US ESG Compliance Outlook — Impacts on International Corporations

Updated: Sep 26



The homecoming of US back to Paris Agreement has been a cheering mark for the global market to see the major economic player to join the climate change battle. Since the H.R.1187 - Corporate Governance Improvement and Investor Protection Act PASSED the house in June, ESG professions are excited to see the new legal development in the US market.



The timeline above highlights the key movements in the 2021, that the SEC (the US Securities and Exchange Commission) has since been actively pursuing for more ESG compliance requirements. This was unthinkable before 2021, where ESG Disclosures were voluntary under US Law in 2019.


Currently, there are many ESG-related legal compliance being introduced to the House, but still a long way ahead of them to finally becomes law. As the tracking path for law making in the United States requires to be Introduced —> Passes House —> Passed Senate —> To President —> Become Law; as most bill shall journey through. For example:


H.R.260 - Women and Climate Change Act of 2021

H.R.1780 - Paris Climate Agreement Disclosure Act

H.R.2570 - Climate Risk Disclosure Act of 2021

S.588 - Addressing Climate Financial Risk Act of 2021

H.R.4329 - ESG Disclosure Simplification Act of 2019


Impacts on International Corporations


The pool of information disclosures for investors have been proven to be inadequate with ESG (along with other non-financial information) being reported on a voluntary basis. And a lack of standardisation of ESG disclosures is troubling for investors to value assets accurately. ESG matters are material to investors, and the SEC is bound to improve such situations. Built upon these, the H.R. 1187 Act is much expected.


Since the passed (House) of H.R.1187 - Corporate Governance Improvement and Investor Protection Act to require the SEC to issue new rules on ESG disclosure. Some might doubt about whether the act could get a majority vote in the Senate, and the SEC has been prepared to act with a series of actions taken this year. Nonetheless, it is a prime time to be prepared for ESG disclosures and TCFD-alignments on climate-related risk management.


Global pressures on emerging ESG disclosures is cornering the U.S. to act faster. The Secretary of the Treasury, Janet L. Yellen endorsed the TCFD recommendations as the key foundational framework for climate reporting in April 2021 and announced the US Treasury’s efforts to work with finance ministries and central banks to build on the work of the TCFD in developing their approaches to sustainability disclosures.


According to the National Law Review, if signed into law, H. R. 1187 would, among other things, require the SEC, for the first time, to define, in regulations, “ESG metrics,” for the purpose of guiding required corporate disclosures under the Securities Exchange Act of 1934 and the Securities Act of 1933, as amended. Specifically, based upon the defined metrics, the Bill would require the following:



Looking forward, the bill also recommends the SEC to incorporate any internationally recognised ESG standards. The EU’s requirements in ESG and climate-related disclosures could be one of the references for the corporates to follow, especially for multi-stakeholders to comply both domestically and aboard.


What’s Next?


For International Corporations, the development of ESG compliance is no surprise these days, it is time to get serious preparation for ESG disclosures and create values beyond merely branding. Alignment with TCFD, building upon ESG compliance resilience, developing board practices to better oversee the development and releasing ESG disclosures are good starting points. Board members should study its company-specific ESG issues closely and consider in greater detail how ESG disclosures could impact the risks to the company as no one knows the business better than its internal stakeholders. As part of their fiduciary duties and oversight responsibilities, directors should not only identify a company’s material ESG risks, which could involve conducting a formal ESG assessment or engagement with key investors, customers and employees on ESG risks, but also the process by which such risks will be addressed and disclosed. Communicate the results with internal and external stakeholders takes work, proper disclosure and active engagement goes a long way. Start educating your business and managing ESG and climate-related risks to prepare for long-term ESG disclosures as the US and global scrutiny associated with these statements.



Reference:


David R. Woodcock, Amisha S. Kotte, and Jonathan D. Guynn, Jones Day, August 12, 2019, Managing Legal Risks from ESG Disclosures, Available at: https://corpgov.law.harvard.edu/2019/08/12/managing-legal-risks-from-esg-disclosures/#:~:text=ESG%20Disclosures%20are%20Voluntary%20Under%20U.S.%20Law%20At,determines%20such%20information%20would%20be%20material%20to%20investors.


The National Law Review, June 2021, House Passes Bill Requiring SEC to Define Mandatory ESG Metrics, Available at: https://www.natlawreview.com/article/house-passes-bill-requiring-sec-to-define-mandatory-esg-metrics





(written by Yitong Yuan)


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