Hearings, rulings and speeches, oh my (to paraphrase and with apologies to The Wizard of Oz). During the back half of last week, there were "anti-ESG" hearings in the House of Representatives on shareholder proposals and other matters, developments in the lawsuits challenging both California's and the Securities and Exchange Commission's climate disclosure rules and a speech by the SEC Chair that was critical of international sustainability reporting. These developments and ten related observations for legal, compliance and sustainability professionals are discussed in this post.
The House Financial Services Committee Holds an "Anti-ESG" Hearing
On September 10, the House Committee on Financial Services held a four-hour hearing titled Proxy Power and Proposal Abuse: Reforming Rule 14a-8 to Protect Shareholder Value. The stated purpose of the hearing was to examine Rule 14a-8 under the Exchange Act "to assess whether the shareholder proposal process, originally designed to provide all shareholders a voice in company oversight, has been co-opted by activist investors who prioritize narrow policy goals over maximizing shareholder value."
Rule 14a-8 addresses when a company must include a shareholder's proposal in its proxy statement. SEC staff guidance and policy on this topic have flip-flopped between Republican and Democratic administrations.
Consistent with prior House Financial Services Committee "anti-ESG" hearings, the September 10 hearing addressed more than just Rule 14a-8. Among other things, the Committee also discussed proxy advisory firm and institutional investment manager practices. The policy positions and rhetoric on both sides of the aisle were consistent with prior hearings, so no surprises there.
Perhaps the biggest change in tone from prior hearings was the focus by many of the Republican Committee members on foreign ownership of the two largest proxy advisors. The New York City mayoral race also came up numerous times in questions addressed to Committee witness Brad Lander, the Comptroller of the City of New York (and former mayoral candidate), who is a supporter of the Democratic nominee Zohran Mamdani, a self-described "democratic socialist."
The hearing was a prelude to the consideration of 15 bills that were noticed in connection with the hearing. The bills – most of which have not yet been introduced – are largely a continuation of House Republicans' agenda from the last Congress. In the 2023-2024 118th Congress, "anti-ESG" bills were introduced – and in some cases passed – in the House of Representatives addressing, among other things, shareholder proposals, public company disclosure requirements, responsibilities of pension plan fiduciaries and proxy advisory firm practices. See this Ropes & Gray post discussing those bills.
Among other things, the current crop of bills deal with the following:
Corporate Issuers
- Exclusion of shareholder proposals that have been substantially implemented or that are substantially similar to previous proposals.
- Flexibility to exclude shareholder proposals that deal with environmental, social or political matters.
Institutional Investment Managers
- Disclosure requirements relating to voting, including the percentage of votes aligned with proxy advisory firm recommendations and how those recommendations were considered, as well as additional customer disclosures by the largest managers.
- Voting by investment advisers of shares held by passively managed funds.
- Outsourced voting.
Proxy Advisory Firms
- Proxy advisor registration.
- Conflicts of interest.
- Restrictions on voting recommendations.
- Disclosures and reporting.
Observations
- Versions of most of the bills noticed for the hearing are likely to be introduced. However, there will undoubtedly be many changes to the bills that move forward.
- It is premature to speculate on whether any of the bills will cross the finish line. As a general matter, most bills – irrespective of the subject matter – do not become law. It was a certainty that none of the 2023-2024 bills would be enacted; they were intended as a marker for the future. With a Republican trifecta, passage of this year's bills is possible, albeit not necessarily likely.
- The current bills merit tracking, and for some market participants they may merit policy engagement.
The SEC Chair Speaks About ESG in Paris
Also on September 10, SEC Chair Paul Atkins delivered the keynote address at the inaugural OECD Roundtable on Global Financial Markets.
Although not the only focus of the speech, a fairly sizeable chunk of the Chair's prepared remarks were devoted to ESG and ESG-adjacent matters.
During his remarks, Chair Atkins expressed concern with both the EU's Corporate Sustainability Reporting Directive (CSRD) and Corporate Sustainability Due Diligence Directive (CSDDD), focusing on their promotion of a double materiality approach. The Chair indicated that regulation based on financial materiality is a pillar of maximizing the efficient flow of capital. US criticism of the CSRD and CSDDD has not been limited to Republicans or the current administration. The Biden Administration also was critical of these regulatory mandates.
The Chair indicated that he has significant concerns with the prescriptive nature of the CSRD and CSDDD and their burdens on US companies. He indicated that, while he is encouraged by the EU's recent commitment to ensure that these laws do not pose undue restrictions on transatlantic trade, as reflected in the US-EU trade framework agreement announcement in August (see this Ropes & Gray post), as well as EU efforts to streamline and simplify these laws, further work remains to refocus these regimes on the principle of financial materiality.
Chair Atkins also commented on the work of the IFRS Foundation. In 2021, the IFRS Foundation created the International Sustainability Standards Board, which operates alongside the International Accounting Standards Board (IASB).
The SEC allows foreign issuers to present financial statements prepared in accordance with the International Financial Reporting Standards issued by the IASB, without reconciliation to US generally accepted accounting principles. In this context, Chair Atkins indicated that, when the SEC eliminated the reconciliation requirement in 2007, it noted that the IASB's sustainability, governance and continued operation in a stand-alone manner as a standard setter were significant considerations, since those factors relate to the ability of the IASB to continue to develop high-quality globally accepted standards. Chair Atkins referenced that, at the time, the SEC specifically noted the ability of the IASC Foundation (the predecessor to the IFRS Foundation) to obtain stable funding for the IASB.
In his speech, Chair Atkins cautioned that the expansion of the IFRS Foundation's remit to funding both the IASB and ISSB cannot be allowed to divert the Foundation's focus from its long-standing core responsibility of funding the IASB. Furthermore, he indicated that the IASB must promote high-quality accounting standards that are focused solely on driving reliable financial reporting and are not used as a backdoor to achieve political or social agendas.
The Chair encouraged the IFRS Foundation to meet its goal for stable funding that prioritizes the IASB and its focus on standards for financial accounting, rather than "specious and speculative issues." He cautioned that, if the IASB does not receive full, stable funding, then one of the underlying premises for the SEC's elimination of the reconciliation requirement for foreign companies may no longer be valid, and the SEC may need to engage in a retrospective review of that decision.
Observations
- The US-EU joint trade framework agreement announcement indicates that the EU commits to undertake efforts to ensure that the CSRD and CSDDD do not pose undue restrictions on transatlantic trade. Although there already is significant momentum in the EU to scale back the CSRD and CSDDD (the Omnibus simplification process), it seems clear that Chair Atkins does not believe those changes go far enough. It bears watching to see what levers, if any, the SEC may seek to pull to influence the Omnibus simplification, or how some EU constituencies may seek to use the Chair's views to advance their own simplification goals.
- The IFRS S1 and S2 sustainability standards already are out and being adopted by many countries. However, perhaps the SEC will more actively seek to influence the scope and scale of future IFRS Foundation sustainability projects. Among other things, the IFRS Foundation's near-term sustainability workplan includes deciding the direction of projects relating to human capital and biodiversity, ecosystems and ecosystem services.
California's Climate Disclosure Laws Survive Another Challenge
On September 11, the US District Court for the Central District of California declined the request to issue an injunction pending appeal of California Health & Safety Code Section 38532 (SB 253) and Section 38533 (SB 261). These laws require disclosure of greenhouse gas emissions and climate risk, respectively.
The plaintiffs previously moved for a preliminary injunction seeking to enjoin both laws. That earlier motion was denied by the District Court in August and subsequently appealed to the Ninth Circuit Court of Appeals.
Also on September 11, the District Court issued an order staying all proceedings in the litigation, including discovery, pre-trial motions (other than currently pending motions) and trial, pending resolution of the plaintiffs' appeal of the Court's order denying the motion for a preliminary injunction. Case deadlines will be reset after resolution of the plaintiffs' appeal.
Observations
- It is now up to the Ninth Circuit to weigh in on the plaintiffs' appeal of the District Court order denying a preliminary injunction.
- Given the quickly approaching January 1, 2026 deadline for SB 261 reporting, subject companies no longer have the luxury to wait for a decision by the Ninth Circuit. Many companies have been preparing for compliance for months or are otherwise in good shape due to their current voluntary TCFD-aligned reporting. The remaining subject companies should start preparing for SB 261 reporting now.
- Companies likely have until the middle of 2026 to comply with SB 253. The California Air Resources Board's most recent staff concept contemplates a June 30, 2026 due date (see this Ropes & Gray post). However, many companies also are stepping up their efforts to be ready for SB 253 reporting.
The Eighth Circuit Puts It Back on the SEC to Decide the Next Steps for its Climate Disclosures Rules
On September 12, the Eighth Circuit issued an order staying the litigation concerning the SEC's March 2024 climate disclosure rules until the SEC reconsiders the challenged rules by notice-and-comment rulemaking or renews its defense of the rules. The Court indicated "[i]t is the agency's responsibility to determine whether its Final Rules will be rescinded, repealed, modified, or defended in litigation."
The Gensler-era climate disclosure rules were challenged in court shortly after their adoption. In March, after the change-over in administration, the SEC withdrew from defending the rules. Thereafter, several "blue states" intervened in the litigation, filing a motion to put the litigation on hold, while "red state" petitioners opposed that motion and wanted the court to decide the case.
In April, the Eighth Circuit entered an order asking the SEC to advise (1) whether it intended to review or reconsider the rules, (2) if it has determined to take no action, whether it will adhere to the rules if the petitions for review in the litigation are denied, and (3) if not, why it will not review or reconsider the rules.
The SEC's July response indicated that it did not intend to review or reconsider the rules and it also requested that the court continue considering the arguments of the parties and decide the case. In its response, the SEC indicated that, if the court upheld the rules in whole or in part, any reconsideration would be subject to SEC deliberation and a vote of its members, and that the SEC could not prejudge that action. The response also indicated that a decision from the court would inform the scope and need for that action, including providing insights as to the SEC's jurisdiction and authority.
Observations
- Irrespective of the SEC's next steps, the rules are effectively dead.
- Perhaps one of the "anti-ESG" bills introduced in Congress will expressly seek to rescind the current rules and limit the SEC's authority to in the future adopt climate disclosure rules.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
