Marco Rubio Asks SEC if Environmental, Social and Governance Metrics Will Apply to China Florida DailyMarco Rubio Asks SEC if Environmental, Social and Governance Metrics Will Apply to China Florida DailyMarco Rubio Asks SEC if Environmental, Social and Governance Metrics Will Apply to China Florida Daily
Impact Investing Forum 2022
London. April 28-29, 2022.
U.S. Senator Marco Rubio, R. Fla., wrote last week to the U.S. Securities and Exchange Commission’s (SEC) Chairman Gary Gensler and to Commissioner Allison Herren Lee about the impact of the SEC’s agenda regarding environmental, social and governance (ESG). He asked whether the same standards would apply for companies based in the People’s Republic of China. Rubio pointed out the hypocrisy in requiring disclosures on ESG, but not requiring disclosures about companies’ human rights practices within China. Rubio also suggested that the SEC should examine how to apply its standards to investor protection and supply chain resilience consistently. Below is the letter. Dear Commissioner Lee and Chair Gensler: I am writing to comment on the U.S. Securities and Exchange Commission’s (the Commission’s) expected rulemakings and guidance regarding disclosure of information related so-called environmental and social governance (ESG), metrics by issuers that have significant business activities in China, China-based issuers, and large investments in the People’s Republic of China. The recent history of the Commission’s most important actions would include expanding disclosures related ESG. One of you stated earlier this year that “no single issue has been more pressing than ensuring the SEC is fully involved in confronting the risk and opportunities that climate or ESG pose.” “[t]here is really not a historical precedent for the magnitude shift in investor focus that was observed over the past decade towards the analysis and use climate and other ESG risks.” These policies are significant given the potential impact on business activity in the PRC from potentially affected issuers. The consistent application of ESG disclosure requirements to the PRC would be crucial to the Commission’s policy goals and internal consistency. A standard that required issuers to disclose “diversity and equity” practices in their “social” businesses would require disclosure of the issuers’ workforces in the United States. However, it would not be sufficient to reveal the complicity of the same issuers in supporting human rights abuses in the PRC and globally. The Commission has made previous statements that it cannot guarantee consistency in its application of its policies to PRC. The Commission has made arbitrary exceptions to its rules for activities in China in recent years. The Commission has allowed the listing of China-based issuesrs and issuers with significant business operations in the PRC on U.S. Stock Exchanges for over a decade without the enforcement U.S. law regarding the ability of the Public Company Accounting Oversight Board to inspect these issuers’ audits. Although the Commission has taken important steps to address this disparity but it is still the case that its policy in this area is based on a baseline exception for China. In August 2021, the Commission approved a rule change proposed by Nasdaq to improve board diversity. This allowed for arbitrary flexibility for foreign issuers. The rule exempts foreign issuers (including China-based ones) from disclosures on board diversity if they are located in a jurisdiction that prohibits them. The rule allows the PRC to exempt China-based issuesrs from the rule in the same way that it does for audits by PCAOB. The rule allows foreign issuers to meet board diversity requirements, even if they do not exempt China-based issuesrs from the rule. However, this rule also allows for additional flexibility. Foreign issuers, including China issuers can add a female director or another individual to the board, while U.S.-based issuers must include both. These exceptions were approved by the Commission for both China-based and foreign issuers, despite the fact the exchange’s stated purpose–to correct “historical marginalization” of underrepresented minorities-–only applies strongly to China under the CCP’s control. Given the past inconsistency of the PRC and ongoing issues, I am writing to comment on a few areas that could be subject to the ESG guidance or rulemaking. These areas would require the consistent application to entities connected to PRC of disclosure requirements in order for the rulemaking to achieve the Commission’s stated policy objectives or ensure their internal consistency. There are many important considerations that must be made in each area. A. Human rights. Disclosures that purports to show an issuer’s adherence to certain “social” standards must include whether the issuer participated in, or violated, violations of human rights. Also, the extent to which the issuer was aware of such violations. It would be obvious that a “social” metric which fails to account for the involvement by issuers in these violations is arbitrary. It would be worse than arbitrary. Investors concerned about “social” standards would see it as a risk to not account for specific violations of human rights recognized by U.S. Law. This would allow issuers to be exonerated of violations of fundamental human right so long they adhere to other standards that are “social” by Commission. This would be evident in the application of these standards to the PRC. The PRC under the CCP’s control is committing grave human rights violations, including crimes versus humanity and genocide. In light of this, I request that the Commission address the following issues in any applicable ESG guidance or rulemaking: It should be disclosed whether an issuer is involved in any human rights violations that are recognized under U.S. Law. The mass surveillance, forced labor, torture and sexual violence, sterilization and other severe human rights violations of more than one million Uyghurs and ethnic Kazakhs, Kyrgyz and members of other Muslim communities in the Xinjiang Uyghur Autonomous Region;
b. Activities that are designed to deny Hong Kongers their long-cherished freedoms, autonomy, and rights include:
i. Censorship and other activities in Hong Kong that restrict, limit, or punish the exercise of freedom or assembly by citizens of Hong Kong or that limit access free and independent print or online media;
ii. Extrajudicial rendition, arbitrarily detained, or torture of any Hong Kong citizen or any other gross violation of internationally recognized human right or serious human rights abuse in Hong Kong. 2. It is necessary that all issuers connected to the PRC who do not disclose any information about their involvement in these violations, regardless of how serious and systematic, are required to affirmatively state that they have not been involved in such violations. 3. Whether the significance of the human rights violations in the PRC recognized under U.S. law, in combination with other credible allegations of human rights violations committed in or by entities in its jurisdiction–including unlawfully threatening and intimidating critics, blocking social media content, pressuring publishers to censor their content in the PRC, influencing academic institutions to the detriment of academic freedom, interfering in multilateral institutions, and pressuring U.S. and international companies to suppress practices that do not conform to the political narratives and demands of the CCP–makes necessary that, as a category, issuers doing any business in or with entities in the PRC should be required to disclose any involvement, direct or indirect, or lack of involvement in such violations. 4. Disclosures of information about an issuer’s performance with respect to human right that, in an attempt to quantify or otherwise normalize the performance, generally include in a composite measure both human rights not internationally recognized and human rights so recognized. This reduces or obscures an issuer’s conduct with respect to violations of internationally recognized rights. 5. If information is to be disclosed that permits or promotes free expression at work or elsewhere by an issuer, it should also include whether the issuer has reached an agreement in form or substance with any entity in PRC that requires suppression or censorship or free expression. 6. Information about the performance of an issuer in respect to human rights must include whether it or its affiliate has any contract for sale or lease of goods and services or any other beneficial economic arrangement. This includes any designation with any Communist Chinese military company pursuant to section 1237 of The Strom Thurmond National Defense Autorization Act of Fiscal Year 1999. Executive Order 13959 of December 17, 2020, Executive Order 1432 of June 3, 2021 or any future such designation pursuant a similar authority. B. B. Supply chain resilience and sustainability. Disclosures that claim to provide information about the resilience or sustainability of an issuer’s supply chains must account for the vulnerability to unforeseeable manipulation by other actors, particularly governments or agents of governments with jurisdiction over relevant supplies chain assets. This kind of manipulation could cause the loss or diminution of supply chain assets, which would be just as detrimental to an issuer than other unsustainable practices. The CCP’s control of strategic sectors in China and other countries means that supply chains located in China, or which rely upon PRC-based partners, pose risks to resilience and sustainability. One example of these risks is the PRC’s hoarding of medical supplies during the COVD-19 epidemic. In light of this, I request that the Commission address the following issues in any applicable ESG guidance or rulemaking: 1. If there are any disclosures of information that are general or specific to risks to supply-chain resilience or sustainability, the location and history of an issuer’s supply chains in the PRC should be required to have a higher standard for the disclosure of relevant information. This includes whether or not the issuer’s supply chains in the PRC should constitute a material risk. 2. Information about supply chain resilience or sustainability risks should be disclosed. This includes information about whether an issuer has any influence over the ownership or operation supply chain assets. It also includes whether any joint venture partner or minority investor is involved in the supply chain. 3. If information is to be disclosed about risks to supply chain resilience or sustainability, it should also include disclosures of oversight and quality control measures taken in order to ensure visibility into suppliers second- and third-tier to the issuer in PRC. 4. If information is to be disclosed about risks to supply chain resilience or sustainability, it should include whether an issuer receives directly or indirectly from any program related the PRC’s Belt and Road Initiative or any other subsidy provided or controlled by any state or non-state actor. 5. If information is to be disclosed about risks to supply chain resilience or sustainability, it should include whether an issuer has any contract for the sharing private data with the Chinese government and CCP. 6. If information about supply chain resilience or sustainability is disclosed, an issuer must provide a rational basis to move or keep supply chain assets in the PRC relative locations in other jurisdictions. C. Governance. Disclosures that are intended to provide information about the governance of an issuer must include basic governance characteristics. While this may be applicable to U.S.-based issuers, it may not apply to China-based issuers. The disclosure of governance information is intended to provide information about an issuer’s decision making to shareholders. This includes information regarding the election of directors and adoption of shareholder proposals. However, the information rests on fundamental norms of corporate governance which may not apply in China. For China-based issuers it may be necessary for disclosures to show that an issuer is complying with basic corporate governance norms. This will allow proponents to establish the effectiveness of disclosures regarding other governance characteristics. Issuers that engage in significant business activities in the PRC could have their own corporate governance arrangements. For example, if a subsidiary or partner based in the PRC holds a seat on an issuer’s board of directors, this may affect the effectiveness of disclosures for other governance characteristics. In light of this, I ask the Commission to consider and address the following issues in any applicable ESG guidance or rulemaking: 1. If disclosures of information regarding governance should require issuers exempted from requirements related the independence audit and compensation committees to disclose information about the independence and composition of their directors. 2. Disclosures of information about governance that include any characteristics of a board of directors of an issuer must include affiliations of directors to entities which pose regulatory risks to the United States. This includes any affiliations with the Chinese government, CCP, any Communist Chinese Military Company designated as such pursuant section 1237 of Strom Thurmond National Defence Authorization Act of Fiscal year 1999, Executive Orders 13959 of November 17, 2020 and 14032 of June 3, 2021 or any future such designation. 3. If disclosures of information about governance are required, an issuer should disclose whether its board or other officers, en virtu of its articles or domicile in a country, are not subjected to fiduciary obligations to the issuer or its investors, and whether the board or other officers have fiduciary obligations to any other entity that might interfere with such duties. 4. If disclosures of information regarding governance are made to an issuer, it should disclose whether its auditor is subject of the full review of PCAOB under the Sarbanes-Oxley Act of 2012. D. “Diversity and equity as well as inclusion.” Disclosures that purport information about an entity’s contribution to, or compliance with, standards related to the agenda, often referred to by the terms “diversity and equity” raise new issues in relation to their application to PRC. In any applicable ESG rulemaking, or guidance, I ask the Commission to consider and address the following: 1. Disclosures of information or other rules relating to diversity of the boards or workforces of China-based issuesrs or issuers that do significant business in China should require representation or information about the representation or information regarding the representation of historically oppressed ethnic or religious groups, such as Uyghurs and ethnic Kazakhs, Kyrgyz and members of other Muslim group, Tibetans, Christians and Falun Gong practitioners. 2. 2.Whether an issuer has made any changes to its products in order to market them or sell them, or marketing generally within the PRC with respect race or sex. This includes whether marketing materials for the PRC have been altered in any way relative to other countries.
These subject areas show that requiring issuers to disclose social policies, as the ESG rulemakings or guidance might suggest, raises important considerations about how those policies will apply to the PRC. The implications of ESG disclosures on issuers and business activities in the PRC help to isolate the principles that the disclosures are attempting to advance beyond their immediate domestic political context. If investors are less interested in ESG disclosures for business activity in the U.S., for substantially similar or more significant activities in the PRC than they are for other activities, it could indicate that the disclosure is not intended to provide investors with consistent and beneficial information about the activity but is a arbitrary attempt to influence domestic political decisions. We appreciate your attention to this important issue and your consideration of it. Recent PostsLatest posts from Florida Daily (see all).