Washington, DC has taken an outsized interest in environmental, social, and governance (ESG) issues. The past few years saw consistent headlines of companies publicly highlighting their ESG efforts and pushing legislation that would create guidelines around reporting. This culminated in the SEC’s ambitious Climate Disclosure Rule released last March, which resulted in over 10,000 comments. In backlash to this growing movement, Republicans have taken up ESG oversight as a political issue ripe for voter mobilization.
As a result, we’ve seen companies quiet down on ESG announcements, especially as those that were most vocal are being targeted by federal and state Republicans. That’s not to say that companies, Congress, and federal regulators are not moving forward with ESG policies. Here’s what to watch in DC to see where the pressure points are:
SEC’s Climate Disclosure Rule: This proposed rule, announced in 2022, would require public companies to disclose more detailed information about their climate-related risks and opportunities. The proposed rule would require companies to report their Scope 1, 2, and 3 greenhouse gas emissions, and disclose the potential financial impacts of climate-related risks such as physical risks, transitional risks, and litigation risks. The SEC also proposed that companies provide information on their climate-related governance, strategy, and risk management practices. The release of the final rule continues to get pushed back and is now scheduled for fall of this year. Expect the SEC rule to immediately be met with lawsuits from groups like the Chamber of Commerce and state attorneys general as soon as it’s finalized.
Republican Oversight: Republicans, especially in the House, have latched onto corporate and government ESG issues as a priority oversight agenda item. The House Financial Services Committee and Oversight Committee are leading these charges. Last month, the Republican Environmental, Social, and Governance (ESG) Working Group, housed with the House Financial Services Committee, released its interim report with a list of recommendations to roll back ESG efforts. We expect these recommendations will be a roadmap for how House Republicans plan to address ESG oversight. This is playing out with House Financial Services announcing a month of ESG-related hearings this month.
While no ESG-related legislation is likely to make it past the House, Republican-led committees are going after companies with requests for information. So far these oversight efforts have been focused on asset managers, like Blackrock. This issue is unlikely to go away, especially as political campaigns ramp up.
Contracting Guidance: While efforts to require federal contractors to disclose climate risk have largely flown under the radar, it could have a real impact on reporting requirements. The Federal Acquisition Regulatory Council issued a proposed rule that would require federal contractors with over $70 million in contracts to “leverage existing third-party standards and systems, including the Task Force on Climate- related Financial Disclosures (TCFD) Recommendations, the CDP (formerly Carbon Disclosure Project) reporting system, and Science Based Targets Initiative (SBTi) criteria, or equivalents, in the development of regulatory amendments to promote contractor attention regarding reduced carbon emissions and Federal sustainability.” While the final rule has not yet been released, it seems likely that the Administration will attempt to move forward with a multi-pronged approach to climate disclosure requirements.
Additionally, while unlikely to move forward, Rep. Espaillat and fellow Democrats submitted an amendment to the NDAA that would “allow funds to go towards the implementation of rules requiring contractors to disclose their greenhouse gas emissions levels, climate-related financial risk, greenhouse gas emissions reductions targets, and other climate metrics.” Expect federal contractors to serve as test cases for what the federal government is capable of requiring in the near future.
The two political parties are moving forward in drastically different directions, leaving many companies with ESG initiatives stuck in the middle. Seeing how ambitious the finalized regulations are, and whether the House policies gain bipartisan traction, will be good indicators of what’s to come.