On September 20, 2019, the Financial Services Committee in the U.S. House of Representatives passed H.R. 4329, the ESG Disclosure Simplification Act of 2019.
The bill would require all public companies to disclose “environmental, social, and governance [ESG] metrics” as material information about the company. Although there is little if any chance that the bill will become law given the current politics in Washington, DC, the bill’s passage in the House Committee highlights that issues of ESG disclosures continuing to be pressing.
H.R. 4329 would require every public company to disclose to shareholders “a clear description of the views of the issuer about the link between ESG metrics and the long-term business strategy of the issuer.”
The Bill if enacted would also create a new permanent Sustainable Finance Advisory Committee that must within 180 days of first meeting submit to the SEC “recommendations about what ESG metrics” the SEC should require be disclosed. But again, there is no realistic scenario under which this becomes law.
However, issues of ESG live on. Governments in Europe have been pushing businesses to make ESG disclosures for years. There is no similar push in the U.S., except for this and similar legislation; all rightly doomed to fail. On this side of the ocean, a small but vocal number of investors evaluate their stock portfolios by matters that include ESG metrics. That private, non governmental response to the fact that many American investors actually believe issues of “energy and the environment” are among the top priorities, takes up a lot of virtual space in social media, and is a positive.
Numbers are difficult to quantify but one of the world’s largest investment banks, based in Europe, has said that by 2020 it expects half of assets managed by investment companies to have expressed ESG considerations. That number, on a global basis, seems overly optimistic.
The broad lack of widespread public disclosures, utter lack of standardized metrics, and complete lack of enforceable goals makes it difficult accept that ESG metrics will be widely considered in in the U.S. Without any of those three, much, if not most, of the ESG information in the market is at best misinformation. And such creates potential liability for companies making ESG disclosures; if not also some silly results, including maybe the most ridiculed, when last year a major U.S. real estate company very publicly announced its principal ESG “environmental initiative” banning meat from its offices and expense accounts.
In the realm of securities disclosures it is often not enough to be correct. In a year when ‘redefining motherhood’ is in and ‘redefining masculinity’ is out, setting priorities not to mention articulating solutions, is fraught with risk.
This law firm regularly advises public companies about environmental and sustainability including matters that may be subject to the company’s disclosure obligations including annual reports on form 10-K, as well as matters of ESG reporting.
The failure of H.R.4329, the ESG Disclosure Simplification Act of 2019, is not only all but certain, but is not a bad thing.
This is an instance where the marketplace should control and not Congress. More and additional government regulation, micromanaging this discreet set of metrics that may not be material suitable for public disclosure will only stifle and limit good business practices that result in environmental progress. Capitalism has and will drive progress. If public companies determine that investors desire ESG disclosures, management will evaluate the risk and respond.
That market driven decision making will not only drive ESG disclosures, which can be a good thing, and also fuel an underlying environmental stewardship of the planet made possible by today’s technological advances enabled by capitalism, .. all in a positive way that no new law could accomplish.
We can save the planet with capitalism.