The plethora of bills hitting Congress that have to do with socially responsible investing matches the growing interest by investors. Last week’s Financial Services subcommittee meeting that heard testimony on impact investing had some fireworks, but one bill focused on climate change was passed by the full committee and is moving to a full House vote.
The Climate Disclosure Act of 2019, introduced by Rep. Sean Casten, D-Ill., requires public companies to disclose information relating to the financial and business risks associated with climate change in their annual reports. Sen. Elizabeth Warren, D-Mass., introduced a similar bill into the Senate.
Some of those in the impact investing business see this recent move as continuing a trend in which environmental, social and governance investing-related bills are being presented or even passed.
“No one wants to be in the business of predicting Washington these days,” John Cochrane, manager for policy and programs of the U.S. Impact Investing Alliance, a group that fosters impact investing, told ThinkAdvisor. “But given it did come down on a party line vote, the House may pass it,” although he acknowledged it “may not receive a lot of attention” in the Republican-led Senate.
Also in July the House Financial Services committee passed — with bipartisan support — two bills, with “an endorsement from the chamber,” that focused on diversity: disclosing information on company executives and members of the board of directors. This too is positive, Cochrane notes.
Indeed, the industry has advanced the “dialog” for better ESG data. “We’ve seen a lot of movement, but companies themselves see [this] info is needed … and our perspective is ESG issues are investment issues,” says Amy O’Brien, global head of responsible investing for Nuveen. She adds that at Nuveen they work with their “mainstream colleagues” on how to move material ESG info into their process. “A lot of stakeholders want to know what they are doing [in regard] to ESG investments.”
A July 10 House Financial Services subcommittee meeting featured some pushback from the Republican side of the aisle on ESG-related bills. In fact, exchanges became heated when one representative accused another of calling a witness a “weenie” and another took on CalPERS for “losing” millions by not investing in tobacco.
That said, the House Financial Services subcommittee on Investor Protection, Entrepreneurship and Capital Markets met with experts from various parts of the financial industry to obtain information to further discuss drafts of five legislative proposals, including the Climate Risk Disclosure Act of 2019:
- ESG Disclosure Simplification Act of 2019, which would have companies provide additional disclosure and have the Securities and Exchange Commission establish a separate Sustainable Finance Advisory Committee.
- Shareholder Protection Act of 2019, which mainly would require public companies to submit quarterly reports to both the SEC and investors detailing the amount, date, and nature of the company’s expenditures for political activities.
- Corporate Human Rights Risk Assessment, Prevention, and Mitigation Act of 2019 that requires issuers to disclose human rights risks and impacts.
- A bill for all public companies to disclose all corporate taxes paid.
Chairwoman Carolyn Maloney, D-N.Y., noted in her introductory remarks that ESG was one of the “most important topics in the financial markets right now.” She added that over 2,300 companies that invest more than $80 trillion have committed to the UN Principles for Responsible Investment.
She pushed for the Securities and Exchange Commission to develop ESG disclosure standards that would apply to all public companies, adding that those who say the SEC shouldn’t mandate ESG data because it isn’t material were wrong. “The SEC mandates disclosure for lots of information that is not tied to the concept of materiality,” she said.
Some GOP representatives were not convinced of the necessity of ESG disclosure, such as Bill Huizenga, R-Mich., who claimed in his opening remarks that if ESG investing does help performance, then those “best practices will bubble to the top.” He said ESG disclosures should not be mandated because they only “name and shame” companies, pulling from a recent speech by SEC Commissioner Hester Peirce.
Finally he noted, in a theme that would be used on the GOP side of the aisle throughout the hearing, that the proposed rules would add costs to having a company go public, and would put downward pressure on the “plunging” number of initial public offerings, and they as “lawmakers should help to promote capital formation.”
For perspective, the number of IPOs listed in 2018, from data by Statista, was 190, which has grown over last couple of years. The number of IPOs over the last 20 years was 2,209, with an average of 110 per year. The highest level of IPOs during that time was 486 in 1999, just before the tech bubble burst. The lowest number was 31 in 2008, during the financial crisis.
Rep. Casten input that the SEC wasn’t there for companies to “hide information” and that “competitive markets depend on transparency no matter how much we as business owners don’t want to provide that information.”
ESG information should be “readily available and standardized,” said Rep. Juan Vargas, D-Calif., adding that “it’s becoming clearer that climate change is real, it’s not a Chinese hoax, it’s something that is impacting all of our communities.”
Maloney asked one witness — CalPERS’ James Andrus, investment manager, financial markets sustainable investment — if ESG disclosure is material to investment. Andrus said yes, although there’s been a lot of mention about it without a full discussion as to what it is. “There’s not one definition of materiality,” Andrus said.
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