ESG Disclosure Bill Passes House by One Vote

By a razor thin margin, the House has passed a bill that would require publicly traded companies to disclose how environmental, social, and governance (ESG) metrics affect their business strategy.

The Corporate Governance Improvement and Investor Protection Act was passed on by the House generally along party lines by a vote of 215 to 214, with the vast majority of Democrats supporting the bill, while all Republicans voted against it.

The bill, also known as H.R. 1187, would require the US Securities and Exchange Commission (SEC) to issue rules defining ESG metrics and would require publicly traded companies to disclose and describe to shareholders and the SEC how those metrics affect their business strategies. Under the bill, the SEC would set up a permanent advisory committee known as the Sustainable Finance Advisory Committee, which would be comprised of up to 20 members, each serving one four-year term, who would advise the regulator on sustainable finance issues.

The committee would be required to submit a report to the SEC no more than 18 months after the date of its first meeting that identifies the challenges and opportunities for investors associated with sustainable finance. It would also recommend policy changes to “facilitate the flow of capital toward sustainable investments, in particular environmentally sustainable investments.”

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The committee would be made up of individuals and entities with an interest in sustainable finance, such as experts on sustainable finance, operators of financial infrastructure, and entities that provide analysis, data, or methodologies that facilitate sustainable finance.

“Information from ESG disclosures will help investors have greater insight into what companies are doing to reduce their carbon footprints and to address important issues like climate change, diversity, and labor rights,” Rep. Juan Vargas, D-California, who sponsored the bill, said in a statement. “My bill will help ensure clarity and comparability in disclosure of companies’ practices, by developing a much-needed comprehensive ESG disclosure framework.”

In his objection to the proposed legislation, Bill Huizenga, R-Michigan, a senior member of the Financial Services Committee, accused Democrats of “seeking to hijack our securities laws to push left-wing political and social agendas,” adding that the bill “will increase costs on publicly owned companies.” However, the Congressional Budget Office (CBO) estimates the cost to the government of implementing the bill over the 2021 to 2026 period would be negligible, as the fees the SEC collects to offset its annual appropriation would cover most of the $6 million cost to issue rules and support the advisory committee.

The Biden administration has thrown its weight behind the bill, saying it “supports efforts to account for climate risk in financial services, empower and protect investors, and promote transparency, accountability, and equity in corporate governance.”

However, the bill may have trouble getting to President Joe Biden’s desk if it needs 60 votes to pass the Senate. According to a tax alert from Ernst & Young, Democrats could include certain disclosures in a 51-vote budget reconciliation bill, but said “their lack of substantial revenue or spending effects could subject the provisions to being challenged and stripped from such a bill under the ‘Byrd rule.’” The Byrd rule restricts what can be included in reconciliation legislation (which only requires a 51 vote majority) in the Senate.