ESG Arrives on Capitol Hill: The Debates Heat Up Over National Policy
By Carol Nolan Drake, J.D., Skytop Contributor / October 22nd, 2021
Carol is the CEO and Founder of Carlow Consulting, LLC, a company she created in January 2017, following a senior position with an institutional investor handling corporate governance and external relations. Before this role, Carol served in leadership positions for three Ohio governors, with appointments to the Cabinet and several boards and commissions, including as a trustee for a public pension fund.
As an attorney, Carol worked in private practice and as an assistant attorney for the city of Columbus. She served five years on the Board of the Council of Institutional Investors (CII). Carol was the co-chair of the ICGN Shareholder Responsibilities Committee (SHREC) under which the Committee revised the Diversity and Share Lending Guidelines.
Carol has published several articles on corporate governance, ESG and diversity, including chapters in The Handbook of Board Governance, Second Edition. She also writes about federal policy and the intersection between effective company reporting and investor expectations. Carol is a frequent speaker on governance, diversity initiatives and investor stewardship. She holds a law degree from the Claude Petit College of Law.
ESG’s Rise from the Valley
In the U.S., the path of Environmental, Social and Governance (ESG) has been a long and winding one, a continuous journey that reminds me of one of my favorite authors, Robert Frost, and his poem, “The Road Less Traveled.” In my early days as a legal intern, I worked for Crowell & Moring (Washington, D.C.), researching Superfund cases, stoking an interest in environmental issues. The governance side became a focus as I voted proxies and engaged companies from my vantage point working for an institutional investor. The social, or human capital focus, began when I served as the chair of a state employment relations board. Altogether, my own path toward ESG has unfolded over the course of my career as the discussion and level of engagement between stakeholders and public companies has expanded.
The United Nations, by fostering conversations about a global call to action, was able to bring policy makers and business leaders to the intersection of business purpose and social responsibility. The movement toward Sustainable Development Goals (SDGs), with new considerations of how to define “materiality” as a standard for determining corporate ESG risk, and the work of organizations such as GRI, CDP, the IIRC and SASB, (now the Value Reporting Foundation) gave corporate executives and investors tools to begin integrating analysis of peer performance, frameworks to evaluate risks, and benchmarks to scale ESG strategies.
ESG Data and the Securities and Exchange Commission (SEC)
The SEC has had its own winding journey to consider whether ESG-related factors impact the capital markets from an issuer risk mitigation perspective. As the 2008 financial crisis slowly passed, and the Dodd-Frank Act became law, the door was open for ESG initiatives to move from the sidelines to the center lane. The use of Proxy Access and specific disclosure requirements offered shareholders greater input into the “G” of ESG, providing a mechanism for shareholders to advocate how company boards of directors might best create long-term value. The SEC showed much more regulatory oversight would be in store and Chair Gary Gensler has indicated that the remainder of this year and early 2022 will be busy.
The missing link to ESG integration, after Dodd-Frank went into effect, was data. Specifically, the granular level of data needed to set benchmarks and evaluate performance, both operationally and financially, which still is needed today. Institutional investors—including public pension funds, labor funds, family offices, foundations, and endowments—began to ask issuers, their external managers, bankers, and investment consultants to review investments through an ESG lens. All the above created the case for a public policy discussion on ESG.
From the Valley to Capitol Hill
Recent announcements by several large firms, such as PwC, have announced their plans to hire significant numbers of ESG analysts and managers to support companies, institutional investors, and their investors/stakeholders in realizing the upward trend of defining “materiality” with more ESG-related analysis and into ESG “assurances”. (PwC planning to hire 100,000 over five years in major ESG push | Reuters)
A record number of companies have announced their commitment to action on climate change, better and more transparent disclosure, improved board diversity and related ESG hot topics as an appeal to key groups such as employees, stakeholders, and investors to secure capital, drive up brand value and demonstrate their good corporate citizenship.
President Biden has acted on his commitment to address the impact of climate change. This, as one might well expect, has caught the attention of advocates and opponents alike on Capitol Hill where the debate is shaping up and likely to be played out in the run up to the mid-term elections in 2022.
Executive Orders, Bills, Resolutions, Speeches and Committee Reports
A review of this year’s Presidential and Congressional activity thus far from Executive Orders issued, bills introduced, resolutions offered or adopted, speeches in the Congressional Record, or Committee reports, reveals that the many aspects of E, S, and G are being considered by the White House and in the U.S. House and Senate.
On a parallel track with Congress, down Pennsylvania Avenue at the White House, President Biden’s administration has issued several Executive Orders that have provided direction on ESG-related topics, including the climate crisis.
In one of his first acts as President, on January 27, 2021, President Biden signed an Executive Order on “Tackling the Climate Crisis at Home and Abroad,” stating, “It is the policy of my Administration that climate considerations shall be an essential element of United States foreign policy and national security.” Executive Order on Tackling the Climate Crisis at Home and Abroad | The White House requires that cabinet and federal agencies named to the National Climate Task Force work together to align federal programs to address climate considerations. In a release on October 7, 2021, the Biden Administration announced that twenty federal agencies have outlined “the steps each agency will take to ensure their facilities and operations adapt to and are increasingly resilient to climate change impacts.” For details, please click on this link. FACT SHEET: Biden Administration Releases Agency Climate Adaptation and Resilience Plans from Across Federal Government | The White House
In one recent announcement, the U.S. Department of Labor, in a newly proposed rule, would reverse a previous rule and permit retirement plan fiduciaries to consider climate change and other ESG factors when making investments. US Department of Labor proposes rule to remove barriers to considering environmental, social, governance factors in plan management | U.S. Department of Labor (dol.gov)
Bills Introduced in Congress
With respect to ESG activity, the U.S. Congress provides a clear contrast between the full embrace of ESG factors or the skepticism thereof. A search of Congress.gov for environmental, social and governance key words yielded over 550 bills introduced in the 117th Congress alone. Please review the introduced bills by clicking on this link. Legislative Search Results | Congress.gov | Library of Congress
Two recently introduced Senate bills provide examples of ESG headway or headwinds. One bill was introduced on September 23, 2021, by Senator Marco Rubio (R-FL), S. 2829, the ”Mind Your Own Business Act” and another bill was introduced on October 7, 2021, by Senator Sherrod Brown (D-OH), S. 2966, the “American Energy Worker Opportunity Act.” S.2966 – 117th Congress (2021-2022): American Energy Worker Opportunity Act of 2021 | Congress.gov | Library of Congress
The Rubio Bill and Its Key Provisions
Senator Rubio’s bill is entitled the ”Mind Your Own Business Act,” which would “amend the Securities Exchange Act of 1934 to require the Securities and Exchange Commission to require the contractual provision by large issuers of procedural privileges with respect to certain shareholder claims relating to board and management accountability for ‘woke’ social policy actions as a condition of listing on a national securities exchange, and for other purposes.” To view text, click on this link. Text – S.2829 – 117th Congress (2021-2022): Mind Your Own Business Act of 2021 | Congress.gov | Library of Congress. As of this date, the bill has no co-sponsors.
A covered company would include an issuer that has, as calculated in accordance with section 240.12b–2 of title 17, Code of Federal Regulations, a public float of more than $20 billion or annual revenues of more than $5 billion. A covered shareholder is defined as a shareholder that has continuously owned not less than $2,000 in market value of the issuer’s securities for at least three years; $15,000 in market value of the issuer’s securities for at least two years; or $25,000 in market value of the issuer’s securities for at least one year.
The bill also defines the term “non-pecuniary investment entity” as any entity that engages in activism with respect to issuers to which section 14 applies for which the primary basis of such activism is facially unrelated to the pecuniary interest of the issuers to which such activism is directed, including:
nominating candidates for election as directors of those issuers; or
making shareholder proposals pursuant to that section; and
any labor organization, as defined in section 2 of the National Labor Relations Act (29 U.S.C. 152), or pension fund affiliated with a labor organization.
Compliance Needed for Listing a Company
After enactment, the Rubio bill would direct the Securities and Exchange Commission to issue a rule, within one year, to direct the national securities exchanges and national securities associations to prohibit the listing of any security of any covered company that is not in compliance with the requirements of the law.
The bill also sets forth presumptions that would apply with respect to any covered claim, including with respect to any factual representation relating to whether a claim asserted is a covered claim. It establishes a presumption that the pecuniary interest of an issuer, which shall include the best interest of the issuer to the extent that such interest is substantially similar to the pecuniary interest of the issuer, does not include:
the morale of, or ability of the issuer to hire or retain, supervisory employees in general;
the diversity of the board of directors, management, or workforce in general with respect to any characteristic protected by section 703 of the Civil Rights Act of 1964 (42 2000e–2);
the public relations, image, value of marketing, or coverage by the news media of the issuer; or
any financial benefit or reduction in cost, including the cost of capital to the issuer, to the extent the pecuniary benefit of or to such benefit or reduction in cost is caused by the—
investment in the securities of the issuer by a non-pecuniary investment entity; or
inclusion of the securities of the issuer in indexes created by index providers that select those indexes on a primarily non-pecuniary basis or that include such securities in any index on a primarily non-pecuniary basis.
Shifting the Burden of Proof to Company Officers
In an Op-Ed, published in the Fox Business Network on September 23, 2021, Senator Rubio said, “The solution is simple: these large, publicly traded companies must provide a clear path forward for shareholders when they sue in response to these actions. My bill would put the burden of proof on the company to show that these actions were in shareholders’ best interests, and make corporate officers personally liable if they can’t prove it.” Sen. Marco Rubio: Here’s how we fight the woke elites running corporate America | Fox Business
The Brown Bill and the Clean Energy Economy
At the other end of the spectrum is S. 2966, the “American Energy Worker Opportunity Act,” introduced by Senator Sherrod Brown (D-OH). There are seven cosponsors thus far, including Senators Bob Casey (D-PA), Elizabeth Warren (D-MA), Tammy Duckworth (D-IL), Sheldon Whitehouse (D-RI), Tammy Baldwin (D-WI), Tina Smith (D-WA) and Michel Bennet (D-CO). The bill would provide “additional benefits to American workers whose employment has been impacted as a result of the transition to a clean energy economy.”
Helping Workers Transition
In a press release announcing the bill’s introduction, Senator Baldwin said:
For decades, America relied on fossil fuels to power our nation. As we transition to a clean energy future, we cannot leave workers in these industries behind. The American Energy Worker Opportunity Act would create a worker-centered plan to support workers, their families and communities that have relied on fossil-fuel production as our energy needs change. Our Build Back Better budget makes major investments in renewable energy and we must use this once-in-a generation opportunity to support our energy workforce through this transition. Brown, Casey, Whitehouse, Baldwin, Bennet, Duckworth, Smith, and Warren Introduce Bill to Empower Fossil-Fuel Workers to Train, Find Jobs in Changing Energy Industry (senate.gov)
The bill would create a worker transition program with wage supplements, health care benefits, education and training funds, and an additional education benefit for children of laid-off workers. It would include:
Eligible workers whose employment is terminated from a coal mine, coal-fired power plant, coal transport, or oil refinery, provided that the worker was employed continuously and full time for at least 12 months prior to layoff, with authority for the Secretary to add additional groups of fossil fuel-dependent workforces as employment impacts make it necessary.
Wage supplements or wage replacement in addition to assistance to maintain health benefits and contribute to retirement.
Worker education and training so workers will be eligible for grants for allowable education and training up to and including a four-year degree.
Education for the children of dislocated workers through direct educational grants for the children of dislocated workers deemed eligible by the program for allowable education and training up to and including a four-year degree.
Prioritized Employers
The bill would also prioritize employers who plan to hire eligible workers for the clean energy grants created under the Build Back Better plan. It is endorsed by the United Mine Workers of America International, United Steelworkers (USW) International, the Utility Workers Union of America, AFL-CIO, BlueGreen Alliance, National Wildlife Federation, LCV, NRDC, and the Union of Concerned Scientists. Brown, Casey, Whitehouse, Baldwin, Bennet, Duckworth, Smith, and Warren Introduce Bill to Empower Fossil-Fuel Workers to Train, Find Jobs in Changing Energy Industry (senate.gov)
A Sign of the Debate to Follow
The path of ESG consideration has been a winding and at times, an arduous one. It seems, for the first time in many years, that policy makers, corporate leaders and investors in the capital markets are navigating a path for a full exploration of ESG well beyond Pennsylvania Avenue and Capitol Hill.
I look forward to keeping Skytop’s reader up to date on these groundbreaking advances that have been developing for many years and have finally arrived on the Hill.