US: ESG disclosure bill inches through Congress but faces Senate hurdle

The Democrat-sponsored bill would require the SEC to define ESG metrics – but it’ll struggle to get through the Republican-controlled Senate

A US bill proposing mandated ESG disclosure for companies and the creation of a permanent sustainable finance committee to advise the Securities and Exchange Commission (SEC) is slowly making its way through Congress, with the proposal passing from a Congressional committee to the House of Representatives.

The ESG Disclosure Simplification Act (HR 4329), introduced by representatives Juan Vargas and Jesús G Garcia, co-sponsor, would ratchet up corporate ESG disclosure requirements under the SEC in proxy statements as well as in audited financial statements.

The SEC would be required to adopt rules defining ESG metrics – which regulation would deem “de facto material” – with the option of incorporating internationally recognised standards. 

The bill would also require the SEC to establish a permanent Sustainable Finance Advisory Committee.

The bill has now been passed to the full House for consideration in a preliminary stage of the legislative process – though it is ultimately not expected to pass through the Republican-controlled Senate.

"The bill has a greater appeal to social activists than Main Street investors."

The development saw the Committee on Financial Services – which passed the bill 31-22 last September – publish its report about the bill, revealing the “minority views” of the Republican contingent in the committee. 

The Committee Republicans said the bill would require “unnecessary, costly, and potentially very confusing disclosures…that will only discourage companies from going (or staying) public, which means fewer investment options for Main Street Americans saving for education or retirement”. 

So-called “Main Street” (retail) investors have repeatedly been invoked in support of anti-ESG efforts in the US – from the Main Street Investors Coalition (MSIC), the corporate lobby-funded organisation that claims to be protecting retail investor interests from shareholder engagement and proxy advisory firms, to the apparently fake letters from retail investors cited by SEC chairman Jay Clayton in justification for proposed rule changes.

In the report’s minority views, Committee Republicans expressed concerns that the disclosures could be used to “name and shame” companies that were operating lawfully but underserved by ESG metrics. 

“Instead of attacking American companies, Committee Republicans want to support American businesses and everyday Americans trying to save their hard-earned money.

“Like so many of the Democrat-sponsored mandatory disclosure bills from the 116th Congress, the bill has a greater appeal to social activists than Main Street investors.”

The Republicans also expressed concern that the bill leaves the task of defining ESG metrics to the SEC, quoting Commissioner Hester Peirce: “Many [ESG issues] cannot be reduced to a single, standardisable score.” 

They conclude: “Committee Democrats want the SEC to do the impossible, and expect the SEC to take the blame (rather than themselves) if and when the ‘‘ESG metrics’’’ disclosure inevitably fail to be useful for everyday investors.”

HR 4329 is one of a suite of bills concerning ESG issues that are making their way through the legislative process after originally having been discussed at the first ever US Congressional hearing on ESG issues in July last year. 

The other bills are the Shareholder Protection Act of 2019, the Corporate Human Rights Risk Assessment, Prevention and Mitigation Act of 2019, the Climate Risk Disclosure Act of 2019 and Country by Country Tax Payment Disclosure.