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ESG, Climate Disclosure Bills Approved by House Committee

ESG Investing

Touted as a way to help investors make better-informed decisions, legislation approved by the House Financial Services Committee would require public companies to start disclosing information about their exposure to climate-related risks. 

The committee on May 12 approved an amended version of the Climate Risk Disclosure Act (H.R. 2570) on a party-line vote of 28-24. The legislation will now move to the House of Representatives for consideration. 

Introduced by Rep. Sean Casten (D-IL), the bill would require public companies to disclose in their annual reports information relating to the financial and business risks associated with climate change as a way to help investors assess those risk. “By increasing market transparency, this bill will empower investors to appropriately assess climate-related risks and accelerate the market transition from fossil fuels to cleaner and more sustainable energy sources that mitigate climate change,” Casten notes in a summary of the bill. 

While some companies have started to disclose their climate-related risks under a variety of voluntary reporting regimes, he suggests that “only a mandatory framework implemented by the SEC can ensure that investors receive the reliable, comparable and consistent information they need to assess these serious risks.” To that end, the legislation directs the SEC, in consultation with other relevant financial agencies, to issue rules on climate-related risk disclosure metrics and guidance, which would be industry-specific and would require companies to make both quantitative and qualitative disclosures. It also directs the SEC to impose additional disclosure requirements on companies engaged in the commercial development of fossil fuels. 

Companion legislation has been introduced in the Senate by Sen. Elizabeth Warren (D-MA). Casten and Warren first introduced the Climate Risk Disclosure Act in 2019 during the 116th Congress.

Congressional and Regulatory Efforts

This legislation comes as congressional Democrats and the regulatory agencies engage in a sweeping effort to implement climate-related disclosures and integrate environmental, social and governance (ESG) factors in investment decisions.  

On April 21, the House Financial Services Committee approved the ESG Disclosure Simplification Act (H.R. 1187) introduced by Rep. Juan Vargas (D-CA). This bill would require issuers of securities to annually disclose to shareholders:

  • certain ESG metrics;
  • the connection between those metrics and the issuer’s long term business strategy; and
  • the method by which the issuer determines how ESG metrics affect its long-term strategy. 

That bill would also require the SEC to adopt rules requiring issuers to disclose ESG metrics in filings that require audited financial statements. Additionally, H.R. 1187 would establish a Sustainable Financial Advisory Committee (SFAC) to provide the SEC with a report identifying policy changes that could facilitate sustainable investments.

Meanwhile, notwithstanding these legislative efforts, the SEC is proceeding with its own regulatory review about whether current disclosures adequately inform investors. The SEC issued a set of questions in March requesting feedback about how the Commission can best regulate and guide climate change disclosures, and what information related to climate risks can be quantified and measured. Further, SEC Chairman Gary Gensler recently told the Committee that the Commission will proceed with rulemaking in this regard. 

Also in March, the Department of Labor announced that it will not enforce the final rules on Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, and indicated that additional rulemaking in this area is forthcoming. Subsequently, a senior DOL official suggested that the financial factors rule had a “chilling effect” on taking ESG factors into consideration, even in circumstances that appeared to be within the realm of permitted activities, and that the agency will be seeking to implement additional guidance.