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HFSC ESGW Hearing

House Committee on Financial Services

Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets

E, S, G, and W: Examining Private Sector Disclosure of Workforce Management,

Investment, and Diversity Data

Thursday, December 8, 2022

Topline

  • Democrats advocated for increased disclosure requirements while Republicans argued these requirements are not material and will impose new burdens and costs on businesses, especially medium and small businesses.
  • Members and witnesses expressed skepticism for Scope 3 emissions disclosure requirements.

Witnesses

  • Cambria Allen-Ratzlaff, Managing Director and Head of Investor Strategies, JUST Capital
  • Colleen Honigsberg, Ph.D. in Accounting and Professor of Law, Stanford Law School
  • Shivaram Rajgopal, Ph.D. in Accounting and Professor of Accounting and Auditing, Columbia Business School
  • Fran Seegull, President, U.S. Impact Investing Alliance
  • Andy Vollmer, Senior Affiliated Scholar, Mercatus Center at George Mason University

Opening Statements
Subcommittee Chair Brad Sherman (D-Calif.)

In his opening statement, Sherman said workforce is the lifeblood of any organization but only 15% of the S&P 500 attempt to make ESG disclosures. He noted that intangibles represent 90% of the value of S&P 500 companies today, compared to 17% in 1975, and that Congress must determine how information on workforce is given and ensure Scope 1 and 2 disclosures make sense, adding that Scope 3 may be a bridge too far.

Subcommittee Ranking Member Bill Huizenga (R-Mich.)

In his opening statement, Huizenga said Democrats are relying on unelected bureaucrats to advance their agenda because they have been unable to legislate their climate and social policies. He said the Committee has not fulfilled its duty because Chair Gensler has not testified in over a year. He also said retail participation in U.S. markets has grown across every demographic, and the current state of the equity markets is the product of years of private sector innovation and prudent, data-driven public sector rulemaking.

Chairwoman Maxine Waters (D-Calif.)

In her opening statement, Waters said the House passed H.R.1187, the Corporate Governance Improvement and Investor Protection Act, which would reform the disclosure regime for public companies by requiring and standardizing the reporting of several ESG metrics. She said the SEC is responding to the needs of investors and workers with their agenda.

Testimony

Cambria Allen-Ratzlaff, Managing Director and Head of Investor Strategies, JUST Capital

In her testimony, Allen-Ratzlaff noted the headcount reporting standard is the only line-item reporting standard of this nature. She said that it was set in 1973 when over 85% of the S&P 500’s market cap was property, plant, and equipment. She added that principles-based disclosures should be anchored by four foundational and decision-useful disclosures that apply to all companies: the number of full-time, part-time, and contingent or contractor labor directly involved in firm operations; labor costs; turnover; and workforce diversity data sufficient to understand the company’s efforts to access and develop new sources of talent.

Colleen Honigsberg, Ph.D. in Accounting and Professor of Law, Stanford Law School

In her testimony, Honigsberg said Prompt action on labor cost disclosures is necessary due to two market trends, which are the growth of human capital firms and the increasing prominence of net-loss firms. She said an increasing portion of public companies derive much of their value from intangible assets, yet only 15% of those firms disclose information as basic as total labor costs. The recommendations she proposed included that managers should be required to disclose what portion of workforce costs they believe to be an investment in the firm’s future growth; workforce costs should be treated in the same way as research and development costs, expensed but disclosed; and the income statement should be disaggregated to give investors more insight into workforce costs.

Shivaram Rajgopal, Ph.D. in Accounting and Professor of Accounting and Auditing, Columbia Business School

In his testimony, Rajgopal said he supports the SEC’s proposed business climate disclosures but has mixed feelings about Scope 3 emissions because we should not double count emissions. He said without the consistency and comparability of climate-related disclosures, companies cannot be held accountable for the carbon reduction promises they make to investors.

Fran Seegull, President, U.S. Impact Investing Alliance

In her testimony, Seegull said markets can only exist and operate efficiently when there is a free flow of information. She supported the SEC’s creation of standardized corporate disclosures on human capital management factors. She listed five key points: the SEC should pursue rulemaking on corporate disclosures for human capital management factors; the Alliance supports these standardized disclosures because the workforce is a company’s greatest asset; the rulemaking is consistent with the SEC’s mission to protect investors; disclosures should improve market efficiency and should not impose significant burdens; and SEC action on this is a matter of American economic leadership and competitiveness.

Andy Vollmer, Senior Affiliated Scholar, Mercatus Center at George Mason University

In his testimony, Vollmer said Congress or the SEC should impose new disclosure regulations only when they have data or evidence of a strong need or a serious continuing harm that the market will not solve. He also said that the Congress should reduce obstacles set up by the public offering process, the complicated set of exemptions, and the lengthy and burdensome set of disclosures. Vollmer noted the current SEC has proposed a long list of major rules in quick succession, in ways that have disserved the rulemaking process and the public.

Question & Answer

Collection and Use of ESGW Information for Ratings

Rep. Josh Gottheimer (D-N.J.) asked Allen-Ratzlaff if JUST Capital uses biased information from the United Nations Human Rights Council for ratings and if it is appropriate for ESG rating firms to use such data. She said they do not and that it points to a larger problem of the lack of definitions.

Gottheimer then asked Seegull how the Alliance helps investors evaluate ESG research to make sure their decisions are not inadvertently supporting movements or efforts that undermine allies. She said that since the data comes from voluntary reports and is cherry picked, they encourage investors to take ratings under advisement, look at underlying methodology, and conduct their own primary research. Gottheimer noted that we should be careful because it can mislead investors into supporting things that are counter to their values.

Diversity

Waters noted that companies that voluntarily disclose data outperform those that do not. She asked why these metrics, particularly diversity-related ones, are important to investors. Seegull said diversity corresponds with better financial performance and resiliency. Sherman asked Allen-Ratzlaff if diversity of boards and executive groups should be disclosed. Allen-Ratzlaff said investors currently guesstimate board diversity.

ESGW Disclosures

Huizenga asked if the data discussed today would already be disclosed if it was material. He also said some SEC commissioners have called for ESG disclosures, which would be imposed indirectly on private companies through Scope 3 requirements. Vollmer said this would deter people from using the securities system to raise capital and that investors already have the information they need. Rep. Alex Mooney (R-W.V.) also raised questions of materiality.

Rep. Ann Wagner (R-Mo.) said the SEC is deviating from its core mission of investor protection and facilitation of capital formation. She said these rules were hastily developed and asked Vollmer if this was outside of the SEC’s mission and expertise. He said they were.

Rep. Warren Davidson (R-Ohio) discussed fiduciary duty and asked if ESG is more important. Vollmer said nothing has changed and that the ultimate responsibility is to shareholders.

Rep. Juan Vargas (D-Calif.) said companies that implement ESG strategies have more innovation and success. He also said he will be in the Congressional Sustainable Investment Caucus next year.

Rep. French Hill (R-Ark.) said ESG disclosure should be done in a way that diminishes agency costs and does not deter capital formation. He asked Honigsberg if either Generally Accepted Accounting Principles (GAAP) or Financial Accounting Standards Board (FASB) is entertaining this. She said FASB is more focused on income statement disaggregation, such as breaking out the cost of goods sold into what portion is labor versus other elements.

Rep. Bill Foster (D-Ill.) noted his concern about intangibles representing 90% of valuations. Rep. Sean Casten (D-Ill.) said climate-friendly companies are trading hire than others and that this shows that the capital markets are efficiently allocating market capital to hedge climate risks. Rajgopal agreed with him and said demand for things like oil for transportation will stabilize and then peter out. Casten asked him if he thought we have sufficiently transparent information for investors to allocate capital, and Rajgopal said we do not.

Standardization

Sherman said we ought to require disclosures to keep everything even between companies and that we need standards because companies are simply doing it on their own. Hill recommended that industry groups make industry recommendations to standard setters.

For more information on this hearing, please click here.

For an archive of past SIFMA hearing coverage, please click here.