[House Hearing, 116 Congress]
[From the U.S. Government Publishing Office]
BUILDING A SUSTAINABLE AND COMPETITIVE
ECONOMY: AN EXAMINATION OF PROPOSALS
TO IMPROVE ENVIRONMENTAL, SOCIAL,
AND GOVERNANCE DISCLOSURES
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON INVESTOR PROTECTION,
ENTREPRENEURSHIP, AND CAPITAL MARKETS
OF THE
COMMITTEE ON FINANCIAL SERVICES
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTEENTH CONGRESS
FIRST SESSION
__________
JULY 10, 2019
__________
Printed for the use of the Committee on Financial Services
Serial No. 116-39
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
__________
U.S. GOVERNMENT PUBLISHING OFFICE
39-739 PDF WASHINGTON : 2020
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California PETER T. KING, New York
GREGORY W. MEEKS, New York FRANK D. LUCAS, Oklahoma
WM. LACY CLAY, Missouri BILL POSEY, Florida
DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri
AL GREEN, Texas BILL HUIZENGA, Michigan
EMANUEL CLEAVER, Missouri SEAN P. DUFFY, Wisconsin
ED PERLMUTTER, Colorado STEVE STIVERS, Ohio
JIM A. HIMES, Connecticut ANN WAGNER, Missouri
BILL FOSTER, Illinois ANDY BARR, Kentucky
JOYCE BEATTY, Ohio SCOTT TIPTON, Colorado
DENNY HECK, Washington ROGER WILLIAMS, Texas
JUAN VARGAS, California FRENCH HILL, Arkansas
JOSH GOTTHEIMER, New Jersey TOM EMMER, Minnesota
VICENTE GONZALEZ, Texas LEE M. ZELDIN, New York
AL LAWSON, Florida BARRY LOUDERMILK, Georgia
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
RASHIDA TLAIB, Michigan WARREN DAVIDSON, Ohio
KATIE PORTER, California TED BUDD, North Carolina
CINDY AXNE, Iowa DAVID KUSTOFF, Tennessee
SEAN CASTEN, Illinois TREY HOLLINGSWORTH, Indiana
AYANNA PRESSLEY, Massachusetts ANTHONY GONZALEZ, Ohio
BEN McADAMS, Utah JOHN ROSE, Tennessee
ALEXANDRIA OCASIO-CORTEZ, New York BRYAN STEIL, Wisconsin
JENNIFER WEXTON, Virginia LANCE GOODEN, Texas
STEPHEN F. LYNCH, Massachusetts DENVER RIGGLEMAN, Virginia
TULSI GABBARD, Hawaii
ALMA ADAMS, North Carolina
MADELEINE DEAN, Pennsylvania
JESUS ``CHUY'' GARCIA, Illinois
SYLVIA GARCIA, Texas
DEAN PHILLIPS, Minnesota
Charla Ouertatani, Staff Director
Subcommittee on Investor Protection, Entrepreneurship,
and Capital Markets
CAROLYN B. MALONEY, New York, Chairwoman
BRAD SHERMAN, California BILL HUIZENGA, Michigan, Ranking
DAVID SCOTT, Georgia Member
JIM A. HIMES, Connecticut PETER T. KING, New York
BILL FOSTER, Illinois SEAN P. DUFFY, Wisconsin
GREGORY W. MEEKS, New York STEVE STIVERS, Ohio
JUAN VARGAS, California ANN WAGNER, Missouri
JOSH GOTTHEIMER. New Jersey FRENCH HILL, Arkansas
VICENTE GONZALEZ, Texas TOM EMMER, Minnesota
MICHAEL SAN NICOLAS, Guam ALEXANDER X. MOONEY, West Virginia
KATIE PORTER, California WARREN DAVIDSON, Ohio
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana, Vice
SEAN CASTEN, Illinois Ranking Member
ALEXANDRIA OCASIO-CORTEZ, New York
C O N T E N T S
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Page
Hearing held on:
July 10, 2019................................................ 1
Appendix:
July 10, 2019................................................ 39
WITNESSES
Wednesday, July 10, 2019
Andrus, James, Investment Manager-Financial Markets, Sustainable
Investment, CalPERS Investment Office.......................... 7
Atkins, Hon. Paul S., Chief Executive Officer, Patomak Global
Partners....................................................... 8
Lubber, Mindy S., President and Chief Executive Officer, Ceres... 11
Mohin, Tim, Chief Executive, Global Reporting Initiative (GRI)... 5
Wright, Degas A., CFA, Chief Executive Officer, Decatur Capital
Management, Inc................................................ 10
APPENDIX
Prepared statements:
Andrus, James................................................ 53
Atkins, Hon. Paul S.......................................... 40
Lubber, Mindy S.............................................. 61
Mohin, Tim................................................... 77
Wright, Degas A.............................................. 84
Additional Material Submitted for the Record
Maloney, Hon. Carolyn:
Written statement of the Council of Institutional Investors.. 90
Written statement of the FACT Coalition...................... 97
Written statement of the International Corporate
Accountability Roundtable (ICAR)........................... 99
Written statement of Morningstar............................. 161
Written statement of Public Citizen.......................... 166
Written statement of the Sustainability Accounting Standards
Board (SASB)............................................... 170
Written statement of the Teachers Insurance and Annuity
Association of America (TIAA).............................. 174
Written statement of the Forum for Sustainable and
Responsible Investment (US SIF)............................ 175
Written statement of various undersigned organizations....... 180
Petition from Cynthia Williams, Osler Chair in Business Law.. 182
Huizenga, Hon. Bill:
CalPERS press release........................................ 202
Institute for Pension Fund Integrity report entitled, ``ESG
Investing for Public Pensions: Does It Add Financial
Value?''................................................... 205
MarketWatch editorial........................................ 215
Pacific Research Institute report entitled, ``Environmental,
Social, and Governance (ESG) Investing: An Evaluation of
the Evidence,'' dated May 2019............................. 217
Editorial from The Wall Street Journal....................... 244
Lubber, Mindy S.:
Written responses to questions for the record from Chairwoman
Maloney.................................................... 249
Mohin, Tim:
Written responses to questions for the record from Chairwoman
Maloney.................................................... 259
Wright, Degas A.:
Written responses to questions for the record from Chairwoman
Maloney.................................................... 265
Written responses to questions for the record from
Representative Himes....................................... 268
BUILDING A SUSTAINABLE AND
COMPETITIVE ECONOMY: AN
EXAMINATION OF PROPOSALS TO
IMPROVE ENVIRONMENTAL, SOCIAL,
AND GOVERNANCE DISCLOSURES
----------
Wednesday, July 10, 2019
U.S. House of Representatives,
Subcommittee on Investor Protection,
Entrepreneurship, and Capital Markets,
Committee on Financial Services,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:06 p.m., in
room 2128, Rayburn House Office Building, Hon. Carolyn Maloney
[chairwoman of the subcommittee] presiding.
Members present: Representatives Maloney, Scott, Foster,
Vargas, Gottheimer, Gonzalez of Texas, Porter, Axne, Casten;
Huizenga, Duffy, Stivers, Wagner, Hill, Emmer, Mooney, and
Davidson.
E officio present: Representatives Waters and McHenry.
Chairwoman Maloney. The Financial Services Committee will
come to order.
Without objection, the Chair is authorized to declare a
recess of the subcommittee at any time. Also, without
objection, members of the full Financial Services Committee who
are not members of the subcommittee are authorized to
participate in today's hearing.
Today's hearing is entitled, ``Building a Sustainable and
Competitive Economy: An Examination of Proposals to Improve
Environmental, Social, and Governance Disclosures.''
I now recognize myself for 3 minutes for an opening
statement..
This hearing will address one of the most important topics
in the markets right now: environmental, social, and
governance, or ESG, disclosures. This includes environmental
issues such as climate change, social issues such as human
rights, and governance issues such as political spending by
public companies.
Investors overwhelmingly want companies to disclose ESG
information, especially because there is now considerable
evidence that companies that perform better on ESG metrics also
perform better financially. In fact, over 2,300 investment
managers around the world who collectively invest over $80
trillion have formally committed to incorporating ESG factors
into their investment decisions by signing on to the U.N.-
sponsored Principles for Responsible Investing.
As a result of this investor demand, many companies already
disclose at least some ESG information. This is a positive
development, but I firmly believe that more must be done.
The ESG disclosures that companies currently make often
aren't as detailed as they should be and are difficult to
compare across companies because they are not often
standardized. I believe the best way to improve the quality and
consistencies of these disclosures is for the SEC to establish
standards for ESG disclosure that would apply to all public
companies in the United States.
Other Federal agencies have already organized--recognized
the importance of improved ESG disclosures. Just today,
Commissioner Ros Behnam at the CFTC announced the creation of a
climate-related market risk advisory committee that will
examine best practices for disclosing climate-related risks in
the derivatives market. And I applaud Commissioner Behnam for
taking action on this important issue.
But now it is time for the SEC to act also. Several of the
bills we are considering today would require the SEC to
establish standards for ESG disclosures. For instance, Mr.
Vargas has a bill that would require public companies to
disclose certain ESG metrics, which the SEC would be required
to establish. To help the SEC in this task, the bill would also
create a sustainable finance advisory committee which would
advise the SEC on which ESG metrics companies should have to
disclose.
In addition, the Shareholder Protection Act would require
public companies to disclose their political spending, which
has been a longstanding priority for Democrats on this
committee.
Before I close, I want to say one thing about the idea that
the SEC shouldn't mandate ESG disclosures, because companies
should only be required to disclose information that is
material.
First of all, that has never been true. The SEC mandates
disclosure of lots of specific information that is not tied to
the concept of materiality. And second, this relies largely on
the SEC staff to know what information is material to each
individual company and then to bring enforcement actions
against those companies. But the SEC staff is in no position to
second-guess companies about what is material to their specific
businesses. And the SEC staff has to rely on the information
the companies provide them in the first place. So materiality
alone is not sufficient. We have to do more.
I look forward to hearing from our witnesses on all of the
bills today.
And with that, the Chair now recognizes the ranking member
of the subcommittee, Mr. Huizenga, for 5 minutes for an opening
statement.
Mr. Huizenga. Thank you, Madam Chairwoman.
Today's hearing entitled, ``Building a Sustainable and
Competitive Economy,'' will examine these legislative proposals
regarding environmental, social, and corporate governance
provisions.
What exactly are these ESGs? And many claim that ESG
investing is an investment strategy that focuses on
incorporating ESG criterion to investment decisions in addition
to the more commonly accepted focus on investments expected
financial returns. However, ESG data and criteria span a range
of issues, including among others, attempts to measure a
company's carbon emissions, labor policies, human right
policies, whether the company engages in, ``harmful
activities'' such as gun manufacturing or sales or cigarette
manufacturers, the structures of corporate governance, for
instance, whether the CEO and the chairman of the board of
directors are the same person or whether a company issues dual
class shares.
Before a December meeting of the SEC Investor Advisory
Committee, SEC Commissioner Hester Peirce opined that the
acronym ESG actually stands for enabling shareholder graft.
Additionally, in a 2019 speech in June, she likened the ESG
disclosures to that of scarlet letters being pinned on
corporations without worrying about facts or circumstances. She
went on to say that for some, ``naming and shaming corporate
villains is fun, trendy, and profitable.''
It is clear that demands for ESG information have
increased, and many companies have responded by voluntarily
increasing the amount of ESG information they disclose. But
let's be clear, companies should focus on providing meaningful
material disclosure that a reasonable investor needs to make
informed decisions with.
I can assure you that if they are seeing what has been
claimed that companies that do that do ``better'', then they
will do it. Best practices will bubble up to the top and they
will be adapted. And, frankly, they should not be forced to be
done under the penalty of law.
After all, companies and boards that are best equipped to
determine what ESG factors they believe are material to their
individual business in order to create an optimized value for
their shareholders and potential investors. What should not
happen is that the government mandate these disclosures.
Mandatory ESG disclosures only name and shame companies, as
well as waste precious company resources that could otherwise
be used to create jobs, increase wages, grow the company,
expand capacity, maximize shareholder value.
And any politically motivated action disguised as a
disclosure mandate will just add yet another hurdle to an even
greater cost of going public, which will only discourage more
companies for doing so. And as we have talked about in this
committee a number of times, we have seen a plunge in these
initial public offerings, these IPOs. And instead, we should be
looking at ways to lower the cost and reduce barriers on those
seeking to become the next Amazon, Microsoft, Starbucks,
Google, and the list goes on and on.
Over the last decades, activist, shareholders, and
corporate gadflies have, frankly, hijacked the SEC and operate
well outside its mandate and push nonmaterial social and
political policies. The SEC should be focused on its current
mandates of protecting investors; maintaining fair, orderly,
and efficient markets; and to facilitate capital formation.
I continue to emphasize that mandating these disclosures is
only doing more harm than good. As the U.S. IPO market steadily
decreases at an alarming rate, the regulatory compliance costs
for businesses continues to grow exponentially. It should be
shocking to everyone that countries like China are producing
over one-third of all of the IPOs that the world is seeing
these days. ESGs do not help produce or launch more IPOs. And
what is being proposed here today stands to reduce an already
low number even further.
We as lawmakers should be working to create an atmosphere
that helps promote more capital formation, strengthen job
creation, and increase economic growth, not harm it.
With that, my time has expired, and I yield back.
Chairwoman Maloney. Thank you so much.
The Chair now recognizes the gentleman from California, Mr.
Vargas, for 2 minutes.
Mr. Vargas. Thank you very much, Madam Chairwoman. And
thank you for yielding and for including my draft legislation,
the ESG Disclosure Simplification Act, in this hearing.
I believe this hearing is timely. Environmental, social,
and governance matters are growing concern and interest to the
investment community. Investors increasingly view ESG
disclosures as crucial tools and material information for
evaluating a company's financial performance. Research has
shown that companies that account for ESG factors tend to
perform better with more stable returns.
This is not about name and shame; this is about protecting
investors and our economy and our environment. The use of ESG
information by investors wouldn't have been possible without
the pioneering leadership of organizations like the Global
Reporting Initiative, GRI, which is represented here today. And
I see Mr. Mohin. Thank you very much for being here.
As many of you are aware, last fall, a coalition of asset
managers, nonprofit organizations, public pensions funds, and
law professors filed a petition with the SEC for a rulemaking
on ESG disclosure. That petition was the impetus for my draft
legislation, which I hope will serve as a starting point for a
larger conversation on ESG disclosures.
I look forward to hearing from the witnesses.
And I have to say also, it is becoming more and more clear
to my friends on the other side that climate change is real. It
is not a Chinese hoax. It is something that is impacting all of
us, all of our communities, here in Washington, D.C., certainly
in California and throughout the world. And that is why I think
it is important for this information to be readily available
and to be standardized.
So, again, I thank those who have pioneered in this field.
And again, Madam Chairwoman, I thank you for the
opportunity of presenting, and I yield back the balance of my
time.
Chairwoman Maloney. Thank you very much.
The Chair now recognizes the ranking member of the full
Financial Services Committee, Mr. McHenry, for 1 minute.
Mr. McHenry. I thank the Chair, and I also thank the
ranking member.
Congress needs to be helping everyday investors. That is
our clear motivation. And the best way to help them is by
making our public markets healthier and more competitive.
Stronger U.S. capital markets will encourage growth, which will
lead to more investment opportunities and choices for everyday
investors to grow their savings. These are good things.
Unfortunately, compared to 20 years ago, families have roughly
half the number of publicly listed companies to choose from
when considering investment opportunities for their savings.
That is a problem.
I am concerned that this hearing yet again misses the mark
by ignoring these really important trends. Instead, at this
hearing, we are going to be discussing costly proposals that
increase barriers to capital formation, discourage companies
from joining or remaining in public markets. And these things
hurt everyday mainstream investors and their investment
opportunities. So it is time we consider and focus on serious
policies to reduce barriers for companies and investors and
make our markets much more competitive and, again, the envy of
the world.
Chairwoman Maloney. Thank you.
Today, we welcome testimony from a distinguished panel of
witnesses. First, we have Tim Mohin, who is the chief executive
for the Global Reporting Initiative. Second, we have James
Andrus, who is an investment manager focusing on sustainable
investments for the California Public Employees' Retirement
System, or CalPERS. Next, we have Paul Atkins, who is the CE0
of Patomak Global Partners and who was formally a Commissioner
at the SEC. Next, we have Degas Wright, who is the CEO of
Decatur Capital Management in Decatur, Georgia. And last but
not least, we have Mindy Lubber, who is president and CEO of
Ceres, a sustainability nonprofit in Boston, Massachusetts.
Witnesses are reminded that your oral testimony will be
limited to 5 minutes. And without objection, your written
statements will be made a part of the record.
Mr. Mohin, you are now recognized for 5 minutes to give an
oral presentation of your testimony.
STATEMENT OF TIM MOHIN, CHIEF EXECUTIVE, GLOBAL REPORTING
INITIATIVE (GRI)
Mr. Mohin. Thank you, Madam Chairwoman. And I thank the
subcommittee for inviting me to testify at today's hearing.
My name is Tim Mohin. I am chief executive of the Global
Reporting Initiative, GRI. We are the largest standard setter
for environmental, social, and governance, the so-called ESG
information. Prior to GRI, I have held senior roles at three
different major American companies. I also have experience in
both the Executive and Legislative Branches of the U.S. Federal
Government. So I speak to you today, not just as the head of
the world's largest ESG standard setter, but as an individual
who understands the complexities and pressures faced by
American companies and also the importance of strong Federal
policy.
Today, I will focus my remarks on the ESG Disclosure and
Simplification Act. GRI welcomes this legislation. It will
strengthen ESG reporting by companies and it will protect
investors. And specifically, the bill will level the playing
field for both companies and investors.
It relies on international standards. And by doing so, it
will not increase reporting burden, because the vast majority
of companies are already reporting and they are already
reporting to the GRI standards. And it will protect investors
by creating essential clear and comparable data.
Let me just share some brief background on GRI to explain
why we support this legislation. We were established in the
United States by Ceres, who is represented on the panel today,
and we became an independent organization in 1997, over 20
years ago. Our success over 20 years is really based on the old
axiom that you manage what you measure.
All organizations, including the ones I previously worked
for, run on data. And by identifying, measuring, and most
importantly, reporting ESG topics, you tend to improve
performance on these topics. This is not just some theory. I
have seen this firsthand in the companies that I have worked
for. Two of my former employees, Intel and AMD, have actually
been reporting ESG information for over 20 years.
For these leaders, it is not just about accountability with
investors outside the company. This information is a very
important decision tool inside the company.
We created the GRI standards to provide the tools needed
for companies to collect and report ESG information. But over
the years, we have continuously improved these tools. Perhaps
the most significant change we have made in the last few years
was to completely revamp our governance model, to become the
world's only independent, international multistakeholder
standard setter for ESG information. And we did that by
modeling our governance model on the same governance that the
financial standard setters have. And largely as a result of
this process, we are now the most adopted ESG standard by both
companies and policymakers.
Today, more than 90 percent of the largest 250 companies on
the planet are reporting ESG information, and 75 percent of
those are using the GRI standards. Here in the U.S., the number
is about 600 companies using the GRI standards and about 80
percent of the Dow Jones Industrial Average.
Globally, the market for this information is exploding. We
had some information last year that the assets being managed
with some form of ESG information are now over 30 trillion U.S.
dollars, and that is larger than the GDP of the United States.
And it has grown by 34 percent in the last 2 years.
It is growing because investors know that so-called
nonfinancial information can have significant financial impacts
over the longer term. And policymakers around the world have
not missed this trend. They are following this trend. We are
tracking right now 139 policies in 61 countries that
specifically reference or require the GRI standards. Sixty of
those policies in 45 countries are capital market regulations.
So just like financial disclosure, it is essential that
this committee and policymakers around the world focus on a
single global standard, because we need a common global
language if we are going to unlock free trade and capital flows
that increasingly depend on this information.
So in conclusion, I want to applaud the committee for the
ESG Disclosure and Simplification Act. It will protect
investors, it will help unlock free trade, and ultimately, it
will help align capital to sustainable business practices.
Thank you for this opportunity to testify today.
[The prepared statement of Mr. Mohin can be found on page
77 of the appendix.]
Chairwoman Maloney. Thank you.
Mr. Andrus, you are recognized now for 5 minutes for your
testimony.
STATEMENT OF JAMES ANDRUS, INVESTMENT MANAGER-FINANCIAL
MARKETS, SUSTAINABLE INVESTMENT, CALPERS INVESTMENT OFFICE
Mr. Andrus. Chairwoman Maloney, Ranking Member Huizenga,
and members of the subcommittee, on behalf of the California
Public Employees' Retirement System, a reasonable investor, I
thank you for the opportunity to testify.
My name is James Andrus, and I am an investment manager for
sustainable investments for CalPERS. I applaud and support the
subcommittee's focus on building a sustainable and competitive
economy.
CalPERS benefits from a system that ensures accountable and
transparent corporate governance with the objective of
achieving the best returns in value over the long term. I will
provide an overview of CalPERS and review various legislative
proposals under consideration.
CalPERS is the largest public pension fund in the United
States, with approximately $370 billion in global assets. The
CalPERS Board of Administration developed governance and
sustainability principles. These principles guide the internal
and external managers of CalPERS when making investment
decisions and provide the framework by which we execute our
shareowner proxy voting responsibilities and exchange portfolio
companies to achieve long-term returns.
Our Board of Administration also adopted a 5-year ESG
strategic plan in 2016. My testimony is primarily based on the
principles in ESG's strategic plan.
CalPERS strongly believes that all investors, whether large
institutions or private individuals, should have access to
disclosures that allow them to make informed investment
decisions. We believe that enhanced data and transparency
requirements will promote more efficient and sustainable
financial markets over the long term.
There are many substantive areas about which long-term
investors could use more information. For example, as a member
of the Human Capital Management Coalition, we joined others to
file a petition with the SEC focused on human capital
disclosures.
I am now pleased to discuss, in broad terms, CalPERS' views
on the bills before us today. I am proud to say that CalPERS
supports the direction of each one.
First, our principles call for robust board oversight and
disclosure of corporate charitable and political activity to
ensure alignment with business strategy and to protect assets
on behalf of shareowners. We have consistently been in favor of
such enhanced disclosure, and therefore, support the
Shareholders Protection Act. Notably, in the majority opinion
of the court in Citizens United, former Justice Anthony Kennedy
wrote that with the advent of the internet, prompt disclosure
of expenditures can provide shareholders and citizens with the
information needed to hold corporations and elected officials
accountable for their positions and supporters. The First
Amendment protects political speech. And disclosure permits
citizens and shareholders to react to the speech of corporate
entities in a proper way.
CalPERS agrees with Justice Kennedy on the material value
of disclosure in this area, and urge Congress, the FEC--or the
SEC to implement these important measures.
Next, climate risk disclosure. Detailed corporate
disclosures regarding the impact of climate change on
corporations' long-term performance are essential.
Comprehensive disclosure of risk factors related to climate
change should clearly reveal how companies identify and manage
such risks to generate sustainable economic returns. The
Climate Risk Disclosure Act does this.
Next, ESG disclosure simplification. Consistent with
CalPERS' strategic plan, the ESG Disclosure Simplification Act
would require companies to make new and more robust ESG
disclosures. This legislation would establish an inclusive
process for advancing important proposals aligned with
integrated reporting. Accordingly, CalPERS supports the
approach.
Fourth, corporate human rights. Our principles are clear
with regard to human rights. Corporations should adopt maximum
progressive practices toward the elimination of human rights
violations in all countries or environments in which the
company operates. In line with our principles, we advocate for
policies, procedures, training, and internal reporting
structures to ensure commitment to universal human rights. For
those reasons, CalPERS supports the human rights proposal.
Finally, country by country tax payment. Our principles
focus significantly on emerging systemic risks and on fostering
action that mitigates those risks. Current tax disclosures in
the U.S. do not provide investors with sufficient tax-related
information to adequately assess companies' values and risks.
The legislation before the subcommittee would require the
disclosure of overly aggressive international tax planning
arrangements, thereby reducing systemic risk.
We look forward to working with the subcommittee and
committee to advance these and, hopefully, more proposals.
Thank you for inviting me to participate in this hearing. I
look forward to your questions.
[The prepared statement of Mr. Andrus can be found on page
53 of the appendix.]
Chairwoman Maloney. Thank you very much.
Mr. Atkins, you are now recognized for 5 minutes for your
testimony.
STATEMENT OF THE HONORABLE PAUL S. ATKINS, CHIEF EXECUTIVE
OFFICER, PATOMAK GLOBAL PARTNERS
Mr. Atkins. Thank you, Chairwoman Maloney, Ranking Member
Huizenga, and members of the subcommittee. Thank you for your
invitation to discuss ESG disclosures and the SEC's disclosure
regime more generally.
My written testimony provides additional background on SEC
disclosure requirements and the legislation under consideration
today. I would like to spend my allotted time focusing on the
significant costs that disclosure mandates impose on businesses
large and small, investors, workers, and the American economy.
Over the years, in administering the disclosure regime
under the Securities Act and the Securities Exchange Act, the
SEC has generally focused on the disclosure of information it
believes to be important to the reasonable investor. The SEC
explained in 1975 that the requirement that information be
material is, ``necessary in order to ensure meaningful and
useful disclosure documents of benefit to most investors
without unreasonable cost to registrants and their
shareholders.''
While many seem to believe that disclosure is costless and
harmless, the costs are real. Most significant is the direct
costs of the disclosure, which were just three provisions of
the Dodd-Frank Act which estimated to total more than $2
billion annually.
Disclosure overload is neither an imagined nor new concept.
It is being used as a blunt force instrument by special
interest groups and policymakers alike to attempt to impose
normative outcomes; this being decried by members of SEC and
the Supreme Court for decades. Yet mandatory disclosures have
only grown, and there is a growing body of evidence that
indicates these ever expanding and ever complex disclosure
mandates hinder the goal of a sustainable and competitive
economy.
Data shows that expanding in complex mandates dissuade
companies from going public. During the past 20 years, IPOs
have been on the decline in the United States. In 1996, there
were more than 600 IPOs in 1 year. Almost a decade later, there
were fewer than 300 over a 2-year period. This downturn doesn't
just affect investors; it affects the broader American economy.
It is estimated that as much as 92 percent of job growth
occurs after an IPO. A study by the Kauffman Foundation looked
at companies that went public between 1996 and 2010, and found
that they employed more than 2 million people in 2010 than they
did before they went public.
The Treasury Department under President Obama recognized
this problem, and in 2011, created the private sector IPO Task
Force. The task force surveyed CEOs and found that almost 75
percent cited public disclosures as their biggest concern about
going public. Of the public companies' CEOs surveyed, 92
percent named the burden of public reporting as one of the most
significant IPO challenges.
An interim report by President Obama's Council on Jobs and
Competitiveness noted that regulations have resulted in fewer
high-growth entrepreneurial companies going public. In 2012,
lead by members of this committee, Congress enacted the JOBS
Act, which recognized that the public company disclosure regime
inhibits companies from going public. The law established the
regime to lessen those requirements on new emerging growth
companies.
Beyond company decisions, many ordinary investors are
losing out on this valuable investment opportunity, especially
compared to high net worth individuals who can more readily
participate in private offerings. The venture capital firm
Andreessen Horowitz compared the return multiples for tech
firms of the 1980s with newer tech firms in the 2000s. In 1986,
Microsoft returned to just over 200 times in private value
creation, while its public value creation was roughly 600
times. Oracle had similar return ratios in the same year. Now
contrast this with Facebook in 2012 and Twitter in 2013, nearly
all of whose returns were private.
Since the passage of the JOBS Act, the number of IPOs per
year has been almost 190, compared to an average 100 per year
in the 5 years prior to the enactment. While this is a
significant improvement, there still is more that can be done.
Unfortunately, while all of the bills under consideration today
are undoubtedly well-intentioned, the reality is that many of
them set requirements already provided elsewhere in law, at
best, or would mostly engender the type of unintended
consequences that prior efforts have visited upon public
companies, their investors, their employees, and U.S. economic
growth.
I will be happy to answer questions that you may have.
Thank you very much.
[The prepared statement of Mr. Atkins can be found on page
40 of the appendix.]
Chairwoman Maloney. Thank you very much.
Mr. Wright, you are now recognized for 5 minutes for your
testimony.
STATEMENT OF DEGAS A. WRIGHT, CFA, CHIEF EXECUTIVE OFFICER,
DECATUR CAPITAL MANAGEMENT, INC.
Mr. Wright. Chairwoman Maloney, Ranking Member Huizenga,
and distinguished members of the subcommittee, I appreciate the
invitation to appear before you this afternoon to talk about
the proposed legislation that will provide greater disclosure
of material information for investors.
My name is Degas Wright, and I am the founding principal of
Decatur Capital Management, an institutional investment
management firm focused on global and sustainable equity
strategies, serving public pension plans, corporations, and
individuals. My comments provided today should not be
considered a recommendation to buy or sell any of the
securities mentioned. I am an investment manager who conducts
company research to manage equity portfolios on behalf of our
clients. Therefore, my interest in environmental social
governance issues is based on the discovery that these items
may provide material information.
First, allow me to define material information or
materiality. It is the information that a reasonable
shareholder would consider is a point in deciding how to vote a
proxy, purchase or sell a security. The legislation requesting
disclosure of political contributions addresses a relative new
material factor in the selection of securities. A recent CEO
survey reports that more than half of the interviewed CEOs
believe that the uncertainty of current political landscape has
a larger impact on their business than in the past.
These firms and their executives use political contribution
as an effective tool to address political risk to protect
shareholder value. Our research indicates that as political
risks increase, political contributions increase. Therefore,
political contributions may define the level of the
corporation's political risk.
We found that the majority of large corporations' returns
were impacted as news of political and regulatory risk
increases. The stock prices decline. Based on our research, we
have found that political contributions as a proxy for
political risk is materially making investment decisions. The
legislation requesting disclosure of climate risk addresses a
complex material impact on security pricing. This risk is
difficult to measure for several reasons, since the risk
parameters may be mispriced due to shortcomings in the
available information.
I will not address the science or legal issues regarding
climate risk. As an investor, I tend to model risk factors and
I treat climate risk as a factor. The best measure for
materiality is the capital markets. A number of corporations
have developed sustainability reports that include current
levels of admissions and admission targets. This information
should be required of all listed securities. Based on our
research, we have found climate risk to be a material item in
making investment decisions.
The corporate tax legislation attempts to address potential
tax avoidance risk. The amount of corporate income tax a
company pays is material to its profitability. Investors,
therefore, seek to understand the extent to which future cash
flows are impacted by companies' tax liabilities. Therefore,
corporate tax avoidance activities, while perfectly legal, may
suggest underlying regulatory or reputational risk.
The legislation requesting disclosure of human rights and
value chain risk are material factors in the selection of
securities. It is easy to understand that news of human rights
violations can impact the reputation and the stock price of a
corporation. Again, a number of firms have human rights and
value chain policies. We recommend that all listed securities
be required to provide this information. Based on our research,
we have found human rights risks to be material in making
investment decisions.
We support the creation of sustainable finance advisory
committee to advise the Securities and Exchange Commission on
the evolving issues to ESG materiality and capital markets.
Thank you for your time. The oversight work of this
subcommittee is a critical responsibility. And I welcome any
questions that you may have.
[The prepared statement of Mr. Wright can be found on page
84 of the appendix.]
Chairwoman Maloney. Thank you very much.
And Ms. Lubber, you are now recognized for 5 minutes for
your testimony.
STATEMENT OF MINDY S. LUBBER, PRESIDENT AND CHIEF EXECUTIVE
OFFICER, CERES
Ms. Lubber. Great. Good afternoon, and thank you. Thank you
for your leadership on picking up these important bills.
My name is Mindy Lubber. I run Ceres, a national
organization that works with hundreds of influential investors
and companies to tackle a number of the world's sustainability
challenges, including water scarcity and pollution,
deforestation, inequitable workplaces, and climate change. I
appreciate the opportunity to be here to share our views on
corporate disclosure of environmental, social, and governance
issues, and to voice support for the various proposals being
heard.
I am going to speak in further specificity to the Climate
Risk Disclosure Act of 2019, which we strongly support. These
bills are firmly rooted in the principles of transparency, of
materiality, and of investors' needs for adequate information
to assure long-term returns.
One of the things we do at Ceres, we run a network, an
investor network on climate risk and sustainability, with 106
institutional investors collectively managing over $26 trillion
in assets. And since our founding 30 years ago, our members
have consistently felt that sustainability challenges pose
material financial risks and that these risks need to be
embedded into our capital market systems.
There are some who like to believe that sustainability
risks are not real financial risks. But let's be clear. Risks
are risks, and they need to be disclosed, whether they come
from trade agreements from fluctuating commodity prices, from
inflation, from currency changes or climate change. If they are
real, if the risks are clear and material, they ought to be
analyzed and disclosed. And it doesn't matter which box or
category they come from.
We have a long history at Ceres in the field of disclosure.
As Tim said, we founded and launched the Global Reporting
Initiative in 2007, and it is prospering with 13,000 plus
companies reporting. And in 2010, Ceres and our investor
network members petitioned the SEC to issue the first of its
kind climate disclosure guidance.
Despite the issuance of this guidance, which I will say is
not being enforced, our research shows that half of the 600
largest United States companies still do not provide decision
useful disclosures on climate-related risks. Those that do
often provide disclosures that are mere boilerplate or just too
brief and effectively meaningless. So investors right now are
simply not getting the information they need to understand how
their portfolios are exposed, which in turn exposes them to
potential losses.
Mandating those disclosures, as you are suggesting to be
done, will help companies better understand their own exposures
and opportunities. And these rules will help stimulate their
ingenuity and their strategic thinking. It will increase their
competitiveness and create, not harm, but create shareholder
value, or as the long-held business school mantra suggests,
what gets measured gets managed, and with adequate and relevant
information being measured, companies will manage their climate
risks and do so better.
And mandatory reporting as you suggest will create a level
playing field where all companies, every company is required to
provide the same information in consistent ways.
Climate change is the greatest economic crisis of this
decade and well beyond. And its implications are real. We can
analyze them and they need to be disclosed. Nearly every sector
of the economy is impacted, from food to agriculture, to
transportation, to energy, to apparel, to technology and on and
on, which is why so many companies, from Apple to Levi Strauss,
to the Gap and others, are disclosing those risks. They are
real and they are material.
Consider the following: More than 200 of the largest global
companies reported almost $1 trillion at risk from climate
impacts, with many of those risks likely to hit in the next 5
years. And our research shows that companies that do provide
climate disclosures are more likely to set relevant goals and
to have systems in place to make them more resilient.
So while we applaud the companies that are showing
leadership, voluntary reporting is simply not enough. It is not
consistent. All players should be required. And the mandatory
requirements laid out in this act are thoughtful. They are
carefully designed. They meet the needs of investors without
unnecessarily burdening companies. These risks can't always be
avoided, but with the right information, they can be managed.
And when the risks are fundamental, investors and companies
need that information.
Thank you for your efforts to make those disclosures real
and available. I think they will change the course of
information in our capital markets. We strongly support them,
and look forward to seeing them.
[The prepared statement of Ms. Lubber can be found on page
61 of the appendix.]
Chairwoman Maloney. Thank you very, very much.
I now recognize myself for 5 minutes for questions.
First, Mr. Andrus, as you know, opponents of ESG
disclosures have been claiming for years that these disclosures
aren't material to investors, even though we see more and more
evidence every day that ESG disclosures are material to
investors.
So as an investment manager at one of the largest
institutional investors in the world, I would like to ask you,
do you consider ESG disclosures to be material?
Mr. Andrus. Thank you very much for the question,
Chairwoman Maloney. Yes, all of the bills that are presented
today would require the presentation of material information in
the regulatory reports. There is much discussion with regard to
materiality without a full analysis of what materiality happens
to be. There is not one definition of materiality.
The TSE court, which focused materiality on voting, is
limited to things that happened in the past. The basic court
focused materiality on probability times magnitude, which
focuses on things in the future. However, the SEC in item 303,
which focuses on forward information, has a two-pronged test
for what needs to be reported. And in that two-pronged test,
all of the information that is presented today would fit within
the current definition of materiality.
There is some criticism, not only of materiality, but that
of what reasonable investors want. I consider CalPERS to be a
reasonable investor. As well as most of the largest investors
in the country, all reasonable investors all desire to have
more of this information presented. It is not limited to this
country.
The demand for ESG is a worldwide issue. Investors from
around the world, all of whom I consider to be very reasonable
investors because they have the same responsibilities that
CalPERS has to pay money to beneficiaries, are focused on these
issues. So, yes, these issues are clearly material.
Chairwoman Maloney. Mr. Wright, do you agree with this?
Mr. Wright. I do.
Chairwoman Maloney. Thank you.
Mr. Mohin, do you think the SEC could effectively build on
the great work that your organization has done in establishing
ESG metrics for companies to disclose?
Mr. Mohin. Yes, I do. And in my testimony, I made a point
about why that is important. As investment flows and capital
flows increasingly rely on this information, it is important to
have international standards. So if we draw a parallel to the
financial standards a few decades ago, it was more sort of a
patchwork system. And as we had the international financial
reporting system and the FASB come together, now we have
basically one system, and it has unlocked free trade.
So it is very important to look at a single global
language. And to do that, you really have to focus on an
independent, international multistakeholder standard setter
like GRI.
Chairwoman Maloney. Could SEC standards essentially
complement your organization standards?
Mr. Mohin. What I would recommend is that SEC, like they
have done with FASB, refer to an independent standard setter
like GRI. That way you get the state of the art, it stays up to
date.
Chairwoman Maloney. Ms. Lubber, as you know, some companies
already disclose a limited amount of information about the
risks of climate change. But as you noted in your testimony,
these disclosures are often inconsistent across companies and
very often incomplete.
Do you think Mr. Casten's bill would require companies to
include sufficient detail on climate risk for investors? And
how important is it for the SEC to include industry specific
guidance on climate risk disclosures?
Ms. Lubber. I think it is perfectly consistent with the
SEC's role and mandate. Their role is to protect investors to
assure material risk disclosure. They do it for many other
issues. This notion that if it sounds environmental or social
it can't be a real risk, but the risks are real. They are very
real, they are very costly for a company who doesn't have
enough water. The water risk is in hundreds of millions of
dollars to PG&E that just found itself in bankruptcy because of
the climate-related climactic changes that caused the fires. We
are seeing billions and billions of dollars.
Those risks are risks investors need to know. And the SEC
is the place, with the kind of guidance offered in your bills,
to structure the kind of material risks and disclosure of those
risks so they are consistent with all other risks that
companies are asked to disclose.
Chairwoman Maloney. Thank you very much.
The Chair now recognizes the distinguished ranking member
of the subcommittee, Mr. Huizenga, for 5 minutes for questions.
Mr. Huizenga. Thank you, Madam Chairwoman.
I wasn't going to go here first, but I just was struck by,
Mr. Andrus, in your written testimony, you noted that,
``CalPERS' primary responsibility is to our beneficiaries.''
You talked about investing over the long term. And I couldn't
agree more with that.
However, one analysis of CalPERS' decision to disvest
itself--or divest itself of tobacco-related products cost the
fund and us hardworking CalPERS members over $3 billion. It
doesn't strike me that losing money like that is in the best
interest of your fund's beneficiaries, either short term or in
the long term, particularly at a time when CalPERS is not fully
funded.
And I would like to note, Madam Chair, that CalPERS' newly
elected president, Jason Perez, who is a police officer from
Corona, California, seems to believe that losing money isn't in
the best interest of his fund's beneficiaries either in
campaign materials that he sent to eligible CalPERS voters last
year. He criticized former CalPERS president Priya Mathur of
putting CalPERS members retirement security at risk, ``due in
part to environmental, social, and governance investing
priorities regardless of investment risk.''
So, Mr. Atkins, as a former Commissioner with the SEC, what
impact does the--you talked about this in your written
testimony--about the IPOs have on employment and job growth?
And what does an uptick in U.S. IPO charters mean for mom-and-
pop 401(k) investors and others?
Mr. Atkins. Thanks for the question. There are a lot of
effects from a robust IPO market. One is particularly as a way
for private companies to have an exit ramp to be able to then
attract more capital and not just be private.
Mr. Huizenga. Do these bills encourage IPO, the process, in
your opinion, or do they encourage companies to identify and
attract new investors? Or is this going to drive more of that
into that private capital world?
Mr. Atkins. Again, I think that imposing these sorts of
detailed disclosure requirements, especially on smaller
companies, in my own experience and as have been reflected in
the surveys of CEOs and others, that is the one biggest
impediment for people wanting to venture into the--
Mr. Huizenga. There has been a lot talked about the
responsibility of the SEC and the responsibility of
corporations. And I have been dealing with section 1502
implementation from Dodd-Frank. I wasn't here for the passage
of Dodd-Frank, but we have been living with the echo effect of
that. And that had to do with what I think everybody
universally would agree is a positive attempt at curving a very
real issue dealing with conflict minerals. But in its economic
analysis, the final rule of the SEC said it is going to cost
compliance. It is going to be between $3 billion to $4 billion
initially and then $207 million to $609 million a year. Mary Jo
White, President Obama's SEC Commissioner and Chair, had talked
about what the proper role of the SEC should be in all of these
things.
And I am curious, as a former SEC Commissioner yourself,
how would you feel about another group, as has been suggested
by Mr. Mohin, setting standards that the SEC then needs to
follow and rather than them coming up with those standards
themselves or letting industry come up with that? So I am
curious what you think of that idea.
Mr. Atkins. I think it is best to leave it to the private
markets to come up with the standards rather than designate yet
another something like FASB or GASB, these various other groups
to do that.
Mr. Huizenga. So let's talk, and kind of finally here,
about our competitiveness internationally. We are seeing IPOs
go up a little bit. They are not nearly where they had been.
And I am just curious if you believe that the Federal
Government needs to force, under penalty of law, companies big
and small to disclose this kind of information. Mr. Mohin, in
his testimony, noted that some of his clients have been doing
this for 20 years voluntarily.
Is it necessary for the Federal Government and through the
SEC to come in with a hammer and force them and maybe put them
into a forum as had been suggested that not even the SEC would
determine but that an outside group would determine?
Mr. Atkins. Yes, it undoubtedly raises costs. And it is not
just the cost of putting the disclosure together to hiring
lawyers and all that, but it is the knock on the cost of threat
of litigation and that sort of thing.
Mr. Huizenga. And I will just note, Madam Chair, as my time
is up, but I do believe that the most effective way of doing
this is to make sure that this is voluntary by these companies,
demanded by clients, customers, investors, beneficiaries,
rather than having the Federal Government mandate this.
So with that, I yield back.
Chairwoman Maloney. The gentleman's time has expired.
And the gentleman from California, Mr. Vargas, is now
recognized for 5 minutes.
Mr. Vargas. Thank very much, Madam Chairwoman. And, again,
thank you for holding this hearing.
Mr. Atkins, let me ask you a follow-up question, if I may.
Do you think that climate change is real?
Mr. Atkins. I don't know. It certainly is a topic of
discussion, but I don't think that really matters.
Mr. Vargas. You don't think climate change matters?
Mr. Wright. No. It doesn't matter what I think.
Mr. Vargas. Well, it does today, that is why we have you
here, and it certainly matters to me. So, do you think climate
change is real? And if it is, do you think humans have impacted
it at all?
Mr. Atkins. There are studies that show that is the case. I
haven't really studied the studies. But obviously, it is a
topic of discussion in the public sphere and elsewhere.
Mr. Vargas. Have you followed it at all?
Mr. Atkins. Well, of course, in newspapers and things like
that.
Mr. Vargas. And have you come to any conclusion yourself?
Mr. Atkins. I think there is a lot of data out there that
shows various ways. So, I haven't really come to any--
Mr. Vargas. You haven't come to a conclusion one way or
another?
Mr. Atkins. Not that I focused on, no.
Mr. Vargas. Okay. I think that is the problem.
I think it is interesting, when I was in law school, one of
the big issues was the issue of the ozone depletion. And we
took it seriously as a country and we took it seriously as a
world. We knew that the CFCs were, in fact, destroying the
ozone layer, so we came up with alternatives and the world
invested in these alternatives. And we found out that, in fact,
you can see Mother Nature cure herself.
And it is interesting that here, presume here there has
been testifying, saying it doesn't know if it is real. When
most of the scientists, in fact virtually all of them, point at
climate change and say it is real. We see in California the
fires are bigger. We see they burn hotter. We see all the
flooding.
It is interesting, one of the groups of people that I have
met in my life, they are real cold blooded, are insurance
actuaries. I used to be a vice president of Liberty Mutual. I
could tell you, these people, they have cold water that runs
through their veins. They simply look at the numbers.
And it is interesting, these events that are happening
every 100 years or 200 years, and they are happening in a much
shorter time period. Something is changing. It is obviously
climate change. All the scientists tell us that. There are a
couple of kook scientists who say otherwise, but all the
scientists point in the same direction and say, of course there
is climate change. And that is why I think it is so important
to have these disclosures. And again, I am sorry that the
United States isn't leading on this as we should be and taking
this seriously and not thinking it is some kind of a hoax.
But I do want to get back to the issue of the destruction
of shareholder value. Mr. Mohin, I heard here that, in fact,
these disclosures will destroy shareholder values. It sounds to
me it is just the opposite. Studies point the other way, do
they not?
Mr. Mohin. They absolutely do. And I wanted to thank
Congressman Vargas for this legislation. It is fantastic
legislation, because these issues, climate change, human
rights, ethics, diversity, environment health and safety, these
are critical issues. And if they were disclosed in an orderly
fashion, then I think investors and companies would have far
more information to make these all important decisions. If, in
fact, they were included in the financial definition of
materiality, we might not have these massive issues that we are
facing today. So, it is very, very important to level the
playing field.
And if you look at what is happening in the world today,
with the majority of companies, all the big companies reporting
using the GRI standards, it is obvious the trend line here,
companies are seeing it is important, investors are asking for
the information, so it is already happening. I think where it
is important for this subcommittee is to level the playing
field so that we don't have those companies that are kind of
lying in the weeds and not stepping up and reporting.
Mr. Vargas. Mr. Andrus, do you agree with that? Do you
agree that, in fact, this is valuable information for an
investor like yourself for CalPERS?
Mr. Andrus. Thank you for the question. Yes, it is valuable
information. It is information we track. And in this particular
case, we are asking you to basically instruct the SEC to make
it a regulatory item such that we get comparable information
from all of the companies and then we can shut down some of the
noise on some of the issues that some other people, in fact,
complain about. I think that items that are before you are
critical issues that we track, and we look forward to
additional disclosure.
Mr. Vargas. I have to thank all of you for being here. My
time is almost up. The only thing I would like to say is this:
Climate change is not the only thing, but it is super
important, and we have to take it seriously and start making
decisions that impact it in a way that is positive, not
negative.
And I have 4 seconds left, so I will yield back. Thank you.
Chairwoman Maloney. Thank you.
The ranking member of the Full Committee, Mr. McHenry, is
now recognized for 5 minutes.
Mr. McHenry. I yield to my colleague from Arkansas, Mr.
Hill.
Mr. Hill. I thank my friend from North Carolina. And I
appreciate all the witnesses, a very informed group, and very
helpful to the committee's work.
And I do come at this from the point of view that our
officers and directors of our companies have a legal obligation
in making--taking their obligations very seriously as a
fiduciary under the business judgment rule, and therefore,
something that is material should be disclosed. If it is a risk
factor and it is material, it should be disclosed. If something
is material financially, it should be disclosed, not only for
the 5 years covered by the 10K, but in the outyears so that--
and shareholders can be informed. And that is a fundamental
part of our system is that issue of materiality. And as a
general statement, I think they do that.
I have been a public company director. I have been an
investment manager, so I understand that. And we balance that
with the cost associated with these issues. And so, it is a
very careful balance, just like Mr. Huizenga, my friend from
Michigan, talked about the views of beneficiaries at CalPERS
are doing that. And it seems that that over $130 billion
shortfall or whatever the number is now in CalPERS has caused
some beneficiaries to question that these decisions to not
invest in certain categories were maybe a bad decision, in
retrospect, after doing the study he cited.
But there is a bigger issue, which is there are fewer
public companies. And so, this issue is there are fewer things
for CalPERS to invest in. So, I think that is why we are so
diligent here about balance.
Conflict minerals, Mr. Atkins testified about the cost. And
I got a letter from a chief accounting officer of a $2 billion
in market cap company the other day that is active in my--has
representation in my State. And she told me that they have $1
billion revenue in this company and that conflict minerals cost
them $250,000 a year to comply with that rule, and they had no
certainty really whatsoever if they were doing a good job or
not. And she went on to tell me that in Form SD, she never had
one question from an investor about the filing from their
investor relations department about conflict minerals. And this
is a company that sources different things in their inventory
from around the world.
I also come at this from the point of view that if we are
reporting things that are material, then we can't just go from
one subject to another and compel something as material because
somebody thinks it is material, if it is not material in the
judgment of these fiduciaries that we have appointed as board
members. I quote here from a Fortune 500 board member: ``We are
asked as a corporation to take a public stance on very
complicated issues. We have crime in the cities. We have 1,000
complicated issues that are very material to our civilization.
But if we spend our time in a meeting taking public stands on
all of them, I think it would be quite counterproductive.''
I don't like the fact that people will constantly present
this issue and never discuss a solution. And so, I think our
companies are sensitive to their philanthropic objectives, et
cetera. But that director was Charlie Munger at Berkshire
Hathaway. His colleague, Warren Buffett, on the issue of
climate change and insurance companies, and since they are a
big property and casualty insurer, they said there are more
material things on any 1 year that are more material to their
pricing. And that in property and casualty pricing that changes
every year. You are not making a 100-year decision and you are
able to reflect those different risks.
My final comment on this was I read an article just the
other day, and here is the quote: ``A climate disaster
triggered by the continued burning of oil and coal could result
in the submergence of Florida, Holland, and other low-lying
areas over the next 50 years, according to the Ohio State
University.''
Do you all agree with that? Does somebody agree with that?
Because this article was written on February 2, 1978.
So I don't know that, while we are concerned about these
issues, if they are material to a company, I think they ought
to be disclosed.
Mr. Atkins, are there penalties if you don't disclose
material information?
Mr. Atkins. Well, severe penalties from the SEC, but then
also private litigation.
Mr. Hill. I think if it is material, officers and directors
ought to have the right to determine that and customize it for
their report and not be compelled to a uniformed standard set
by somebody else.
I thank my friend from North Carolina.
Chairwoman Maloney. Thank you.
The gentleman from Illinois, Mr. Casten, is now recognized
for 5 minutes.
Mr. Casten. Thank you so much, Chairwoman Maloney. And
thank you so much to the panelists.
I am excited to be here today, and I am very proud to have
introduced the Climate Risk Disclosure Act with Representative
Cartwright in the House.
There are more than 200 of the world's largest listed
companies who have forecasted climate change could cost them a
combined total of almost $1 trillion, according to a report
from the Carbon Disclosure Institute. But investors largely
lack access to the basic information about the potential impact
of the climate crisis on American companies. And not just
companies. When Chairman Powell from the Federal Reserve was
first here, not this morning, but when he first came earlier in
the year, I asked him whether Fannie and Freddie mortgage
lenders were factoring in the risk to a 30-year mortgage in
low-lying areas, and his comment was that would be an
interesting thing to think about, but he wasn't sure we did.
That is a big deal if you are taking the other end of that
risk. And there ain't nothing wrong with having transparency of
information, despite what some folks here have said today. And
I just would like to remind people that the SEC was not created
in order to allow businesses to hide information and protect
their profits. It was created to compel businesses to disclose
information and protect investors.
Capitalism is an awesome thing. It depends on competitive
markets. And we best not forget that competitive markets depend
on transparency of information, no matter how much we as
business owners don't want to provide all that information.
To that end, the Climate Risk and Disclosure Act would
require public companies to disclose more information about
their exposure to climate-related risks, which will help
investors assess and, let's be clear, hedge those risks and
effectively remove the subsidies that currently accrue to
companies that aren't mitigating those risks. Risk and reward
are related, right? And if people don't know what your risk is,
they get to hedge it.
That is the point of it. That is why 33 groups have
endorsed the bill and are committed to addressing the necessity
of climate risk disclosure.
I would like to ask the Chair for unanimous consent to
enter into the record this letter of support.
Chairwoman Maloney. Without objection, it is so ordered.
Mr. Casten. Thank you.
How is my time? Close.
The Task Force on Climate-Related Financial Disclosures,
set up by the G20's Financial Stability Board, found in its
report that climate-related disclosure had improved since 2016,
but only about a quarter of companies disclosed information
aligned with more than 5 of their 11 recommendations, and there
was only a 3-percent increase from to 2016 to 2018in the number
of firms disclosing.
I want to start with Ms. Lubber.
It is clear that some companies generally disclose climate
risks, but those disclosures are typically very vague and don't
always provide investors with a good sense of the scale of the
risks that the company faces from climate change.
Do you believe that the qualitative and quantitative
disclosures of climate risks required by the Climate Risk
Disclosure Act would be a meaningful improvement on the status
quo for investors?
Ms. Lubber. I think there is no question. The risks are
real; they can be calculated. But they need to be consistent.
They need to be comparable, company to company. Investors need
that information, and the SEC ought to mandate the disclosure
of it.
We are talking about, or some of your colleagues, somehow
this is an extraordinary extra burden. It ought not to be seen
just as climate risk. It is a material financial risk, as you
talk about. The SEC knows how to regulate that. They regulate
it for inflation, for currency, for trade. They can regulate it
for the material risks of climate.
And I don't believe the burden is that high. I believe it
is doable, manageable, could fit in under the regimes that they
have. But it ought to be, as you designed in your bill,
consistent, comparable, and, frankly, mandatory so the laggards
don't get away with not doing it while the leaders do.
Mr. Casten. So, Mr. Mohin, I was delighted to hear about
what GRI has done. This is going to date me a little bit.
Twenty years ago, one of my first jobs out of grad school was
doing lifecycles, carbon modeling for companies like British
Petroleum, using a lot of WRI data.
Can you help us understand, if we were to adopt these rules
tomorrow, do companies need to reinvent the wheel for how to
actually go through and calculate these risks? Or, through the
good work that GRI and WRI and others have done, are the
templates largely in place at this point?
Mr. Mohin. The templates are largely in place, Congressman.
And they continue to evolve and grow as the mega-trends of
having this information go from sort of more the reputational
space into the global capital markets. The disclosures have
become much more professionalized and the taxonomy
standardized.
Mr. Casten. Okay.
Last question, with the time I have left, to Mr. Wright:
Can you help me understand what the long-term risks are to
investors in companies that fail to disclose these risks?
Mr. Wright. Yes, it is very important. And one of the
things that we are seeing is that many companies have already
taken that upon themselves, to start reporting voluntarily this
information. However, the information is not consistent. And
that is the information we need to really understand the
transitional aspect and the impact it has on employees and also
investors.
Mr. Casten. Thank you.
I yield back.
Mr. Vargas [presiding]. Thank you very much.
The gentlewoman from Missouri, Mrs. Wagner, is now
recognized for 5 minutes.
Mrs. Wagner. I thank the Chair.
And I certainly thank our witnesses for being here to
testify today.
The United States continues to experience a slump in the
number of new businesses, which in 2017 hit a 40-year low. The
U.S. is only seeing half the number of domestic initial public
offerings, or IPOs, that it had seen just some 20 years ago,
while, at the same time, the U.S. doubled the regulatory
compliance costs a business must incur.
While the U.S. IPO market is steadily decreasing, foreign
markets, particularly in China, are growing. Instead of placing
additional burdens on public companies, we should be
encouraging more growth and more IPOs here in the United
States, which will lead to more investment opportunities and
choices for Main Street investors--Main Street investors, real
people--to grow their savings and their retirement accounts.
Commissioner Atkins, I too am concerned about the decline
in American IPOs over the last few decades and the growing
trend of American companies opting for private capital as
opposed to public markets. Meanwhile, China's IPO market--are
you ready for this?--they produced over one-third of the
world's IPOs in 2017. China. Which makes the decline in
American IPOs even more troubling.
Why should we find these trends concerning, sir?
Mr. Atkins. First of all, a robust public market is a good
democratic type of situation to have, where people are going
out to the public to raise capital rather than just private
investors. And it is a lot cheaper to do it with private
investors, the way things are now, and you are subjecting
yourself to a lot more regulation if you go to public markets.
Mrs. Wagner. Doubled--doubled--in the last 20 years.
Would the bills discussed in today's hearing create
additional requirements on American public companies, adding to
their regulatory compliance costs?
Mr. Atkins. Oh, I definitely think so, yes.
Mrs. Wagner. How would the bipartisan capital formation
provisions from the JOBS and Investor Confidence Act of 2018
help encourage more U.S. IPOs and make us more competitive
globally?
Mr. Atkins. A number of those provisions--for example,
taking aim again at Sarbanes-Oxley Section 404 is one example
of unintended consequences of a lot more burdens on smaller
companies. And so, the provision in that Act to extend the
situation there for smaller companies to not have to be subject
to that is just one. But there are others there that would
increase access to capital and, that I think would be very
helpful for growing companies.
Mrs. Wagner. What else? What else should Congress be doing
or not doing to make U.S. capital markets more attractive?
Mr. Atkins. Well, reduce the regulatory burden. We talked
about the conflict-minerals provision of Dodd-Frank. That was a
huge gift to consultants, all sorts of consulting firms. Even
if you look at your credit card, Citibank and others have to
analyze that strip of metal on the back to make sure that there
are no conflict minerals in it. So, that adds a huge burden
even to the largest companies like that and, as well, to small
ones.
Mrs. Wagner. Any other things that you can cite that would
make U.S. capital markets more attractive certainly from a
regulatory reform--
Mr. Atkins. So, as Chairman Clayton and his colleagues are
doing at the SEC, I think, taking a real examination of the
regulatory rule book that is there with respect to going public
in the United States and remaining public. For example, they
are looking at corporate governance and other things, because
when you--
Mrs. Wagner. Right.
Mr. Atkins. Oh.
Mrs. Wagner. Please, go ahead.
Mr. Atkins. When you look at ESG, as Barbara Novick of
BlackRock says, ``G'' is the most important part of the ESG.
Mrs. Wagner. Thank you. I appreciate--
Mr. Huizenga. Would the gentlelady yield?
Mrs. Wagner. And I would yield, yes.
Mr. Huizenga. I appreciate it. In the remaining seconds
here, again, it strikes me, as we are hearing testimony about
companies using and doing things without a government mandate,
it begs the question of whether we have to have the Federal
Government come in and force them to do these things that they
see as good practices.
So, with that, I yield back.
Mrs. Wagner. Thank you. I yield back.
Mr. Vargas. Thank you very much.
The gentleman from Illinois, Mr. Foster, is now recognized
for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
And thank you to our witnesses.
A newly released report from the London School of Economics
examined instances of legal action on climate change for a 30-
year period, ending this year. The report found that climate
change cases are on the rise worldwide, and, to date, climate
change litigation has been brought in at least 28 different
countries, with about three-quarters coming from the U.S.
Increasingly, plaintiffs are making claims against
investment funds and companies for failing to incorporate
climate risk into their decision-making and for failing to
disclose climate risk to their beneficiaries.
Mr. Andrus, Mr. Wright, and Ms. Lubber, what can the rise
in climate change lawsuits tell us about the need for more
high-quality climate risk disclosures by companies?
Ms. Lubber?
Ms. Lubber. Certainly, we are seeing more lawsuits not only
as it relates to investors but as it relates to fiduciaries--
board members at companies. And being somebody who trains
corporate board members on the financial issues of climate or
water, what they are telling us is they want more information,
they don't want to be sued. They see their duty--one of the
first duties of a fiduciary of a company is to analyze risk and
act on it for the company.
I think one way to make sure that we are not seeing
lawsuits prevail is for people to have the information so they
could act asresponsible fiduciaries and respond to the very
real issues.
But there is no doubt we are seeing more litigation in many
parts of the world around climate change, and that will just
grow. I think there are ways to head it off through better
management.
Mr. Foster. More clarity on the responsibilities to report
and to factor these in would probably reduce the amount of
litigation. Is that--
Ms. Lubber. I am sorry. Could you--
Mr. Foster. If there was more clarity on the exact
responsibilities to factor in climate change into policies and
decisions, then that would likely reduce the amount of
litigation that you see.
Ms. Lubber. Precisely.
And the information that is being asked for is consistent
with how the SEC does their business. It is not a massive new
corporate burden. There will be definitions but as defined by
the bills.
We are just looking for material information that allows
companies to manage themselves better and investors to know
where their real risks are and where they aren't. And it allows
fiduciaries, corporate board members, to know where their real
risks are and where they aren't. And we all know better
information leads to better decisions.
Mr. Foster. Okay. Any other comments?
Mr. Andrus?
Mr. Andrus. Yes, thank you, Congressman.
Basically, based upon what you are saying, it is additional
evidence that what we are talking about is actually material
and there is an actual need to have this information disclosed
on a regulatory basis.
Mr. Foster. Uh-huh.
Now, Mr. Wright, as you noted in your testimony, that, as
an investment manager, you measure climate risk for clients
and, as part of that analysis, you routinely measure a
company's baseline carbon emissions; however, of the 186 firms
you evaluated, only 18 percent report their current level of
emissions.
Could you say a little bit about how having comprehensive
information on emission levels for all companies in this sector
might be helpful in making investment decisions?
Mr. Wright. Yes. Thank you for the question.
Basically, what we found is that environmental news can
impact future stock prices. And so, as we have more information
that is positive, that would actually benefit our holdings. So,
as we get more information, we can make better decisions
relative to the stocks that we own, to include the fact that
these companies are making transitional plans, so we want to
see what their future plans are, where we can price that into
the stock valuation.
Mr. Foster. Thank you.
I guess that pretty much completes my question, so I yield
back the balance of my time.
Mr. Vargas. Thank you very much.
The gentleman from Ohio, Mr. Davidson, is now recognized
for 5 minutes.
Mr. Davidson. Thank you, Mr. Chairman.
And thank you to our witnesses. I appreciate your expertise
and coming here and sharing it with us and, frankly, your
passion for environmental and social goals and, I think, more
on the underlying basis, for the high-functioning capital
markets that are the envy of the world here in the United
States.
I think when you think about fiduciary duties, from what I
gather, many of you simply want to look at a broader definition
of a fiduciary duty, so that the fiduciary duty involves not
just quantitative things like discounted cash flow but an essay
question on, ``How do you feel about these environmental/social
goals that are out there?'' Some of you might say, if you
properly take those into account, you would get the same
discounted cash flows across the board.
I am just curious. All of you are involved at some level in
the investment sector. And just go down the line. Does your
firm currently employ ESG in their investing practices?
Mr. Mohin. Thank you, Congressman. We are a standards
setter, so that wouldn't apply to GRI.
Mr. Davidson. Next?
Mr. Andrus. Yes.
Mr. Davidson. Yes?
Mr. Atkins. We are a consulting firm, so no.
Mr. Wright. Yes, we do.
Ms. Lubber. And of our 160 investor members, whose assets
total $26 trillion, they all in one way or another are
analyzing ESG risks and incorporating them.
Mr. Davidson. Thank you.
And while we heard previous testimony that the companies
that use ESG outperform those that don't, the studies on that
are varied.
And, frankly, even with CalPERS--Mr. Andrus, you
highlighted that the CalPERS does use ESG as part of its
metrics. And I am just curious, is CalPERS currently considered
to be fully funded on its pension obligations or underfunded?
Mr. Andrus. Congressman, we are underfunded. But it is
important to point out that what is being discussed here is
focused on disclosures--
Mr. Davidson. Yep.
Mr. Andrus. --which is additional transparency--
Mr. Davidson. Got it. And I appreciate that.
When I look at--for the record, Jason Perez, a CalPERS
board member, estimates that it costs CalPERS $8 billion for
divesting from tobacco, for example.
And so, while tobacco is performing well, you can
appreciate people on an individual level deciding, ``I am not
going to invest in tobacco.'' And, at some level, a firm, you
might feel that way, but an institution--when you are reserving
and you are fully funded, that is one thing. When you are
underfunded--I just talked with some of my teachers from Ohio
today, and what they wanted to know is their retirement is
secure. They don't want to take wild risks.
And maybe you felt that you are protecting people not just
from the harmful effects of tobacco but from a potential crash
in the value of tobacco, and some of the bets turn out wrong in
every investment. In fact, for every long there is a short,
right?
And so, when you look at the information that you are
seeking to standardize, people would draw different conclusions
on that. I just don't understand how that is different than the
market functions today.
For example, Mr. Atkins, my concern--in the current
practice, using ESG goals, American Century Sustainable Equity
Fund divested itself from ExxonMobil, but it increased holdings
in ConocoPhillips because their corporate governance practice
they found better. Same sector, different return. Do you see
examples such as the one I described often, as it pertains to
ESG funds?
Mr. Atkins. Part of the problem with the whole ESG concept
is it is very squishy. And so even a lot of the types of
frameworks that are out there, it is very difficult to pin down
exactly what it means.
Mr. Davidson. And here is the closing thing I would say.
Heavily institutional investors are relying on proxy firms. So
proxy firms are required, or permitted, by the institutional
investors when they take corporate proxies--not required. But
the proxy advisors are dominated by two firms, 97 percent of
the market. And they are already employing ESG. They are
already influencing the market. They are influencing the
practices of institutional investors.
And I think it would be really nice to have a hearing at
some point in the future on how proxy advisory is already
influencing ESG.
And, with that, I yield.
Mr. Vargas. Thank you very much.
The gentleman from Georgia, Mr. Scott, is now recognized
for 5 minutes.
Mr. Scott. Thank you, Mr. Chairman.
Ms. Lubber, you spoke of the relationship between
performance on environmental, social, and governance measures
and company performance. As a matter of fact, in your written
testimony, you state this. You say, ``Disclosure is valuable
for its ability to stimulate ingenuity and strategic thinking
by businesses, which can improve sustainability, performance,
increase a company's competitiveness in a resource-constrained
economy, and create shareholder value.'' That is a very good
statement and a worthy one.
Could you share with us a little bit, go into a little
detail, what you meant by this and how influential you feel a
company's performance is on these environmental, social, and
governance measures to their overall performance?
Maybe you could give us an example. Take an environmental
issue like climate change. How does that relate to a company's
performance?
Ms. Lubber. Great.
Mr. Scott. And then give me an idea--we talked about the
example of the environment. What would be a social change? Give
us an example of that and the climate change and tell us how
that works.
Ms. Lubber. Sure.
Very quickly, on the social side, when Nike many years ago
was found to be employing in their supply chain in Southeast
Asia young children, sewing and stitching their soccer balls,
that was a reputational catastrophe that hit their bottom line.
And so they said, we have to be doing better, not only on
the ``E'' side but on the ``S'' side. We want to know who is
making our products, what standards they are being held to. If
there are contractors, should those contractors be held to the
same standards.
And it is not only Nike. PepsiCo. PepsiCo has a program,
Performance with Purpose, and they have goals on social,
environmental, and governance issues. And what that has done is
it allows them to better manage their supply chain and know who
is doing what. It allows them to better manage the risks from
water problems and climate problems.
And, by doing that, they are providing their--studying the
performance of those issues, they are disclosing them, and the
disclosure forces them to manage it better. When they know that
they have human-rights risks in their supply chain, they are
acting and they are acting quickly.
Mr. Scott. Well, let me ask you this, because you brought
up the Nike thing. The most recent one is this business of the
Betsy Ross flag on the sneaker brought up by Kaepernick. How do
you evaluate that with truth and honesty? I was very torn with
that. I am a sort of patriotic fellow.
Ms. Lubber. Yes. So--
Mr. Scott. I love this country.
Ms. Lubber. Right. You are asking a great question. And I
will say, reputational harm to companies can run to the
shareholder value. Again, when Apple found out in their supply
chain that there were toxic chemicals being used in some of the
resources that went into the phones and what that meant on the
health of their workers, that was a huge reputational risk. So,
it does matter.
What we saw at Nike--and not everything can be valued
immediately. I will come back to places where you can more
precisely value it. When you come back to Nike, when they first
put out the Colin Kaepernick ad, my understanding is, first of
all, it was a very thought-out decision by their board of
directors. They knew it was a risk. When they first put it out,
they saw a slight drop in sales. And then, in the week
following it and the weeks since then, they have seen a
straight uprise in sales.
The public does vote in what they purchase, and they are
looking for, all the polls show, companies that are consistent
with the values of those consumers.
Mr. Scott. So you are saying, in essence, that on this
particular situation with Nike and the Betsy Ross flag that
Nike made the right decision?
Ms. Lubber. What I am saying is the consumers--I am saying
that they made a decision, and it almost doesn't matter--just
as Mr. Atkins doesn't know everything about climate change, I
don't know everything about--but what we saw is, as it relates
to share value, the strength and profitability of that company,
they did well. And they did well, and they are hearing it from
their consumers.
The fact of the matter is, not every issue can be evaluated
completely, but that is an example where we are seeing positive
feedback from the most important people to Nike, their
consumers.
Mr. Scott. Thank you very much for your very well-thought-
out insight.
Mr. Vargas. Thank you very much.
The gentleman from West Virginia, Mr. Mooney, is now
recognized for 5 minutes.
Mr. Mooney. Thank you, Mr. Chairman.
So, looking at these proposed bills, Mr. Atkins, let me
just ask you this. The proposed bills require companies to
disclose country-by-country reporting of tax payments.
In your opinion, are the employees of the SEC international
tax--are the employees of the SEC's--are they international tax
experts with intimate knowledge of the tax laws of dozens of
countries? And if not, do you think it is appropriate for
Congress to pass an SEC disclosure bill knowing that the SEC
cannot review the disclosures for accuracy?
Mr. Atkins. Yes, I think that is very problematic. And I
think largely, those things depend on the company, but are
probably immaterial. And FASB already requires material issues
to be reported like that in the financial statements.
Mr. Mooney. All right.
So, following up to that with other requirements that these
bills would impose upon you or ask you to require you to come
up with, Commissioner Atkins, to your knowledge, how many
environmental law experts are on staff at the SEC?
Mr. Atkins. I am not sure. There might be some people in
corporation finance, but as far as scientists and all that, I
don't know.
Mr. Mooney. A couple more. How about, how many human rights
experts are on staff at the SEC?
Mr. Atkins. I am not sure.
Mr. Mooney. And how many election law experts are on staff
at the SEC?
Mr. Atkins. I have no clue.
Mr. Mooney. I think the goal--and the point I am trying to
make, obviously, is the goal should be for the SEC and this
committee to work on solving capital formation issues that are
hindering American companies, entrepreneurs, and mom and pop
investors. I think these bills are pushing you outside of your
area of what SEC's mandate is.
Mr. Atkins. I think that is fair to say.
Mr. Mooney. Yes.
Well, I think I have made my point. I know there are a lot
of other people in the queue, Mr. Chairman, so I am happy to
yield my time back to the ranking member or to--
Mr. Huizenga. If the gentleman will yield?
Mr. Mooney. Sure.
Mr. Huizenga. If the gentleman will yield for a moment, I
will take care of this little piece of business, because I do
want to submit for the record five different articles, the
first article being an article from The Wall Street Journal
entitled, ``CalPERS' Dilemma: Save the World or Make Money?''
The second is a report from the Institute for Pension Fund
Integrity.
The third is a report from the Pacific Research Institute.
The fourth is an article from MarketWatch entitled,
``Opinion: ESG--or Socially Responsible--Funds May Soothe Your
Conscience But Could Weaken Your Portfolio.''
And the fifth and final one is an article from Chief
Investment Officer, ``CalPERS President Loses Her Board Seat.''
Mr. Vargas. Without objection, it is so ordered.
Mr. Huizenga. Thank you. I wanted to get that little piece
of business done.
And I think as my friend was making the point and as I was
trying to make the point in a much shorter period of time with
my colleague from Missouri, we have heard time and time and
time again so far from the panel about how private businesses
have made decisions.
I happen to think it is stupid that Nike pulled the Betsy
Ross flag shoes, but that is their decision. It is my decision
whether I go and outfit myself with Nike or not. There are
things like that that businesses make those decisions all the
time. The question is, who is going to decide what the next
Betsy Ross flag is or not and whether that should be part of
somebody's social justice portfolio or not?
I happen to think that it was a fairly innocuous flag from
1774, I believe, or 1773, as I recall, before we were even
declaring independence that didn't seem like a current social
statement to me. In fact, it seemed like it might have been a
workaround for the commentary on the current 50-star flag that
had been of some consequence at the time.
But, who is going to be making those decisions? I sure in
the heck don't want it to be the SEC. And I certainly don't
think that it ought to be some sort of other sidecar
institution that the SEC has handed off that responsibility to.
I am okay with a privately held company making those decisions
and all of us voting with our wallets. But that is a very
different equation than having the Federal Government come in,
under penalty of law, deciding what those standards are that
these companies should adhere to.
I appreciate my friend from West Virginia yielding me his
time, and I yield back to him.
Mr. Mooney. I yield back, Mr. Chairman.
Mr. Vargas. Thank you very much.
The gentlewoman from California, Ms. Porter, is now
recognized for 5 minutes.
Ms. Porter. Hello.
Mr. Atkins, you were an SEC Commissioner from 2002 to 2008,
and some pivotal things happened during that time, like the
setup for the global economy blowing up. And a key part of your
job at the SEC during that time was to regulate the biggest
broker-dealers. And while you were at the SEC, they began what
is called the Consolidated Supervised Entity Program. And the
SEC created this to oversee those banks. And there were five
banks in that program, including some who are no longer with
us, like Bear Stearns, Lehman Brothers, a couple survivors,
like Merrill Lynch. And the whole point of that program was for
the SEC, through supervision, to make sure those banks didn't
collapse.
Do you recall, how did those banks feel about this new CSE
Program and this new alternative capital standard they had to
meet?
Mr. Atkins. I don't recall offhand.
Ms. Porter. Okay. So they were actually quite happy. Lehman
Brothers wrote that it applauds and supports the SEC for
adopting this new rule.
And so the 5 biggest banks were in this program in 2004,
2005, 2006, 2007, and 2008, while you were at the Commission.
Did the SEC assess the stability of those banks before you
enacted the CSE Program?
Mr. Atkins. Well, that was the staff in Trading and
Markets. And I was assured by them that they had the capability
and the wherewithal to administer the program.
Ms. Porter. You were assured by the staff that those banks
were stable and would be well-supervised by the CSE Program.
Mr. Atkins. That they had the wherewithal to administer the
program as we were adopting it.
Ms. Porter. There were definitely issues with those banks
right at the start that the SEC was fully aware of. One of the
other Commissioners, Harvey Goldschmid, said during a 2004
meeting, ``If anything goes wrong, it's going to be an awfully
big mess. Do we feel secure, if these drops in capital occur,
we really will have investor protection?''
Did you have any similar concerns, and did you express
them?
Mr. Atkins. Oh, I did. As I said, my question of the staff
was, do you have the resources to properly administer that
program? And I was--
Ms. Porter. So, despite the fact that while you were at the
SEC as a Commissioner these banks became highly leveraged, were
given weaker capital requirements and supervision, and a
disastrous crash did in fact occur all under your watch, you
have then publicly railed against labor unions, environmental,
gay rights groups challenging the practices of big banks
through shareholder activism. And, in fact, you called
companies who ``cave to social activism'' ``weenies.'' And that
is a direct quote.
So you personally presided over the most disastrous
financial downturn since the Great Depression. You did not
stand up to the big banks. Why are you in a position to call
other corporations who respond to their shareholders
``weenies?''
Mr. Atkins. I think that was a very unfair
characterization. First of all, I didn't preside over it. I was
a member of the Commission. And that is a body that, like this
one, adopts rules and is the--
Ms. Porter. You would like this committee to do more strict
oversight over the SEC? Because I would probably be there for
that. If that is what you are suggesting, I will inform your
current Commissioners.
Mr. Atkins. I was comparing the role of a Commissioner to a
member of this committee.
But be that as it may, there were many other financial
institutions that were much more heavily levered than the banks
in the CSE Program. But the staff, like I said, had assured
me--
Ms. Porter. Okay. Let's stop there. Reclaiming my time,
what is your job now, Mr. Atkins?
Mr. Atkins. I am a CEO of a consulting firm here in
Washington, Potomac Global Partners.
Ms. Porter. And what do you charge as a consultant?
Mr. Atkins. I am sorry?
Ms. Porter. What do you charge as a consultant?
Mr. Atkins. It varies. It depends on the project and things
like that.
Ms. Porter. So I guess I am struggling, in a capitalist
economy, as a capitalist, to understand why anybody would pay
you big bucks when you, in fact, didn't stand up and were a
weenie in the wake of the financial crisis and then are
labeling other people that.
The duty of a corporation--
Mr. Huizenga. Mr. Chairman, that is inappropriate.
Ms. Porter. Those are his quotes.
Mr. Stivers. You just called him a weenie.
We should take down her words, Mr. Chairman.
Mr. Vargas. Was the--just to understand--and the time has
expired. Just to understand the quote, were you quoting
material that Mr. Atkins--so it is a direct quote from Mr.
Atkins that you are quoting?
Ms. Porter. Yes. He has called companies, ``weenies who
often cave to social activists.''
Mr. Atkins. I don't recall that, but whatever.
Mr. Stivers. Mr. Chairman, I believe she called him a
weenie and--a point of order.
Ms. Porter. Let me ask you, Mr. Atkins--
Mr. Stivers. That is different than a quote, Mr. Chairman.
Ms. Porter. I would like to have my time reclaimed from
this discussion.
Mr. Stivers. Rule 17, rules of decorum, Mr. Chairman.
Mr. Vargas. My understanding is that the witness is not a
protected class. It only applies to Members of Congress.
Ms. Porter. So let me just ask you, Mr. Atkins--
Mr. Vargas. Your time has expired, though, so I apologize.
Ms. Porter. Because of his objections?
Mr. Vargas. Excuse me?
Ms. Porter. Because of the objections?
Mr. Vargas. There was about 3 seconds left, and I believe
that your time was expired by the time that the objection was
made. That is what I think I saw. I could be wrong.
Ms. Porter. I feel very confident that I have made my
point. Thank you.
Mr. Stivers. Mr. Chairman, I would insist on my point of
order, that we keep decorum in the hearing room. That is the
obligation of the chairman.
Mr. Vargas. Yes. And, again, we will keep decorum. Direct
quotes, of course, are--I have heard things even from our
President that I wouldn't repeat. But, again, those are direct
quotes, and I believe that the quote was a direct one. But
thank you for the objection.
Okay.
Mr. Stivers. I insist on my point of order.
[Discussion off the record.]
Mr. Vargas. A quorum is established, and the point of order
is not sustained.
The gentleman from Wisconsin, Mr. Duffy, is now recognized
for 5 minutes.
Mr. Duffy. Thank you.
Mr. Mohin, how much do you make?
Mr. Mohin. Pardon me?
Mr. Duffy. How much do you make?
Mr. Mohin. I am not sure that is material to the hearing.
Mr. Duffy. This is all about disclosure. The gentlelady
from California wanted to ask Mr. Atkins that, so how much?
Mr. Mohin. I believe my remuneration is publicly available
in our annual report.
Mr. Duffy. So what it is?
Mr. Mohin. It ranges each year depending on--
Mr. Duffy. What was it last year?
Mr. Mohin. $250,000.
Mr. Duffy. Mr. Andrus?
Mr. Andrus. $300,000.
Mr. Duffy. Mr. Wright?
Mr. Wright. I have elected not to answer that because I am
a business owner and I have a--
Mr. Duffy. We are all about disclosure here. This is
transparency.
Mr. Wright. But, however, I have--
Mr. Duffy. You are declining to be transparent.
Ms. Lubber, how about you?
Ms. Lubber. $230,000. And it is fully disclosed in our 990
and available to the public.
Mr. Duffy. Thank you.
So, Mr. Mohin, when we talk about things that should be
disclosed, are there some harmful activities that you think
should be disclosed to the public? So, in the banking sector,
if banks bank certain industries, should that be disclosed?
Mr. Mohin. Thank you for the question. Sir, we are a
standards setter, so our role is to create the world's best
standards using multistakeholder--
Mr. Duffy. Standards for banks. Should banks disclose who
they bank?
Mr. Mohin. The disclosure based on our standards is really
a matter for companies and the regulators of those companies.
So we set the standards; others choose to use them or not.
Mr. Duffy. We want to know, if you invest in a gun
manufacturer or a gun retailer, is that something you think the
public should know?
Mr. Mohin. Again, sir, our disclosure--
Mr. Duffy. I am talking about, do you think we should know
that?
Mr. Mohin. As a standards setter, it is not something that
we have a position on.
Mr. Duffy. Or about whether you invest in abortion clinics
or THC or whether you support the American flag or whether you
will bank detention centers. Are those things that you think
are important for the public to know?
Mr. Mohin. Actually, it is quite an interesting question,
because our independent standards setting board actually
chooses which standards go through that process, and none of
the issues that you just mentioned have actually made it
through that process. And so, by employing the world's experts
in terms of what is a sustainability issue, none of those has
actually gotten through.
To the point that Mr. Huizenga made, some of these issues
do bubble to the top--
Mr. Duffy. So, on the social side, what do you want
disclosed on the social side?
Mr. Mohin. We actually have our disclosure standards. We
have 33 topic-specific standards--
Mr. Duffy. Give me a couple. What are your favorites?
Mr. Mohin. Human rights, ethics, environment, health and
safety. Some of the basics--
Mr. Duffy. So, on the environment side, who sets the
environmental standard? You guys do? You set the priorities?
Mr. Mohin. No, no, we don't set the standards. The experts.
We have subject-matter experts from--
Mr. Duffy. You set the standards on what you should do on
your environmental standards. So you have your experts
internally--
Mr. Mohin. Not internally, no, sir.
Mr. Duffy. Externally.
Mr. Mohin. They come from industry, they come from civil
society--
Mr. Duffy. How are you funded?
Mr. Mohin. Pardon?
Mr. Duffy. How are you funded?
Mr. Mohin. We have sources of funding that are 70 percent
self-funded and 30 percent from grants.
Mr. Duffy. So, if you look at the political spectrum on who
funds you, is it down the middle of the road? No political
persuasion? Left? Right? Who funds you?
Mr. Mohin. Of the 30 percent that is grant funding, it is
majority government. So we have fundings from government that
actually cite our standards in their legislation.
Mr. Duffy. I would note that I think we should be focused
less on your ESG requirements and we should focus on returns.
And that is what CalPERS should probably do as well. Because if
they continue to perform the way that they have, I am sure they
are going to come to this institution and their members will
come to this institution and say, we want more money, we want
you to bail us out.
And I guess, Mr. Atkins, to get your opinion, I think what
this is is to try to set up disclosures to put political
pressure on companies to do things that the Congress could
never pass itself. So if you want companies to comply with
different standards, whether it is global cooling from the
1970s or global warming from the 1990s or now there is climate
change today, pass it through the Congress. Right? Or if you
don't like guns, debate it in the Congress.
But I think what you want to do is get disclosures so you
can put political pressure on companies to get them to change
what they are doing because of political pressure. Am I wrong
on that, Mr. Atkins? And if I am, you can tell me I am.
Mr. Atkins. Sometimes, that is what, as I said in my
testimony, either government or others try to use for normative
reasons.
Mr. Duffy. And to your point, I think you expressed some
concern when you were asked about global warming. I think if
you look at the predictions that have been made over the last
30, 40, 50 years, most of them have not come to pass. Many of
them have not. And so you might just go, how accurate have the
predictions been, even from--go back to Al Gore's movie. Many
of the predictions that were made didn't come to pass. And so I
don't--I think that we--anyway, my time is up.
I yield back.
Mr. Vargas. Thank you.
The gentleman from Texas, Mr. Gonzalez, is now recognized
for 5 minutes.
Mr. Gonzalez of Texas. I yield back.
Mr. Vargas. The gentleman yields back.
The gentleman from Ohio, Mr. Stivers, is now recognized for
5 minutes.
Mr. Stivers. Thank you, Mr. Chairman.
Mr. Andrus, have you ever read the article that was
submitted into the record, ``Save the World or Make Money?'',
about CalPERS?
Mr. Andrus. No, sir, I have not.
Mr. Stivers. So what is your goal as an investment manager
at CalPERS? Who do you work for? Who do you consider your
fiduciary? And what do you consider your goal?
Mr. Andrus. So I work for the Board of Administration. They
are the fiduciaries of the--
Mr. Stivers. I am sorry. Who do you work for the benefit
of?
Mr. Andrus. I work for the benefit of our pensioners and
the workers of the State of California.
Mr. Stivers. And can you explain to the folks in the
hearing what happened in the chairman's race recently for the
board of your pension?
Mr. Andrus. Mr. Perez won a board election. And in the
chairman's race, the board then selected another chairman.
Mr. Stivers. I'm sorry, the Chair of your board lost her
board seat, correct?
Mr. Andrus. Correct.
Mr. Stivers. What was that issue over?
Mr. Andrus. I do not know what the issue was over. I do
know what Mr. Perez ran on.
Mr. Stivers. Okay. All I know is that it says here that it
was angry pensioners and beneficiaries that felt like the fund
was not focused enough on returns.
What is the annual return of CalPERS? I saw something that
said it is about 7 percent. Does that sound about right?
Mr. Andrus. That is our discount rate. Over the last 10
years, we have been above that.
Mr. Stivers. Okay. And you recently had to change your
amortization policy from 30 years to 20 years on investment
losses, which forced all the pensioners and the public folks
who fund those pensions to increase their contributions. Is
that correct? That happened last year, February 2018. Is that
correct?
Mr. Andrus. That is correct. That is not the reason why
that change was--
Mr. Stivers. But the result was that pensioners are paying
more money and local governments are paying more money. Is that
correct?
Mr. Andrus. That is correct.
Mr. Stivers. So it seems to me that if I was an investment
manager at CalPERS, I would be a lot more focused on increasing
my rate of return for my pensioners, because they are the ones
who are suffering right now. And I hope you will focus on that.
I have nothing against environmental stewardship,
sustainable social governance, and all that, but I think the
key thing here is about the policemen and the firemen and the
public workers that need the best return they can get.
And I appreciate your answering my questions.
Mr. Atkins, who decides materiality for a company?
Mr. Atkins. The company itself, in their disclosure.
Mr. Stivers. Who is in a best position to decide
materiality for a company?
Mr. Atkins. Again, the company itself.
Mr. Stivers. I think so too.
And are there a lot of societal issues we could decide
that, gee, this is a great social justice cause?
Mr. Atkins. I am sure among us all.
Mr. Stivers. I believe the answer is yes. But is the most
important social justice cause for a pension to provide
pensions for their pensioners?
Mr. Atkins. That is what it is instituted to do, yes.
Mr. Stivers. Isn't that their purpose?
Mr. Atkins. Yes, sir.
Mr. Stivers. And if it doesn't benefit that purpose, is it
helpful to the pensioners? Maybe. But if it hurts the return--
and it could hurt the return--it could actually damage the
pensioners.
And we have already had this asked and answered, but what
happens to the number of public companies as you increase
disclosure requirements on public companies? What choice will
companies make on becoming public?
Mr. Atkins. We have seen that overall regulatory burden,
including disclosure burden, causes companies not to choose to
go public.
Mr. Stivers. And what does that do to mom and pop
investors?
Mr. Atkins. It provides them fewer choices for investment.
Mr. Stivers. So, if you are a big pension like CalPERS, you
can get access to private equity. Is that correct? You can
still invest in those companies.
Mr. Atkins. Depending on the rules of--
Mr. Stivers. But if you are a mom and pop investor and you
are a small-business owner, do you have those same
opportunities?
Mr. Atkins. Unless you are an accredited investor, probably
not.
Mr. Stivers. Probably not. And especially on Main Street in
Logan, Ohio, and in Lancaster, Ohio, and Pickerington, Ohio,
that I represent.
And I am all for folks who want to use environmental and
social justice as their investment strategy, but for those
folks, aren't their companies that voluntarily disclose and
give people options?
Mr. Atkins. Oh, sure.
Mr. Stivers. Thank you.
I yield back.
Mr. Vargas. Thank you very much.
The gentleman from Arkansas, Mr. Hill, is now recognized
for 5 minutes.
Mr. Hill. Thank you, Chairman Vargas.
Again, this has been a great panel and very informative.
And thanks for your forbearance in being here this afternoon.
There were a couple of bills that I haven't heard much
discussion about. One was on disclosure on corporate taxes
being paid that was proposed. And, again, it struck me as--I
was confused, because, in my experience, corporate taxes are
disclosed pretty well, I think.
And I have pulled about 10 different public companies to
look at their tax disclosure and their 10-K. Did it cover
Federal taxes? The answer was yes. Did it cover State taxes?
Yes. Did it disclose taxes they paid internationally? The
answer was yes.
And it also tends to, in the footnote, reconcile those, and
it gives some additional commentary, depending on how
complicated the company is, again, unique to the company,
unique to this issue of financial statement preparation.
Mr. Atkins, do we need this additional direction on taxes,
tax disclosure?
Mr. Atkins. I think it is problematic. Again, it is very
focused, very detailed, as you were saying. I used to be a--
Mr. Hill. What would investors gain from that compared to
what people were reporting and have reported for decades now?
Mr. Atkins. Well, already, companies need to report
material information regarding their taxes, their tax
liabilities and litigation and that sort of thing.
Mr. Hill. It also seemed to imply that there was some
interest in knowing business around the world. And, of course,
of our Fortune 500 companies, 50 percent of revenues of the
Fortune 500 are international.
So I went and pulled for many of these same companies, does
it disclose their business by country or region? And the answer
is yes. I just pulled Procter & Gamble for fun. Forty-four
percent in the U.S. and Canada, 24 percent of sales in Europe,
9 percent in China.
So I am missing something again in this bill, if this is
necessary. Do we need more segment analysis? Are we missing
something there?
Mr. Atkins. Yes, again, it is very narrowly focused on tax
issues by countries.
Mr. Hill. Okay. Thank you for that.
And then another bill that I noted was on political or--I
guess, political expensing or lobbying expenses maybe. And this
bill doesn't have a bill number. It is the Shareholder
Protection Act about corporate expenditures over $10,000.
Again, I have seen companies have proxy proposals on that
year after year, and they just don't tend to pass. I think
there are about 60 companies that had something related to
disclosing lobbying expenses or political contribution
expenses, and they got about a third of the vote in favor.
So, in your experience as a Commissioner, what is the issue
here? What am I missing on this? They have the ability to have
a proxy solicited, go through a process in the annual meeting,
and people don't seem to be interested in that information.
Mr. Atkins. By and large, these sorts of proposals fail.
And at a couple of companies here and there, they have passed,
depending on the particular circumstances of the company. But,
overall, shareholders reject these.
Mr. Hill. Yes.
I guess my main point here is, I agree with so many of the
comments made today that companies have an obligation to
disclose materiality things that will impact their business and
their shareholder investing, whether it is related to climate
change because they have risk associated with that. They have
an obligation to disclose material risks now.
The key thing I think that is important is they have that
obligation, they have civil and in some cases criminal
penalties associated with not reporting material standards. And
the beauty of our system is, in fact, that it is unique to each
company. Each company determines that board and that management
team with full input. We have shareholder activists, we have
institutional investors that some of you represent, all
engaging in that conversation.
And so I view these bills, while interesting ideas and
well-meaning, I just don't think that they are needed and that
these issues are being addressed now by boards of directors,
shareholders, corporate officers, and our process that we have
now.
And, with that, Mr. Chairman, I yield back the balance of
my time unless the ranking member wants time.
I yield back.
Mr. Vargas. Thank you very much.
Before we wrap up, I would like to take care of one
administrative matter. Without objection, I would like to
submit letters and statements for the record from the Carbon
Disclosure Project; Public Citizen; the Council for
Institutional Investors; the FACT Coalition; Principles for
Responsible Investment; Morningstar; Professors Cynthia
Williams and Jill Fish; TIAA; and the International Corporate
Accountability Roundtable.
I would also like to thank our witnesses today. I think the
information was very valuable. I know it got a little rough
there at points, but I appreciate very much you being here and
your testimony. It is invaluable. So, thank you.
The Chair notes that some Members may have additional
questions for this panel, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
This hearing is now adjourned.
[Whereupon, at 3:57 p.m., the hearing was adjourned.]
A P P E N D I X
July 10, 2019
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