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House Financial Services Subcommittee Hearing on Environmental, Social, and Governance Disclosure (ESG) Proposals

House Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

“Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social and Governance Disclosures”

Wednesday, July 10, 2019

 

Key Topics & Takeaways

  • Future of ESG Disclosures for Public Companies: Mohin said that environmental, social and governance (ESG) disclosures will help support ongoing efforts by organizations to reach sustainable growth and profits. Wright stated that risk can be hard to measure for investors due to the lack of disclosed information available in the economy.
  • ESG Disclosures Impact Regarding Investors: Andrus said that financial reporting disclosures allow providers of capital to make informed decisions whether to buy, sell, or hold certain securities. Atkins said that the SEC generally should focus on disclosures that are truly relevant to the investor. He also stated that the cost of disclosures are a significant problem for the investor.

Witnesses

 

Opening Statements

Chairwoman Carolyn Maloney (D-N.Y.)

In her opening statement, Maloney noted the importance of environmental, social, and governance (ESG) disclosure in public companies, noting that there is evidence that companies that perform better on ESG metrics also perform better financially. She said that some companies already disclose ESG information, but not at a sufficient level. Maloney also noted the difficulty in comparing ESG disclosures across companies due to the of the lack of a common standard. She added that the best way to combat the lack of clarity is by the SEC mandating ESG disclosure standards from public companies.

Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga noted that demands for ESG disclosure have increased and many companies have begun to voluntarily provide this information. Huizenga stated that as a result of publicly traded companies performing better on ESG metrics, other firms will voluntarily begin to disclose ESG information. He continued that implementing a mandatory disclosure practice for public companies would only add a regulatory hurdle and discourage companies from going public. Huizenga noted that initial public offering (IPO) numbers have plunged in the United States and that the committee should find ways to encourage expansion, not suppress it.

Testimony

Tim Mohin, CEO, Global Reporting Initiative (GRI)

In his testimony, Mohin stated that the GRI strongly supports these disclosure proposals by the committee as a way to strengthen existing reporting requirements for publicly traded companies, noting that ESG disclosures are critical elements of information for investors. Mohin continued that the establishment of a Sustainable Finance Advisory Committee will support the ongoing efforts by organizations like GRI and Ceres to help facilitate the transition to sustainable global markets. He stated that non-financial information can have large impacts on the financial services industry, and that there needs to be a focus on developing a common global standard.

James Andrus, Investment Manager-Financial Markets, Sustainable Investment, CalPERS Investment Office

In his testimony, Andrus stated that he strongly believes that all investors, whether large institutions or private individuals, “should have access to financial reporting disclosures that allow providers of capital to make informed decisions whether to buy, sell, or hold certain securities.” He stated that there is a need for disclosures regarding corporate charitable and political activities, noting that he is a strong believer in the Shareholder Protection Act of 2019. Andrus stated that environmental disclosures are necessary to reveal how companies will be able to generate sustainable returns in the future.

The Honorable Paul S. Atkins, CEO, Potomak Global Partners

In his testimony, Atkins stated that disclosure mandates cause significant costs in the economy, noting that elements of the Dodd Frank Act have caused two billion dollars in costs annually. Atkins stated that mandatory disclosures can hinder the sustainability and competition of the economy, and that they have dramatically reduced the number of companies wanting to go public.

Degas A. Wright, CFA, CEO, Decatur Capital Management, Inc.

In his testimony, Wright stated that ESG information should be shared with all shareholders and investors and that the SEC must amend the reporting requirements in order to meet these needs. Wright continued that research has indicated that political information has the ability to impact the pricing of securities, and therefore must be measured. Wright said that risk can be difficult to measure due to shortcomings in the available information. He noted that it is necessary to support the creation of a Sustainable Finance Advisory Committee to advise the SEC on ESG.

Mindy S. Lubber, President and CEO, Ceres

In her testimony, Lubber strongly voiced her support for the various disclosure proposals made by Congress. She stated that the economy needs to be strongly rooted in ideals of transparency and adequate information to ensure long term returns. Lubber said that research indicates that large companies do not provide useful disclosures on climate risk, adding that investors are not getting the information they need to understand how their portfolios are exposed. Lubber stated that new regulation will act as a jump start for firms to begin more comprehensive strategic planning.

Question & Answer

Future of ESG Disclosures for Public Companies

Huizenga asked if the bills discussed in the hearing would encourage more IPOs or if they would drive investors into the private capital world. Atkins explained that imposing disclosure requirements, especially for smaller companies, would be an immense impediment of entering an IPO.

Huizenga then asked if the federal government needs to force ESG disclosure under law even though companies have been disclosing this information for years. Atkins stated that if the federal government required ESG disclosure it would raise costs, noting that it would be better for the industry to be voluntary.

ESG Disclosures Impact Regarding Investors

Rep. Juan Vargas (D-Calif.) asked about how ESG disclosure could impact shareholder value. Mohin and Andrus explained that ESG disclosure is extremely valuable information to compare companies and would level the playing field between companies that do disclose information and those that do not.

Rep. Bill Foster (D-Ill.) asked if comprehensive information on ESG factors from all companies in this sector were public, how it would affect investment decisions. Wright explained that environmental news can impact future stock price, and the more information regarding ESG the better.

Rep. Steve Stivers (R-Ohio) asked about the impact of more regulation of public companies for investors. Atkins suggested that the number of public companies will decrease with the rise of regulation, specifically ESG disclosure, which will in turn provide fewer choices for investors and decrease competition.

For more information about this hearing, click here.