Just recently the United States House of Representative passed the Environmental, Social, and Governance (ESG) Disclosure Simplification Act of 2021, which is an effort put forth by the Biden Administration to require more transparent operations of businesses. More specifically, this Act requires business entities to provide certain details to the public regarding the economic and social risks faced by investors.
If the Act becomes law, the bill requires the Securities and Exchange Commission (SEC) to implement “ESG Metrics” that address corporate disclosures under the Securities Exchange Act. The bill requires several elements, which include but are not limited to:
- In consent solicitation and proxy statements, issuers must include a clear description of the issuer’s review, and a description of any process the issuer utilizes to assess the impact of ESG metrics on its long-term business strategy.
- Within audited financial statements, issuers must reveal ESG metrics so that a Sustainable Financial Advisory Committee may be formed. Issuers must also provide the SEC with recommendations about what metrics issuers should disclose. Additionally, the report must identify the challenges, as well as the opportunities for investors associated with sustainable finance.
Why ESG Reporting Matters
ESG reporting includes the disclosure of information connected to a company’s corporate, environmental, and social operations, and gives investors more detail which can assist their analysis on whether to avoid or engage with a company. When done correctly, ESG reporting provides a detailed image of the business’s impact in these three areas:
- Environment. This reporting analyzes how companies utilize energy and maintain the company’s environmental relations. For example, this would include disclosure of a company’s energy use, waste use, and how it treats animals.
- Governance. This reporting reviews a company’s controls, practices and procedures. For example, this detail might include information about an illegal practice in which the company was once involved; or, the processes in place to avoid illegal practices that are common among publicly traded companies.
- Social. This reporting considers the connection between a company’s workers and the work culture. For example, this category might include details about whether a company donates a percentage of its profits to the surrounding community.
The History Behind the Act
Long before this initiative went through the House of Representatives, the bill was introduced by a California legislator whose intent was that the proposed regulations would encourage both corporate and social responsibility in California, and throughout the country. The hope was that the regulation would result in companies being held to stricter standards involving ESG disclosure. The work on this bill comes during a time when many ESG lawmakers have begun working together to unify reporting standards, and provide more rigid and thorough environmental disclosures to the public due to various global environmental concerns.
Obtain the Assistance of an Experienced Corporate Law Attorney
This Act represents just one of several pieces of notable corporate law legislation that have been filed in the last year. If you need help navigating the ESG Disclosure Simplification Act or any other corporate law issue, you should not hesitate to speak with a knowledgeable lawyer. Contact Resnick Law P.C. today to schedule a free case evaluation.