Although the SEC currently does not require public companies to disclose any environmental, social, and governance (“ESG”) information, including human rights issues and labor practices, historically, Congress mandated additional disclosures due to public policy considerations.
On July 11, 2019, a discussion draft of the Corporate Human Rights Risk Assessment, Prevention and Mitigation Act of 2019 (“CHRRA Act”) was introduced at a hearing of the U.S. House Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets. The hearing was entitled “Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social, and Governance Disclosures” (the “Hearing”), and the CHRRA Act was one of the 5 bills discussed. The bill is in early stages of development and is currently undergoing committee review, making it difficult to predict the likelihood of its passage. However, for reasons explained below, it is clear that even if the CHRRA Act does not get enacted into law, it will likely be followed with other bills imposing similar requirements on corporations.
The CHHRA Act would mandate that any issuer required to file an annual report under Section 13 of the Securities Exchange Act, on an annual basis, perform the following:
- identify any human rights risks and impacts that exist in its operations and value chain and that are known or should be known to the issuer;
- rank the identified human rights risks and impacts based on their severity, taking into account the gravity and expected extent of any potential harm to human rights, as well as any anticipated challenges in remedying the potential harm.
A human rights impact is defined as an adverse impact of the issuer’s action on the enjoyment of human rights, including the rights encompassed in the Universal Declaration of Human Rights, the International Covenant on Economic, Social, and Cultural Rights, and the 8 core conventions of the International Labor Organization (“ILO”). A human rights risk is defined as a potential adverse impact that an action of the issuer may have on the enjoyment of human rights as defined above.
In addition, the CHRRA Act would require issuers to disclose the following:
- the business structure of its supply chain, including subsidiaries and business relationships;
- the process through which the issuer educates executives, employees, contractors, sub-contractors and other actors in its value chain on its human rights policies;
- a description of the human rights risk analysis, including a list of the ranked human rights risks and impacts identified;
- a description of any actions taken to avoid or mitigate the identified human rights risks and impacts (and the reasoning why in certain cases, no action was taken), the issuer’s assessment of the efficacy of these actions, and the outcomes of these actions;
- the description of the process in place to avoid and mitigate any human rights impacts that the issuer caused or may cause (or an explanation why no such process is in place).
The human rights risk and impact analysis mandated by the CHRRA is hardly a new concept in the world of responsible sourcing and supply chain related compliance initiatives. The key international organizations’ guidance documents related to ESG matters, i.e., the United Nations (“UN”) Guiding Principles on Business and Human Rights, UN Global Compact, OECD Guidelines for Multinational Enterprises and ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy, have long encouraged companies to implement human rights due diligence processes to identify, analyze and remediate/prevent human rights risks and adverse human rights impacts. Although these international instruments are non-binding guidance tools that currently have no enforcement mechanisms, many multinational companies have already reflected some of the international organizations’ recommendations in their responsible sourcing programs and volunteered to disclose certain ESG information. Doing so helps companies boost their public image and meet the ever increasing corporate social responsibility expectations of the civil society and NGOs. In part as evidenced by the CHRRA, the international guiding norms listed above also provide insight into the development of future legal regimes, as these norms are likely to form the basis of the next wave of enforced legal standards.
In addition, there is growing evidence that ESG disclosures are material to investors. Interestingly, investors appear to consider ESG information not only in evaluating reputational risks, but in assessing the companies’ financial performance as well. A 2015 report by the Blackrock Institute stated the following:
ESG factors cannot be divorced from financial analysis. We view a strong ESG record as a mark of operational and management excellence. Companies that score high on ESG measures tend to quickly adapt to changing environmental and social trends, use resources efficiently, have engaged (and, therefore, productive) employees, and face lower risks of regulatory fines or reputational damage.
In October 2018, a coalition of large public pension funds, asset managers, law professors, and non-profit organizations filed a petition with the SEC for a rulemaking on ESG disclosures. The petition called on the SEC to develop a comprehensive ESG disclosure framework, and identified seven specific issues that the SEC could act on immediately: (1) climate risk; (2) annual ESG disclosures based on the Global Reporting Initiative (GRI) framework; (3) gender pay ratios; (4) human capital management; (5) human rights; (6) political spending; and (7) tax disclosure.
In January 2020, a task force sponsored by the International Business Council (IBC) of the World Economic Forum (WEF), has released a consultation draft proposing a set of common disclosures aligned with the UN Sustainable Development Goals. The task force was chaired by Brian Moynihan, Chairman and CEO of Bank of America and Chairman of the IBC, and included experts from each of the Big Four accounting firms—Deloitte, EY, KPMG and PwC. The draft framework titled “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation” proposes a set of disclosures organized into four pillars grounded in the UN Sustainable Development Goals: the Principles of Governance, Planet, People and Prosperity. The proposed “People” metrics and disclosures include: risk of incidents of child and forced labor, discrimination and harassment incidents, gender equality, and risks to the right of freedom of association and collective bargaining.
In addition, over 2,300 investment managers, asset managers, and service providers representing over $80 trillion in assets under management (AUM) are signatories to the UN-sponsored Principles for Responsible Investment (PRI), which commit these institutions to incorporating ESG factors into their investment decisions. Of these signatories, 458 are U.S. institutions, which collectively represent over $40 trillion AUM.
On January 18, 2019, the International Organization of Securities Commissions published a Statement on Disclosure of ESG Matters by Issuers, in which it encouraged issuers “to consider the materiality of ESG matters to their business” and “give insight into the governance and oversight of ESG-related material risks,” including by disclosing the methodology and findings of the corporate ESG risk assessment. The SEC was the only IOSCO member regulator not to sign on to the IOSCO’s statement. However, it is unlikely that the SEC will be able to resist the global push for ESG disclosures for long, and even if it does, the CHRRA Act demonstrates how Congress could unilaterally impose an ESG public disclosure requirement.