Companies Brace Themselves for New ESG Regulations Under Biden
Businesses and trade groups are hoping to get clarity about—and influence—expected rules on environmental, social and governance issues
Companies are bracing for further regulation under the incoming Biden administration. One area that could affect a number of industries: potential new requirements related to diversity, carbon emissions and other types of sustainability metrics.
President-elect Joe Biden campaigned on requiring companies to provide more detail on environmental risks and greenhouse-gas emissions as part of a broader agenda to combat climate change. He laid out a multipronged plan to address longstanding racial inequality. And he has said he would hold corporate executives personally accountable, including jail time where merited, for violations such as corporate pollution that affect the health and safety of workers and surrounding communities.
Jon Hale, head of sustainability research at Morningstar, says any moves by the Biden administration would follow calls from many others seeking environmental, social and governance, or ESG, regulations.
“It’s not just investors demanding it; all other stakeholders—workers, customers, clients, the communities you operate in—they are expecting a higher standard from companies in the way that they operate,” he says. “In virtually every industry, there’s a unique set of ESG issues that are material to that industry.”
What must be said
Businesses and trade groups have been requesting meetings with Mr. Biden’s agency review teams and incoming staff to build relationships, get clarity on expected policies and make their own pitches for potential rules, according to Biden transition officials, executives and trade groups. So far, the Biden team has been listening and asking questions, the transition officials say.
One of the biggest areas to be addressed is disclosure. Under the Trump administration, the Securities and Exchange Commission stymied calls for tighter ESG regulations. Currently public companies must disclose ESG information only if they deem it material to investors’ perception of the business.
Even though a number of trade groups, including the U.S. Chamber of Commerce, have put out voluntary sustainability-disclosure guidelines in recent years, companies often don’t disclose ESG data in their financial statements. And the information in voluntary sustainability reports may be inconsistent or incomplete, since companies may report metrics only where they perform well.
Mr. Biden on Monday named Gary Gensler, a former financial regulator and Goldman Sachs Group Inc. executive, as his SEC pick. Although Mr. Gensler hasn’t outlined his priorities yet, Mr. Hale expects the SEC to require public companies to disclose climate-related financial risks and greenhouse-gas emissions in their operations and supply chains, since the commission will have a three-to-two Democratic majority.
SEC Commissioner Allison Herren Lee, a Democrat, wrote in August that the SEC should “get investors the standardized, consistent, reliable, and comparable ESG disclosures they need to protect their investments and allocate capital toward a sustainable economy.”
“Companies’ disclosure of the potential financial impact of climate change on strategy and operations is still limited,” says Mary Schapiro, a former SEC chairwoman. “Markets need high-quality, comparable information from companies to enable informed capital-allocation decisions in the face of climate-related risk.”
Other large changes may be in the works. Under the Trump administration, the regulatory environment took what some describe as anti-ESG stances in some rule-making decisions. For instance, the Labor Department completed a rule in October making it more difficult for funds focused on ESG factors to be included in retirement plans.
Morningstar’s Mr. Hale expects the Biden Labor Department to clarify or reverse that rule. Mr. Biden chose Boston Mayor Marty Walsh, who previously led a labor union and the region’s Building and Construction Trades Council, as his pick for secretary of labor—a role that will likely involve dealing with ESG issues around workplace safety amid the continuing pandemic and economic recovery.
Mr. Biden also named Brian Deese, who led sustainable investing at asset-management giant BlackRock, as his top economic adviser. Mr. Deese, who previously focused on climate change and energy issues as a senior adviser to President Obama, is likely to have influence on ESG-related issues.
Some companies and trade groups say that if the Biden team moves forward on new rules, they would prefer a so-called principles-based approach on ESG reporting, tailored to industries rather than uniform regulations. For instance, perhaps property and casualty insurers, which are dealing with more frequent storms, would have to consider environmental impact on their business closely, while smaller companies wouldn’t have to weigh ESG factors in the same way.
“Our belief is a principles-based approach, rather than a one-size-fits-all rules-based approach, is much better,” says Richard McMahon, senior vice president of energy supply and finance at the Edison Electric Institute, which represents investor-owned electric companies. “It allows the marketplace to innovate but also to provide information investors are looking for.”
Tom Quaadman, an executive vice president at the U.S. Chamber of Commerce, says the group has had several discussions with the Biden transition team on issues including the importance of principles-based ESG rules. The U.S. Chamber, which represents more than three million businesses of different sizes and industries, says it has focused on the difference between ESG risks in general and what needs to be disclosed in security filings.
A number of industries that are likely to be affected by any new ESG rules say they have made headway with ESG efforts of their own in recent years.
Several banks and financial-services firms, for instance, say they have met with Biden agency review teams on matters including potential ESG risks. At the same time, the financial industry has made progress in the U.S. for the past several years in developing financial products that factor in sustainability considerations, reducing their carbon footprints and understanding ESG risks that could affect their business, says Tim Adams, CEO of the Institute of International Finance, a trade group representing more than 450 financial firms across the world.
The American Petroleum Institute’s manager of climate and ESG policy, Aaron Padilla, says that it is ready to engage with the Biden administration on ESG issues, and that it has already made progress on those issues, including sustainability-reporting guidance, workforce-diversity efforts and emission-reduction initiatives. He says any future regulatory actions should preserve access to capital for all sectors and reflect the oil-and-gas industry’s ability to exceed increasing expectations from its investors.
“There’s a right way and a wrong way to do this, and it starts with acknowledging that natural gas and oil are part of the climate solution and will remain essential within the world’s energy mix for decades to come,” he says.
Auto companies are also expected to be on the hook related to emissions in products and the shift to electric vehicles.
Though many companies have had a head start on sustainability work, ESG risks are still front and center, given the expectation of new rules from the Biden administration.
Brad Karp, chairman of the law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP, says that during a recent virtual meeting with about 1,000 corporate leaders who are clients, the conversation focused on Mr. Biden’s expected push “to make ESG real, concrete and hold corporations accountable.”
“It’s a virtual certainty that the SEC will follow the European lead and impose enhanced ESG disclosure requirements on public companies,” he says.