House Passes Bill Requiring SEC to Define Mandatory ESG Metrics

Sheppard Mullin Richter & Hampton LLP

[co-author: Brett Uslaner*]

On June 16, 2021, the U.S. House of Representatives voted (215-214) to pass the ESG [Environmental, Social and Governance] Disclosure Simplification Act of 2021 (H. R. 1187) (the “Bill”).[1] This legislation would build on the Biden Administration’s push for major corporations to be more transparent in disclosing economic and social risks to investors, including climate-related risks.

If signed into law, H. R. 1187 would, among other things, require the Securities and Exchange Commission (“SEC”), for the first time, to define, in regulations, “ESG metrics,” for the purpose of guiding required corporate disclosures under the Securities Exchange Act of 1934 and the Securities Act of 1933, as amended.[2] Specifically, based upon the defined metrics, the Bill would require the following:

  • In consent solicitation or proxy statements, issuers would be required to include “(a) a clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer; and (b) a description of any process the issuer uses to determine the impact of ESG metrics on the long-term business strategy of the issuer.” (Section 103(a)(1))
  • In audited financial statements, issuers would be required to disclose ESG metrics. (Section 103(b)(1))

The Bill also calls for the SEC to establish a Sustainable Finance Advisory Committee,[3] which will be required to submit to the SEC, within 180 days after its first meeting, a report with recommendations on what ESG metrics issuers should be required to disclose. The report would “(i) identif[y] the challenges and opportunities for investors associated with sustainable finance; and (ii) recommend[] policy changes to facilitate the flow of capital towards sustainable investments, in particular environmentally sustainable investments.”[4]

Of note, the Bill also provides that the SEC may “incorporate any internationally recognized, independent, multi-stakeholder environmental, social, and governance disclosure standards.”[5] This could prove to be a viable path forward, as the European Union[6] and the United Kingdom[7] have already implemented line item disclosure requirements for climate and ESG related matters. Furthermore, incorporating internationally recognized standards could harmonize the ESG framework and provide clarity to issuers who have a presence both domestically and abroad.

The establishment of a definition of ESG metrics would be a significant step toward clarifying the SEC’s new emerging climate and ESG disclosure policies. In the past six months, the SEC has taken several actions with respect to ESG, including the discussion of climate and ESG related matters in its 2021 Examination Priorities Report; formally requesting public comment on issues related to ESG; and the formation of an ESG enforcement task force.[8] Additionally, President Biden issued the Executive Order on Climate-related Financial Risk, declaring that it is the policy of the United States to “advance consistent, clear, intelligible, comparable, and accurate disclosure of climate-related financial risk” and “to mitigate that risk and its drivers, while accounting for and addressing disparate impacts on disadvantaged communities and communities of color.”[9]

While the passage of the Bill is an encouraging development for ESG advocates, it is important to note that the Bill passed along partisan lines. In fact, not one Republican voted in favor of H. R. 1187 and four Democratic members voted against it. Facing a Senate split (50-50) along partisan lines, the prospect that the Bill becomes law remains unclear at this time, even with President Biden’s public support.

Sheppard Mullin will continue to keep an eye on emerging developments in this area, and its impact on risk and other related disclosures for public companies.

*Brett Uslaner is a law clerk in the Corporate Practice Group in the firm’s New York office.

FOOTNOTES

[1] The Bill is included as Title I of the larger Corporate Governance Improvement and Investor Protection Act. See Text – H.R.1187 – 117th Congress (2021-2022): Corporate Governance Improvement and Investor Protection Act | Congress.gov | Library of Congress.

[2] See Section 103 of the Bill. The definition of “ESG metrics” would be codified in SEC regulations found at 17 CFR Part 210.

[3] The Bill provides that the committee will consist of up to 20 members, representing financial institutions, analysts and investors as well as including experts on sustainable finance, each to serve a four-year term. See Section 104 of the Bill.

[4] See Sections 103(b)(2) and 104 of the Bill.

[5] See Section 103(b)(4).

[6] See Explaining the EU Action Plan for Financing Sustainable Growth | Reports/Guides | PRI (unpri.org).

[7] See U.K. and EU Regulators Move Ahead on ESG Disclosures and Benchmarks (harvard.edu).

[8] See 2021 Examination Priorities Report (sec.gov); SEC.gov Public Input Welcomed on Climate Change Disclosures; see also Sheppard Mullin, SEC Going Cyber-Hunting for ESG-Related Misconduct | Corporate & Securities Law Blog (corporatesecuritieslawblog.com).

[9] See Executive Order on Climate-Related Financial Risk | The White House.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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