SOURCE: Workiva
DESCRIPTION:
By Mandi McReynolds & Steve Soter
A bill that narrowly won approval in the U.S. House of Representatives could become the country’s most comprehensive environmental, social, and governance (ESG) disclosure requirements ever, with specific reporting expectations on climate risks, political spending, CEO pay, and taxation rates.
It’s uncertain if the Senate will pass the ESG Disclosure Simplification Act, or H.R. 1187, which squeaked by on a 215-214 House vote. But, it signals congressional intent to expand the scope of information available to investors while offering hints of how future ESG disclosure frameworks could look.
But first, some context from around the world
The U.S. Securities and Exchange Commission (SEC) has issued a steady flow of statements on climate and is expected to propose enhanced rules this fall. The House bill would explicitly require the SEC to issue specific ESG reporting requirements.
That could help the U.S. catch up to the European Union. There, the Sustainable Finance Disclosure Regulation (SFDR) applies to financial market participants and advisors and aims to steer capital toward sustainable investments through mandated ESG reporting. The European Commission also has proposed the Corporate Sustainability Reporting Directive (CSRD) to require even unlisted companies to report how sustainability issues affect their businesses, as well as how their businesses affect people and the environment. It’s possible the SEC could mirror some of the CSRD's requirements in areas such as data tagging or audits of sustainability disclosures.
Even without specific requirements, investors are demanding more transparency, as we saw this proxy season. Shareholders raised questions about ESG, sparking debate about the materiality of ESG, risk, and how companies can authentically show their impacts on stakeholders.
A Workiva survey of individual investors in the U.S., United Kingdom, France, and Germany showed 70% agree companies should be responsible for demonstrating their ESG performance; 64% agreed ordinary investors should pressure companies to be more transparent.
Qualitative and quantitative disclosures help investors understand how their capital is being used. That way, they can more effectively allocate their money in line with their strategy and beliefs.
9 hints of where ESG disclosures are going
By deconstructing H.R. 1187, one can see where legislators want to expand transparency and accountability. For instance, the bill would strengthen SEC rules on disclosures related to human capital and climate change while adding details on political contributions and, according to the bill, “disclosure of tax havens.”
The bill would broadly require a public company to disclose certain ESG metrics and their connection to the long-term business strategy.
Again, there’s no telling what the bill will look like if the Senate moves on it. But, looking at the categories of disclosure that it covers, at least some in Washington are thinking about ESG (you can read the full bill for all the details):
| Categories | What companies might need to disclose |
|
Shareholder Political Transparency |
Political contributions, with a description of spending on political activities, including dates, amounts, and details of who got the money |
|
Greater Accountability in Pay |
More details on executive pay including:
|
|
Climate Risk Disclosure |
Direct and indirect greenhouse gas emissions, total amount of fossil fuel-related assets, and potentially even the amount of water withdrawn from freshwater sources for operations |
|
Disclosure of Tax Havens and Offshoring |
Financial performance and taxes on a country-by-country basis |
|
Workforce Investment Disclosure |
Specific workforce disclosures including:
|
|
Preventing and Responding to Workplace Harassment |
Number of settlements reached and payments of settlements, judgments, and awards related to harassment |
|
Cybersecurity Disclosure |
Whether any member of the governing body has cybersecurity expertise |
|
Improving Corporate Governance Through Diversity |
Demographic data on the board of directors, board nominees, and executive officers, based on voluntary self-identification of race, ethnicity, gender identity, sexual orientation, and veteran status |
|
Uyghur Forced Labor Disclosure |
Whether the company or affiliates imported goods made in a region associated with forced labor |
The bill also would direct the SEC to study the issues small businesses face with respect to disclosing ESG metrics.
In addition, we wouldn’t be surprised if companies eventually are asked to make ESG disclosures in a machine-readable format, perhaps with XBRL® tags.
The big takeaway
No matter the fate of H.R. 1187, regulators ultimately may require new disclosures to meet the growth in ESG investments and demands for transparency. With so much capital at stake, investors are the ones looking for data they can trust and comparability.
All told, public companies might want to prepare for:
-
Dramatically expanded ESG reporting requirements
-
New formats for ESG disclosures
-
Audit assurance of sustainability disclosures, which will certainly raise the stakes for this reporting
Any or all of those changes will likely drive companies toward ESG disclosure software or technology to address reporting risks and simplify how teams aggregate and report ESG data.
Are you ready?
Workiva has an ESG reporting solution. Request a demo for a free look.
KEYWORDS: Workiva, NYSE:WK, H.R. 1187
