House Passes Bill That Would Require SEC to Standardize ESG Disclosure Info

By:
Chris Gaetano
Published Date:
Jun 18, 2021
GettyImages-1306922625-ESG

The House of Representatives has passed a bill, the ESG Disclosure and Simplificaton Act, which would mandate that the Securities and Exchange Commission (SEC) both create a standard definition of environmental, social and governance (ESG) metrics and require standardized ESG disclosures.

The bill is the creation of Rep. Juan Vargas (D-Calif.), who authored it as part of a larger legislative package. It would require that the SEC establish a permanent Sustainable Finance Advisory Committee, which would make recommendations to the commission within 180 days of its formation, should the bill pass into law. It may incorporate any internationally recognized, independent, multi-stakeholder environmental, social, and governance disclosure standards. as it finds appropriate. The bill also says that ESG metrics would be considered de facto material for the purposes of securities law.

“Information from ESG disclosures will help investors have greater insight into what companies are doing to reduce their carbon footprints and to address important issues like climate change, diversity, and labor rights," said Rep. Vargas. "Investors in my district have increasingly been demanding public companies disclose ESG information. My bill will help ensure clarity and comparability in disclosure of companies’ practices, by developing a much-needed comprehensive ESG disclosure framework."

The lack of standardized ESG metrics has been increasingly recognized as a problem in financial reporting, as it inhibits the comparability of information and opens the door to companies cherry picking what they report. It was with this exact issue in mind that the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) decided to merge into the Value Reporting Foundation. It has also been the motivation for the International Financial Reporting Standards Foundation to consider forming a Sustainability Standards Board of its own, as well as a joint project by major sustainability organizations (including the VRF) to promote interoperability between their respective frameworks.

The package of bills also contains provisions that would mandate that companies disclose spending on political activities; boost current pay disclosure laws to include compensation increases for management compared to the average worker; and disclose climate risks, tax havens and offshoring activities, workplace demographic information, cybersecurity risks and the degree to which a company relies on forced Uyghur labor. It also mandates a study on ESG matters for small businesses.

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