Acts of 1933 and 1934 and provides a discussion of ESG. Part II argues that material ESG metrics should be dependent on which sector or industry a certain company operates in. Part III proposes the institution of an ESG Bar for companies selling securities as well proposes statutory language to add to the ESG Act. Part IV discusses possible alternatives to the ESG Act and ESG Bar. Overall, the ESG Act can effectively hold public corporations to a much higher standard and make capitalism work for the betterment of society.[25]

[1] Leslie P., Norton, 13 ESG Investing Trends to Watch for in 2020, Barrons (Jan. 30, 2020), https://www.barrons.com/articles/13-esg-investing-trends-to-watch-for-in-2020-51580385602.

[2] Irina Ivanova, Investors Say Facebook, Tesla and Many Other Companies Are Hiding Climate Impact, CBS News (June 17, 2019 8:24 PM), https://www.cbsnews.com/news/climate-change-700-companies-tesla-amazon-facebook-carbon-footprint/.

[3] New Survey From RBC Global Asset Management Uncovers Diverging Views on Responsible Investing Among Institutional Investors, RBC Global Asset Mgmt. (Oct. 16, 2019, 3:00 PM) (“[I]nstitutional investors are more convinced than ever that [the ESG] approach helps lower risk and increase returns” . . . and “[m]ore than 70% of [these] investors use ESG principles as part of their investment approach and decision-making process.”) https://www.prnewswire.com/news-releases/new-survey-from-rbc-global-asset-management-uncovers-diverging-views-on-responsible-investing-among-institutional-investors-300939259.html; The KPMG Survey of Corporate Responsibility Reporting 2017, KPMG (2017), https://assets.kpmg/content/dam/kpmg/xx/pdf/2017/10/kpmg-survey-of-corporate-responsibility-reporting-2017.pdf; David S. Rauf, Powerful Investors Push Big Companies to Plan for Climate Change, SCI. AM. (May 3, 2018), https://www.scientificamerican.com/article/powerful-investors-push-big-companies-to-plan-for-climate-change/ (“Fortune 500 corporations . . . are facing renewed pressure from climate-focused activist investors . . . [who] are supporting the push for businesses to respond to climate change.”).

[4] Rauf, supra note 3 (noting that based upon shareholder-led proposals, climate inquiries are a top concern in companies).

[5] Ivanova, supra note 2.

[6] Id.

[7]  Robin Young How Corporate America Is Addressing Climate Change Risks, WBUR (July 9, 2019), (“[I]nvestors have made it clear that they want this information. Any executive who says, ‘I don’t want to do it.’ The first question you really want to ask them is, ‘What are you hiding?’”).

[8] SASB, Climate Risk Technical Bulletin 86 (2016), https://www.sasb.org/knowledge-hub/climate-risk-technical-bulletin/.

[9] Kathleen McLaughlin & Andrew Steer, Why Walmart and Other Companies Are Sticking with the Paris Climate Deal, N.Y. Times (Nov. 6, 2019), https://www.nytimes.com/2019/11/06/opinion/climate-change-walmart-paris.html.

[10] Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures, U.S. House Comm. on Fin. Serv. (July 10, 2019) [hereinafter ESG Hearing].

[11] Financial Services Committee, Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social, and Governance Disclosures, YouTube (July 10, 2019), https://www.youtube.com/watch?v=5Au_kjup-EU (statement of Carolyn B. Maloney).

[12]  Craig Kublin, US House Financial Services Committee Holds Landmark Hearing on ESG Reporting, Latham & Watkins, LLP (July 22, 2019), https://www.globalelr.com/2019/07/us-house-financial-services-committee-holds-landmark-hearing-on-esg-reporting/.

[13]  ESG Hearing, supra note 11.

[14]  ESG Disclosure Simplification Act of 2019, H. R. 4329, 116^th Congress (2019–2020) [hereinafter ESG Act] (sponsored by Representative Juan Vargas (D-CA)).

[15]  Id.

[16]  Committee Passes 12 Bills to Benefit Consumers, Investors and Vulnerable Families, U.S. House Comm. on Fin. Serv., https://financialservices.house.gov/news/documentsingle.aspx?DocumentID=404362 (last visited Jan. 26, 2020).

[17]  Securities Act of 1934, 15 U.S.C. § 78n.

[18]  ESG Act, supra note 14.

[19]  Id.

[20]  Id.

[21]  Id.

[22]  ESG Act, supra note 14. (amending Section 4 of the Securities Exchange Act of 1934 (15 U.S.C. § 78d)).

[23]  Id.

[24]  For the purposes of this report, the word “companies” is used to refer to those public companies that are subject to the registration and reporting requirements of the Securities Act of 1933 and the Securities Exchange Act of 1934.

[25]  ESG Act, supra note 14.