Economy and Society: House passes ESG disclosure act

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

House passes ESG disclosure act

On June 16, the U. S. House of Representatives passed “The ESG Disclosure and Simplification Act,” which, as its name suggests, aims to compel publicly traded companies in the United States to disclose and report ESG-related data annually, in addition to the pecuniary and other relevant disclosures they already make. The bill passed by a narrow margin and faces what commentators argue is an uncertain fate in the Senate, perhaps unlikely to be enacted. Its passage in the House, however, is considered by ESG advocates a symbolic victory:

“The measure’s passage, on a 215-214 vote, marked the first time the chamber has passed sweeping legislation for transparency on sustainability issues. The package of bills would require disclosure of ESG metrics broadly and dictate specific reporting expectations on climate risks, political spending, CEO pay and taxation rates.

The package “will create clear, consistent disclosure standards for issuers and finally provide investors and our markets with the information they need to make the best investment decisions possible and to hold the companies they’re invested in accountable,” House Financial Services Chairwoman Maxine Waters, D-Calif., said Monday during a Rules Committee meeting on the measure….

The legislation would require publicly traded companies to disclose and define ESG metrics and their view on the link between ESG and long-term business performance. It would allow the SEC to consider independent, internationally recognized disclosure standards for reporting when creating rules to facilitate the ESG disclosure and establish a Sustainable Finance Advisory Committee at the agency.

The package would also require public companies to disclose industry-tailored climate information, including direct and indirect greenhouse gas emissions and fossil fuel-related assets.

Other provisions would mandate quarterly and annual reporting on political activities by companies and their trade associations, including the amount, date, candidate and party for contributions. Companies would have to report a ratio of the percentage pay increase for executives compared to the raise for a median worker each year, and taxes paid by jurisdiction.

Before passage, the House adopted amendments that would require disclosure of the race, ethnicity, gender, sexual orientation and veteran status of board members and executives; workforce-related information, including diversity, safety and pay; settlements or judgments connected to workplace harassment; board members’ cybersecurity expertise; and sourcing of materials from Xinjiang, China.”

Worth noting in this bill is language providing explicit legislative authority for the SEC “to consider independent, internationally recognized disclosure standards for reporting….” As noted in this newsletter last week, SEC Commissioner Elad Roisman has expressed doubts about the Commission’s need to pass new reporting standards and about the legality of designating a non-governmental third-party to develop and apply those standards. This provision would, it appears, provide the authority that Roisman suggested the SEC currently lacks.

Tech companies push back against new disclosure standards

Tech companies—some of which are among the most widely held stocks in ESG portfoliosare resisting the rush to new disclosure standards. Among others, Alphabet (the parent company of Google) and Microsoft have asked the SEC to reconsider its position. Asset managers, in turn, have expressed their frustration with the tech giants, arguing that their resistance to mandatory reporting is, in their view, a betrayal of the ESG principles they helped to foster and from which they have benefitted:

“Microsoft and Alphabet have pushed back against calls to include disclosures on environmental, social and governance issues in key US regulatory filings, setting them on course for a tussle with major asset managers.

The tech companies told the top US securities watchdog that ESG information should not be included in a type of filing known as a 10k, which most public groups must submit each year. Microsoft and Alphabet said including ESG information in these filings would open them up to potential legal risks since such data are subject to more uncertainty than the detailed financials and risk disclosures that are currently required in 10ks….

The battle between asset managers and companies over ESG disclosure is expected to intensify in coming months. With global warming and human rights posing new risks for companies, the SEC has embarked on unprecedented disclosure rulemaking for the booming ESG sector.

In 2021, almost a third of global equity inflows have gone into ESG funds, Bank of America said in a June 1 report. Assets under management in ESG funds hit a record $1.4tn in April, more than double the level from a year ago and growing at nearly 3 times the rate of non-ESG assets, the bank said.

Microsoft and Alphabet have benefited from this surge. Microsoft is the most widely held company in US ESG funds, Bank of America said. Alphabet is among the top 10 most popular ESG companies and is held in almost half of all US ESG funds.

Alphabet joined other technology companies on an SEC letter last week that recommended ESG disclosures “be furnished via separate climate reporting to the SEC”.

“Given that climate disclosures rely on estimates and assumptions that involve inherent uncertainty, it is important not to subject companies to undue liability, including from private parties,” the companies said.”

SEC Commissioner Roisman, who has warned against increased legal liability to corporations stemming from enhanced disclosure requirements, has asked for, at a bare minimum, a safe harbor for corporations to prevent or soften what he expects to be a post-mandatory-disclosure boom in ESG-related liability actions. Commissioner Allison Herren Leeone of the primary advocates for new disclosureshas agreed that a safe harbor may be necessary to alleviate legal action and calm corporations’ fears.

Activists prepare for greater ESG disclosure

Investor Update, a London-based market-intelligence firm, recently released a 100-plus page white paper on ESG and the market opportunities it offers now and in the near future. Among other insights offered in the report, IU argues that the current push for greater ESG disclosure will all but certainly provide greater opportunities for activists to make headway and to affect business operations and personnel. Greater disclosure means more information available to activists which means more opportunity to find mistakes and underperformance, and more opportunity to correct those mistakes through shareholder activism:

“ESG disclosure, already at record levels, is set to increase further thanks to a range of new regulations being planned or considered in markets such as the US, EU and UK.

‘Over time that will lead to a more efficient reflection of company behavior and industry performance,’ notes the paper from Investor Update, a market intelligence firm.

‘However, during the transition phase, increased regulation and enhanced disclosure… is providing more opportunity for activists as opposed to less. This is because it makes it easier to effectively measure performance and thereby more readily identify the outliers.’

When people think about activism, they instinctively think there is inefficiency of information, Andrew Archer, the author of the paper and head of ESG advisory at Investor Update, tells Corporate Secretary sister publication IR Magazine. ‘Whereas the reality is the opposite,’ he says. ‘Greater disclosure [offers] more opportunity for analysis and comparison, and therefore challenge.’…

‘There has been a great deal of movement and change over the last 18 months, which reflects the degree to which the key players in activism are repositioning around the ESG opportunity and looking to secure and leverage opportunities where they identify them,’ the white paper notes.”

On Wall Street and in the private sector

Inflation and ESG are reported primary investor concerns

According to various reports, including, as the markets prepare to enter the 2nd-Quarter earnings season, investors’ primary concerns are inflation and ESG:

“Also happening next week are two conferences on the hot topic of ESG. Environmental, Social and Governance are top of mind (along with inflation) in the C-Suite. On Tuesday this week, Cisco (NASDAQ:CSCO) and Goldman Sachs (NYSE:GS) will host an ESG Conference Call, and on Wednesday morning Johnson & Johnson will host an ESG Investor Update Webcast.

With a record number of S&P 500 discussing ESG during the Q1 earnings season, expect more such conferences as the year progresses, particularly as events move to traditional in-person settings….

At the Cisco & Goldman webcast, Cisco’s SVP of corporate affairs will provide an overview of the firm’s Corporate Social Responsibility (CSR) strategy and how it will help overall shareholder value creation….

J&J’s ESG Investor Update on Wednesday is slated to outline the company’s ESG management approach around its corporate priorities.”

Fidelity nearly doubles its ESG offerings

On June 16, Boston-based Fidelity announced that it is adding five new ESG funds to its product lineup, nearly doubling its ESG offerings. One of the new funds will focus specifically on gender diversity. A Fidelity press release couched the announcement as follow:

“Fidelity Investments today expands its sustainable investing lineup with five new actively managed Environmental, Social and Governance (ESG) funds – two equity mutual funds, one bond mutual fund and two equity exchange-traded funds (ETFs) – available June 17, 2021….

Fidelity’s new equity funds will seek to invest in high-quality companies that are addressing climate change via corporate strategy or through products and services, prioritizing and advancing women’s leadership and development, or that have proven or improving sustainability practices. Additionally, Fidelity will offer a bond fund seeking to invest in companies that provide environmental solutions or support efforts to reduce their own environmental footprints. The mutual funds and ETFs will be available for individual investors and financial advisors to purchase commission-free through Fidelity’s online brokerage platforms….

The three new actively managed mutual funds are Fidelity Climate Action Fund (FCAEX), Fidelity Environmental Bond Fund (FFEBX), and Fidelity Sustainability U.S. Equity Fund (FSEBX). The mutual funds will have no investment minimums, like most Fidelity funds, and will be available with both retail and advisor share classes.

The two new actively managed ETFs are Fidelity Sustainability U.S. Equity ETF (FSST)1 and Fidelity Women’s Leadership ETF (FDWM)1. The ETFs will have the same investment strategies as their like-named mutual funds.”

Companies plan for uncertain ESG future

On June 14, The Wall Street Journal ran a long piece on corporate moves to placate ESG investors, often taking costly action now to produce unknown future results that may or may not achieve any goal other than fending off ESG activists:

“Businesses increasingly are coming under pressure from investors, lawmakers and regulators who demand more details on their spending plans and the progress they are making to achieve their environmental, social and governance goals….

But, those investments present challenges for chief financial officers overseeing companies’ capital spending plans. Many of them are entering unknown territory by allocating funds to projects that carry big price tags, cover long time horizons and yield returns that are sometimes hard to quantify, executives said. Companies often make these investments before new regulations are proposed or consumer choices change, adding to the difficulty of finding the right balance….

Those investments come as policy makers are paying more attention to environmental, social and governance issues. President Biden as part of his infrastructure proposal wants to build more electric charging stations and generate more renewable energy. U.S. securities regulators are considering introducing mandatory disclosure requirements on climate-related risks, while lawmakers in California and Massachusetts recently banned gas-powered car sales starting in 2035.

Still, it could take more than a decade for these and other investments to generate returns, said Gregg Lemos-Stein, chief analytical officer at ratings firm S&P Global Ratings.”

In the spotlight

ESG and Bitcoin, again

As we have noted in this newsletter ESG and Bitcoinor almost any crypto-currency, for that matterare in the view of some commentators on a collision course, with the environmental concerns of ESG advocates running headlong into the perceived energy-intensive mining of Bitcoin. According to Coindesk, some crypto investors are responding with near full-blown panic, doing anything they can to avert this perceived collision:

“One cryptocurrency asset manager is buying emission offsets. A digital-asset trading platform says it wants to be “carbon negative” within 18 months. A new token would wrap bitcoin with carbon credits so that they could trade together as a single asset.

Just a month after Tesla CEO Elon Musk tweeted his concerns about the potential environmental harm from bitcoin mining, sending the cryptocurrency’s price into a tailspin, some industry players are rushing to respond. They’re looking at ways to address the environmental, social and governance (ESG) issues that might deter big institutional investors from embracing bitcoin….

Though some experts had been warning for years that the bitcoin market’s narrative of “institutional adoption” was on a collision course with the ESG mandate that now dominates the activities of big money managers like BlackRock, it’s too early to tell how much of a difference the latest efforts might make. Will the bitcoin mining industry actually shrink its carbon footprint or just announce ambitious goals and make peripheral adjustments to give big investors cover?…

The issue doesn’t seem to be going away, with bitcoin now changing hands at around $37,500, well off the all-time high near $65,000 reached in April.

So some big players are moving beyond the rhetoric and denial toward business changes that might help to address or remedy any environmental ills.”

The article also presents a rundown of what some major crypto dealers and investors are currently doing or plan to do to try to head off the perceived collision.