Impact Investing Conference

ESG InvestingESG Investing

Will ESG Disclosures be Mandated by Law? A Legislative Analysis. JD SupraWill ESG Disclosures be Mandated by Law? A Legislative Analysis. JD SupraWill ESG Disclosures be Mandated by Law? A Legislative Analysis. JD Supra

Impact Investing Forum 2024

London. April 24-25, 2023.

Book Now! 

INTRODUCTION In recent years, the chorus calling for companies to disclose information about their environmental, social, and governance (“ESG”) impacts has grown louder with the advent of new administrations. The trend towards “socially responsible investment” is a strategy that invests in companies that take into account how they impact social issues like climate change and diversity, as well as whether they will return on their investments. Investors have asked the Securities and Exchange Commission (“SEC”) to require that all companies report on social issues in their quarterly and annual reports, proxy statement, and other public filings. These efforts were made by President Joe Biden, SEC and most recently the U.S. House of Representatives. The House narrowly passed H.R. 16-21 on June 16, 2021. 1187, the “Corporate Governance Improvement and Investor Protection Act” (“Act”) was narrowly passed by the House. This bill, which included several bills, required companies to disclose significant ESG metrics in various issuer materials. The “ESG Disclosure Simplification Act of 2021”, and the “Climate Risk Disclosure Act of 2021” are the most notable. These bills would amend the Securities Exchange Act of 1934, and direct the SEC into rulemaking to establish the requirements for standard ESG disclosures. 1187 becomes law. This article examines the background and content of H.R. 1187, which has now been referred to Senate Committee on Banking, Housing, and Urban Affairs, is now considered a possibility that H.R. 1187, or a similar Congressional effort, will become law. This will increase the likelihood that efforts by Congress to push through SEC rulemaking (whether required by Congress or not) will succeed over the long-term. ESG ISSUES ARE GETTING GREENER Investors are now more likely to include ESG information in their investment decisions. Harvard Business Review recently conducted a survey to find out the following: In 2006, UN-backed Principles for Responsible Investment were launched. 63 investment companies (asset managers, asset owners, and service providers) had $6.5 trillion in assets under management (AUM). They pledged to include ESG issues in their investment decisions. The number of signatories grew to 1,715 by April 2018 and represented $81.7 trillion in AUM. A 2018 global survey by FTSE Russo found that more than half of global asset holders are currently implementing ESG considerations or evaluating them in their investment strategy. [ii] The current administration is taking note. The Executive Order on Climate-Related Financial Risk was issued by President Biden on May 20, 2021. The order requires Treasury Security Janet Yellen (Treasury’s Financial Stability Oversight Council, “FSOC”) and Treasury Security Janet Yellen (“Treasury Security Janet Yellen”) to assess the risk that climate change poses for the American financial system and provide guidance on possible regulatory actions. [iii] In March 2021, the Commodities Futures Trading Commission (“CFTC”) created its Climate Risk Unit. The Climate Risk Unit focuses on the “role of derivatives in understanding pricing and addressing climate related risk and transitioning into a low-carbon economy”. It also addresses the “industry-led, market-driven processes in climate–and larger ESG–space. “[iv] Under the leadership of Chair Gary Gensler and other SEC officials, the SEC has indicated a willingness to respond to investor interest in this area. It is not surprising that the current SEC focus is on ESG, as we noted in our March 2021 Alert. [v] The position of Senior Policy Advisor for Climate & ESG was created by Allison Herren Lee, then-SEC Acting Chairman, in January 2021. [vi] The Climate and ESG Task Force was established by the SEC within its Division of Enforcement in March 2021. [vii] Although not explicitly stated, the SEC press release anticipates future ESG rules and the Task Force’s role in enforcing disclosure requirements. This assumption is supported by the SEC’s immediate request for public comments on possible rulemaking in this area. [viii] CORPORATE GOVERNANCE IMPROVEMENT AND INVESTOR PROTECTION ACT: HISTORY OF H.R. 1187 H.R. 1187 was introduced by Rep. Juan Vargas (Democrat from California) on February 18, 2021. 1187: The Corporate Governance Improvement and Investor Protection Act. [ix] This Act brought forward several bills that were previously considered by the House Financial Services Committee. Each bill was assigned a title in the final bill that was voted on by all members of the House. The majority of the staff at the Financial Services Committee heard that there was growing evidence that climate change risk and other ESG disclosures are important to investors. However, companies are not always disclosing them in the hearing. Staff also cites the inability of supply chain transparency as a reason for these disclosures. This “prevents investors and shareholders from adequately assessing a company’s potential legal exposure and risk to reputational harm.” Majority staff believe that these disclosures will establish clear criteria for measuring corporate social accountability. This will allow companies to determine whether certain risks are significant. The Act contained seven ESG bills that were approved by the House Financial Services Committee in recent months. [xi] The House narrowly passed H.R. 16 June 2021. 1187 was largely voted for by the parties. The bill was passed with a narrow margin of 215-214 votes. Four Democrats voted against it, while no Republicans voted in favor. [xii] The bill was passed in the Senate and referred by the Committee on Banking, Housing, and Urban Affairs to the Committee on Banking, Housing, and Urban Affairs. What’s in the Corporate Governance Improving and Investor Protection Act? The ambitious Act covers eleven areas: ESG disclosures; shareholder political transparency; accountability in pay; climate risk disclosures; disclosure of tax havens or offshoring; workforce investment; preventing and responding workplace harassment; cybersecurity disclosure; governance through diversity disclosure and disclosure of forced labor. [xiii] This article focuses only on Title I, The ESG Disclosure Simplification Act of 2020, and Title IV, The Climate Risk Disclosure Act of 2020. A. Title I – ESG Disclosure Simplification Act 2021. The Act requires the SEC to issue rules to establish exact ESG disclosure standards. It also requires public filers to disclose “a clear description” of the view of the issuer regarding the link between ESG metrics, the long-term strategy of the issuer, and “a description or description of any process that the issuer uses in order to determine the effect of ESG metrics on its long-term strategy.” The Act directs the SEC to determine the “ESG metrics” to be disclosed. The Act also establishes the Sustainable Finance Advisory Committee, pursuant to section 4(k), Securities and Exchange Act of 1934. This committee would make recommendations to the SEC regarding the ESG metrics that issuers should disclose no later than 180 days following an initial meeting. The Act clarifies that ESG metrics as they will be defined by SEC will be considered de facto material for disclosure purposes. Although the Act doesn’t specify where companies must include ESG metrics, it states that ESC disclosures can be included in the filing’s notes section. This means that the Act allows the SEC to require companies include this information in their financial statements’ notes. These statements are audited. The Act delays the requirements for small issuers as defined in 17 CFR? 240.0-10, issuers with assets less than $5 million — this allows the SEC to take a “phased approach”. The Act also calls for the SEC’s study on shareholder collective actions, specifically the “emergence, viability and significance of coalitions… who wish to preserve or promote critical employment and ESG standards.” The study would examine whether shareholder collective actions have any implications for issuer filing requirements as well as whether there are anticompetitive activities that are associated with shareholder collective action. The SEC study would be submitted to Congress, which would include guidance on shareholder engagement activities not considered to involve questions about corporate control and recommendations on regulatory safe harbours for portfolio companies that invest in socially responsible investments. B. B. Title IV also contains specific codified disclosure requirements. These include the identification, evaluation and risk-management strategies related to climate change’s physical and transitional hazards. A description of corporate governance processes and structures that identify, assess and manage climate-related risk. The specific actions taken by the issuer to mitigate climate-related risk. A description of how climate risk is integrated into the overall risk-management strategy. The Act identifies “sectors of finance and insurance”, “transport, electric power, mining, non-renewable energie” and requires the SEC, in consultation with appropriate climate principals, to promulgate rules for any other sector. The Title IV proposal would likely result in an increase in costs for many industries that do not currently quantify their environmental impact. This includes the finance and manufacturing industries. [xiv] While details are still being finalized, the finance sector may need to account for all companies it lends money to. [xv] Meanwhile, the manufacturing industry may have to evaluate suppliers of supply chain materials in a way it has never done before. [xvi] While other industries may be better at quantifying their environmental impact, they have historically been reluctant to share this information with investors. LIKELY THAT THE CORPORATE GLOBAL IMPROVEMENT & INVESTOR PROTECTION Act BECOMES LAW. Despite the House’s ambitious efforts and the breadth of this Act, it is unlikely that the Senate will pass the Act without reconciliation (and bypassing the filibuster) and pass the Act by a simple majority vote. In a letter to the SEC, Republicans on the Senate Banking Committee expressed their opposition to further ESG disclosures. In the letter, it states that “[W]e don’t believe that any further securities regulation to specifically address global warming is necessary or appropriate and will only serve as a discouragement to firms becoming publicly traded, thus denying significant investments opportunities for retail investors. “[xvii] Furthermore, four Democrats in Congress voted against the Act. This suggests that moderate Senate Democrats might be concerned about the scope of additional disclosures required under the House’s Act. This would eliminate reconciliation as a possible option to pass the Act. The Act, despite its low likelihood of passage shows that Gary Gensler, newly appointed Chairman of the SEC, has high expectations for the majority of Congress. This article examines the potential steps that the SEC could take even if the Act fails to pass. It also discusses the likelihood of rulemaking succeeding in the absence legislative support. CAN THE SEC REQUIRE ESG-DISCLOSURES, EVEN IF CONGRESSIONAL ACTION IS FAILURE? Even if Congress fails to pass the Act, there are growing signs that the SEC will unilaterally require issuers include ESG data on public disclosures. It is unclear whether the SEC has the authority without explicit Congressional authorization to do so. Those who support unilateral SEC rulesmaking argue that the SEC does not need to be authorized by Congress to expand its disclosure obligations. [xviii] Instead, the SEC can already dictate what information issuers must disclose under the Securities Act of 1933 or the Securities Exchange Act of 1934. These statutes give the SEC broad authority over regulations, which is part of their mission to protect investors and maintain fair, orderly, and efficient markets and facilitate capital formation. [xix] Section 7 of Securities Act allows the SEC to exercise its rulemaking authority and prescribe additional information. . . as it considers necessary or appropriate in order to protect investors or the public interest. “[xx] The opponents of unilateral SEC actions and ESG disclosures in general argue that the SEC cannot require issuers not to disclose such information unless, at least, a congressional statute authorizes them to do so. [xxi] This is because these disclosure obligations “would not be different from what Congress allowed the SEC to create,” which are limited to “the characteristics of the company that have an impact on financial performance. [xxii] Companies should not disclose ESG concerns if they are likely to have an impact on their financial performance. [xxiii] The debate about whether such information is “material” is a point of contention between those who support ESG-related SEC action and those who don’t. TSC Industries v. Northway is a well-known Supreme Court decision. Justice Thurgood Marshall defined material as information that a reasonable investor would consider essential to make an investment or voting decision. [xxiv] Many people who argue that the SEC should and cannot adopt ESG disclosure standards do so on the ground that such information isn’t “material”. In a speech to the National Investor Relations Institute on June 22, 20,21, Commissioner Elad Roisman stated that ESG information is not “material”. Many have pointed out that ESG issues are important to investors because of the increased money retail investors allocate to funds labeled as “ESG,” green, and the like. It is unclear to me whether we fully understand the objectives of these investors, which, as the Asset Management Advisory Committee of SEC has noted, may “fall outside of risk/return alone.” It is difficult to see how information related to these strategies could be considered to be material, given the historical understanding of the term by the SEC. [xxv] The SEC’s unilateral action supporters claim that the SEC does not have to use the concept of “materiality” when dictating disclosure requirements.[xxvi] However, even if it did, information about a company’s environmental impact, diversity, or political contributions is information that investors consider “financially significant.” “[xxvii] The SEC believes it has the power to unilaterally expand reporting requirements to include ESG disclosures. Recent events suggest that it intends to do this. First, Gary Gensler, the current Chair of the SEC, has repeatedly supported new rules requiring disclosures on climate risks. [xxix] He also advocated for greater transparency around sustainability and diversity claims by asset manager. [xxx] The SEC asked for public comments to determine whether current disclosure obligations “adequately notify investors about known material risk, uncertainties, impacts and opportunities” or “whether greater consistency can be achieved.” “[xxxi] In February, the SEC appointed Satyam Khanna to be its first Senior Policy Advisor for Climate & ESG. He will be responsible for “advising” the agency on matters of governance, environmental, and governance and also advancing related initiatives across its offices. “[xxxii] Assuming the SEC Takes Action, Will Rulemaking Still Be Successful? Even if the SEC succeeds in its rulemaking process, it is likely that it will be many years before issuers have to disclose ESG information within their quarterly and annual reports. Any successful rulemaking will likely face a flurry lawsuits and could even be subject to Congressional action. The SEC’s previous efforts to make politically sensitive rules offer insight into the future. Section 1504 was passed by Congress in 2010 as part of the Dodd-Frank Act. It requires the SEC to issue rules that require resource extraction issuers disclose payments made to the United States and foreign governments for the commercial production of oil, natural gas, and minerals. [xxxiii] Three times, the SEC tried to issue final rules. The first attempt at final rules was made in 2012. However, industry groups opposed it. They challenged the rules in federal court. [xxxiv] The rules were vacated by the U.S. District Court for the District of Columbia in 2013. This was because the SEC had “misread the statute and acted arbitrarily upon another.” “[xxxv] In 2016, the SEC issued the same rules, but again faced resistance from Congress. Federal agencies are required to submit final rules to Congress under the Congressional Review Act. Congress is allowed to disprove a rule within a specified time limit. [xxxvi] Congress rejected the rules in a joint resolution on February 14, 2017. This was only the second time that the CRA applies to federal agencies. [xxxviii] Finally on December 16, 2020, SEC voted to adopt final rules for the third time. [xxxix] The SEC’s tortuous journey to comply with Section 1504 illustrates some of the pitfalls that could befall future efforts at releasing rules governing ESG disclosures. H.R. Strong industry and partisan opposition to 1187 is possible, just like Section 1504, H.R. Any rulemaking will be subjected to lawsuits. A change in Congressional leadership could lead to the rules being scrutinized under the Congressional Review Act. The rules could also be subject to political scrutiny, which could lead to disclosure obligations that are not in line with the Act and Chair Gensler’s goals. Critics argue that the third attempt by the SEC to pass rules for resource extraction issuers fails to meet the transparency and anticorruption goals that Section1504 was intended to achieve. There are also calls for President Biden’s appointment of new appointees to strengthen the newly passed rules. [xl] Conclusion The path to final rules that require ESG disclosures is likely to be long and difficult, regardless of whether such rulemaking is initiated by Congress or the Commission. Even without such rules, evidence suggests that investors are moving away from issuers that do not publish this information and make ESG-related issues part their governing mandate. It is becoming more likely that issuers will start to disclose such information to raise capital or because they believe the information is important to investors. It is not clear how effective such disclosures can be without standard definitions or disclosure obligations that clearly outline what information investors can expect. [i] Robert Eccles & Svetlana Klimenko, The Investor Revolution, Harvard Business Review (May-June 2019), available at; Imogen Tew, How ESG-linked stock outperformed in 2020, FT Adviser (Nov. 10, 2020), available at (“ESG investing has boomed in popularity in recent years as fears over climate change have led investors to consider the impact of their money and as a growing number of millennials have begun investing.”). [ii] Eccles & Klimenko, supra note 1. [iii] Press Release, The White House, Executive Order on Climate-Related Financial Risk (May 20, 2021), available at [iv] Press release, CFTC, CFTC Acting Chair Behnam Creates New Climate Risk Unit (Mar. 17, 2021), available at [v] SEC Kicks Off 2021 Agenda With Intense Focus on ESG Disclosures, King & Spalding (March 19, 2021), available at [vi] Press Release, SEC, Satyam Khanna Named Senior Policy Advisor for Climate and ESG (Feb. 1, 2021), available at [vii] SEC, SEC Announces Climate and ESG Issues Task Force (Mar. 4, 2021), available at [viii] Public Statement by the SEC, Public Input Welcomed on Climate Change Disclosures. (Mar. 15, 2021), available at [ix] H.R.1187 – 117th Congress, (2021-2022), [x] Memorandum from the FSC Majority Staff on February 25, 2021, Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets Hearing entitled, Climate Change and Social Responsibility: Helping Corporate Boards and Investors Make Decisions for a Sustainable World, (Feb. 22, 221), available at [xi] All Actions, H.R.1187 – 117th Congress, (2021-2022), available at The bill includes H.R. 1187, “ESG Disclosure Simplification Bill of 2021,” H.R. 3623, “Climate Risk Disclosure Act,” H.R. 5084, “Improving Corporate Governance through Diversity Act of 2021,” H.R. 1087, “Shareholders Political Transparency Act 2021,” H.R. 1188, “Greater Accountability in Pay Act of 2020,” H.R. 3007, “Disclosure of tax Havens and Offshoring Act,” and H.R. 6270, “Uyghur Forced Labor Disclosure Act 2020.” [xii] Roll Call 169, Bill Number: H. R. 1187, 117th Congress, 1st Session, Office of the Clerk, U.S. House of Representatives (2021), available at, The following four Democrats voted against the Corporate Governance Improvement and Investor Protection Act: Rep. Henry Cuellar, Rep. Lizzie Fletcher, Rep. Susie Lee (NV-3), and Rep. Kurt Schrader (5). [xiii] H.R.1187 – 117th Congress, (2021-2022), available at, [xiv] See Press Release, National Association of Manufacturers, NAM Lays Out ESG Disclosure Priorities, (last visited Sept. 16, 2021). The National Association of Manufactures responded to the March 2021 SEC call for public input regarding potential ESG disclosure framework rules. [xv] John Coates, Acting Director. Div. Corp. Fin. Corp. Fin. 11, 2021), [xvi] National Association of Manufacturers supra note 14. [xvii] A letter from the United States Senate Committee on Banking Housing and Urban Affairs, to Gary Gensler, Chair, and Allison Herren Lee Comm’r, U.S. Senate. (Jun. 13, 2021), available at [xviii] See, e.g., Alexandra Thornton and Tyler Gellasch, The SEC has Broad Authority to Require Climate and Other ESG Disclosures, CENTER FOR AMERICAN PROGRESS (June 10, 2021), [xix] What We Do, SEC, available at (last visited Aug. 26, 2021). [xx] Financial and Business Disclosure Required by Regulation SK, Exchange Act Release Number. 33-10064. 2016 WL 1458170. 22-27. 204-05 (Apr. 13, 2016, citing 15 U.S.C. 77g. [xxi] Andrew N. Vollmer. Mandatory Disclosure Rules on Climate Change Are a Job For Congress, Not the SEC. The Hill (Jul. 31, 2021), [xxii] Vollmer, supra note 21;; see also, Elad L. Roisman, Comm’r, SEC, Can the SEC make ESG Rules that are Sustainable? (Jun. 22, 2021), (“[W]e must remember that the SEC has no legislative mandate to make rules for the U.S. financial markets to further these same societal objectives. If Congress wants to follow suit, it can [xxiii] Roisman supra note 22: “The Commission must continue to be focused on its role as federal securities regulator. It should evaluate the merits and compare them with the question of whether reasonable investors would consider them material, that is, to a company’s financial value. [xxiv] TSC Industries, Inc. against Northway, Inc., 426 U.S. 438, 449 (1976). [xxv] Elad Roisman, Comm’r to the SEC, Can ESG Rules be Made by the SEC that Are Sustainable? (Jun. 22, 2021), [xxvi] See, e.g., Alexandra Thornton and Tyler Gellasch, The SEC Has Broad Authority To Require Climate and Other ESG Disclosures, Center for American Progress (June 10, 2021), (“Nowhere in the Securities Act of 1933, the Securities Exchange Act of 1934, their legislative histories, or case law is the SEC’s authority to mandate disclosures limited to just information that is deemed material to investors. In fact, imposing such a limit would effectively repeal a significant part of U.S. federal Securities laws that protects investors directly but also promotes capital formation and protects the public interest. “; Letter from Heather Slavkin Corzo (Director, AFL-CIO), to Brett J. Fields, Secretary, SEC at 9 (July 21, 2016), (“‘Materiality,’ the dominant principle in our disclosure regime, defines the floor below which reporting becomes fraudulent. It is the catchall, the backstop, and the ‘at an minimum’ safety provision. It is not the driving force behind our disclosure regime. The ’33 & ’34 Acts entrust the Commission with creating a disclosure regime that protects investors and markets. It cannot do this if it focuses only on what would be fraud . [xxvii] A letter from Securities Law specialists to Brett J. Fields, Secretary, SEC at 6 (Oct. 1, 2018), available at [xxviii] Financial and Business Disclosure Required by Regulation SK, Exchange Act Release Number. 33-10064. 2016 WL 1458170. 22-27. 204-05 (Apr. 13, 2016. [xxix] Bob Pisani, SEC Chair Gensler says investors want mandatory disclosure on climate risks, CNBC (July 28, 2021), [xxx] Gary Gensler, Chair, SEC, Prepared Remarks Before the Asset Management Advisory Committee (July 7, 2021), available at [xxxi] Allison Herren Lee is the Acting Chair of SEC, Public Input on Climate Change Disclosures (Mar. 15, 2021), available at [xxxii] Press Release, SEC, Satyam Khanna Named Senior Policy Advisor for Climate and ESG (Feb. 1, 2021), available at [xxxiii] Nicholas Grabar and Sandra L. Flow, Congress Rolls Back SEC Resource Extraction Payments Rule, Harvard Law School Forum on Corporate Governance (Feb. 16, 2017), [xxxiv] Id. [xxxv] Id. [xxxvi] Id. [xxxvii] Id. [xxxviii] Peter Rasmussen, Analysis: SEC Tries to Solve CRA Conundrum on Resource Payments, BLOOMBERG LAW (Jan. 7, 2020), [xxxix] Press Release, SEC, SEC Adopts Final Rules for the Disclosure of Payments by Resource Extraction Issuers (Dec. 16, 2020), available at The third attempt to pass final rules was met with internal resistance. In a speech to the Society for Corporate Governance, Chairman Roisman said the following about the SEC rulemaking for resource extract issuers: While I take the Commission’s statutory requirements very seriously, I cannot plausibly claim that the rulemaking is central in the SEC’s tripartite mission of protecting investors; maintaining fair, orderly and efficient markets; capital formation. One senator who cosponsored the rulemaking requirement stated that this rule would “help empower citizens to hold governments accountable for decisions made by their governments in managing valuable oil, gas and mineral resources and revenue.” I’m sure members of Congress, as well as those working at the State Department or other agencies responsible for responding to violence and corruption in other countries, are aware of certain behaviors and problems. I hope they are looking at ways to stop it. I don’t consider myself to be an expert in these matters and I worry that if we adopt this rule and it forces companies to stop operating in certain countries, we will not have the net benefit Congress wanted. Or will these people lose their only employment option? What type of mandatory disclosure will solve this problem? My point is that securities regulators are not well equipped to address all potential negative effects of us approaching these issues via mandated disclosures under the securities laws framework. Elad L.Roisman, SEC Commissioner Advocates ESG disclosure for Asset Managers, not Issuers, THE CLS.BLUESKY BLOG (Jul. 10, 2021), [xl] Andrew Ramonas, Biden SEC Will Face Calls to Toughen Energy Payment Disclosures, BLOOMBERG LAW (Dec. 17, 2020),

Read More

By ESG Magazine

ESG Magazine is one of leading ESG investments publications for ESG Funds and ESG Companies. It's based in London, UK.

Leave a Reply

Your email address will not be published. Required fields are marked *

ESG Investing Conference