| <html> | |
| <title> - CLIMATE CHANGE AND SOCIAL RESPONSIBILITY: HELPING CORPORATE BOARDS AND INVESTORS MAKE DECISIONS FOR A SUSTAINABLE WORLD</title> | |
| <body><pre> | |
| [House Hearing, 117 Congress] | |
| [From the U.S. Government Publishing Office] | |
| CLIMATE CHANGE AND SOCIAL | |
| RESPONSIBILITY: HELPING CORPORATE | |
| BOARDS AND INVESTORS MAKE DECISIONS | |
| FOR A SUSTAINABLE WORLD | |
| ======================================================================= | |
| VIRTUAL HEARING | |
| BEFORE THE | |
| SUBCOMMITTEE ON INVESTOR PROTECTION, | |
| ENTREPRENEURSHIP, AND CAPITAL MARKETS | |
| OF THE | |
| COMMITTEE ON FINANCIAL SERVICES | |
| U.S. HOUSE OF REPRESENTATIVES | |
| ONE HUNDRED SEVENTEENTH CONGRESS | |
| FIRST SESSION | |
| __________ | |
| FEBRUARY 25, 2021 | |
| __________ | |
| Printed for the use of the Committee on Financial Services | |
| Serial No. 117-7 | |
| [GRAPHIC NOT AVAILABLE IN TIFF FORMAT] | |
| __________ | |
| U.S. GOVERNMENT PUBLISHING OFFICE | |
| 43-994 PDF WASHINGTON : 2021 | |
| -------------------------------------------------------------------------------------- | |
| 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 FRANK D. LUCAS, Oklahoma | |
| GREGORY W. MEEKS, New York BILL POSEY, Florida | |
| DAVID SCOTT, Georgia BLAINE LUETKEMEYER, Missouri | |
| AL GREEN, Texas BILL HUIZENGA, Michigan | |
| EMANUEL CLEAVER, Missouri STEVE STIVERS, Ohio | |
| ED PERLMUTTER, Colorado ANN WAGNER, Missouri | |
| JIM A. HIMES, Connecticut ANDY BARR, Kentucky | |
| BILL FOSTER, Illinois ROGER WILLIAMS, Texas | |
| JOYCE BEATTY, Ohio FRENCH HILL, Arkansas | |
| JUAN VARGAS, California TOM EMMER, Minnesota | |
| JOSH GOTTHEIMER, New Jersey LEE M. ZELDIN, New York | |
| VICENTE GONZALEZ, Texas BARRY LOUDERMILK, Georgia | |
| AL LAWSON, Florida ALEXANDER X. MOONEY, West Virginia | |
| MICHAEL SAN NICOLAS, Guam WARREN DAVIDSON, Ohio | |
| CINDY AXNE, Iowa TED BUDD, North Carolina | |
| SEAN CASTEN, Illinois DAVID KUSTOFF, Tennessee | |
| AYANNA PRESSLEY, Massachusetts TREY HOLLINGSWORTH, Indiana | |
| RITCHIE TORRES, New York ANTHONY GONZALEZ, Ohio | |
| STEPHEN F. LYNCH, Massachusetts JOHN ROSE, Tennessee | |
| ALMA ADAMS, North Carolina BRYAN STEIL, Wisconsin | |
| RASHIDA TLAIB, Michigan LANCE GOODEN, Texas | |
| MADELEINE DEAN, Pennsylvania WILLIAM TIMMONS, South Carolina | |
| ALEXANDRIA OCASIO-CORTEZ, New York VAN TAYLOR, Texas | |
| JESUS ``CHUY'' GARCIA, Illinois | |
| SYLVIA GARCIA, Texas | |
| NIKEMA WILLIAMS, Georgia | |
| JAKE AUCHINCLOSS, Massachusetts | |
| Charla Ouertatani, Staff Director | |
| Subcommittee on Investor Protection, Entrepreneurship, | |
| and Capital Markets | |
| BRAD SHERMAN, California, Chairman | |
| CAROLYN B. MALONEY, New York BILL HUIZENGA, Michigan, Ranking | |
| DAVID SCOTT, Georgia Member | |
| JIM A. HIMES, Connecticut STEVE STIVERS, Ohio | |
| BILL FOSTER, Illinois ANN WAGNER, Missouri | |
| GREGORY W. MEEKS, New York FRENCH HILL, Arkansas | |
| JUAN VARGAS, California TOM EMMER, Minnesota | |
| JOSH GOTTHEIMER. New Jersey ALEXANDER X. MOONEY, West Virginia | |
| VICENTE GONZALEZ, Texas WARREN DAVIDSON, Ohio | |
| MICHAEL SAN NICOLAS, Guam TREY HOLLINGSWORTH, Indiana, Vice | |
| CINDY AXNE, Iowa Ranking Member | |
| SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio | |
| EMANUEL CLEAVER, Missouri BRYAN STEIL, Wisconsin | |
| C O N T E N T S | |
| ---------- | |
| Page | |
| Hearing held on: | |
| February 25, 2021............................................ 1 | |
| Appendix: | |
| February 25, 2021............................................ 39 | |
| WITNESSES | |
| Thursday, February 25, 2021 | |
| Andrus, James, Investment Manager, Board Governance and | |
| Sustainability Program, California Public Employees' Retirement | |
| System (CalPERS)............................................... 10 | |
| Green, Andy, Senior Fellow for Economic Policy, Center for | |
| American Progress.............................................. 5 | |
| Ramani, Veena, Senior Program Director, Capital Market Systems, | |
| Ceres.......................................................... 9 | |
| Ramaswamy, Vivek, Founder & Executive Chairman, Roivant Sciences. 12 | |
| Toney, Heather McTeer, Climate Justice Liaison, Environmental | |
| Defense Fund, and Senior Advisor, Moms Clean Air Force......... 7 | |
| APPENDIX | |
| Prepared statements: | |
| Andrus, James................................................ 40 | |
| Green, Andy.................................................. 51 | |
| Ramani, Veena................................................ 83 | |
| Ramaswamy, Vivek............................................. 99 | |
| Toney, Heather McTeer........................................ 107 | |
| Additional Material Submitted for the Record | |
| Sherman, Hon. Brad: | |
| Center for American Progress report, ``The SEC's Time to | |
| Act''...................................................... 116 | |
| CDP report, ``Pitfalls of Climate-Related Disclosures''...... 153 | |
| Ceres report, ``Disclose What Matters''...................... 163 | |
| Ceres report, ``Running the Risk''........................... 194 | |
| Letter from Kevin Fromer, President and CEO, Financial | |
| Services Forum, to Senator Menendez and Representative | |
| Meeks...................................................... 237 | |
| ISS Climate Scenario Analysis................................ 238 | |
| ISS ESG Climate Portfolio Analysis........................... 248 | |
| ISS Ethix, ``Decarbonizing a Portfolio Versus Decarbonizing | |
| the Economy''.............................................. 253 | |
| Letter from Rich Sorkin, CEO, Jupiter Intelligence, to | |
| Chairwoman Waters, Chairman Sherman, Ranking Member | |
| McHenry, and Ranking Member Huizenga....................... 256 | |
| PGIM report, ``Weathering Climate Change''................... 260 | |
| Letter from Fiona Reynolds, CEO, PRI, to Chairman Sherman and | |
| Ranking Member Huizenga.................................... 265 | |
| Letter from Lisa Gilbert, Executive Vice President, Public | |
| Citizen, to Chairman Sherman and Ranking Member Huizenga... 273 | |
| Recommendations of the Task Force on Climate-Related | |
| Financial Disclosures (TCFD)............................... 277 | |
| Huizenga, Hon. Bill: | |
| ``Yellen Can't Save the Polar Bears,'' by Gregory Zerzan..... 351 | |
| Written statement of Benjamin Zycher......................... 355 | |
| CLIMATE CHANGE AND SOCIAL | |
| RESPONSIBILITY: HELPING | |
| CORPORATE BOARDS AND | |
| INVESTORS MAKE DECISIONS | |
| FOR A SUSTAINABLE WORLD | |
| ---------- | |
| Thursday, February 25, 2021 | |
| 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 2:01 p.m., via | |
| Webex, Hon. Brad Sherman [chairman of the subcommittee] | |
| presiding. | |
| Members present: Representatives Sherman, Scott, Himes, | |
| Foster, Meeks, Vargas, Gottheimer, Gonzalez of Texas, San | |
| Nicolas, Axne, Casten, Cleaver; Huizenga, Stivers, Wagner, | |
| Hill, Emmer, Mooney, Davidson, Hollingsworth, Gonzalez of Ohio, | |
| and Steil. | |
| Ex officio present: Representative Waters. | |
| Also present: Representative Barr. | |
| Chairman Sherman. The Subcommittee on Investor Protection, | |
| Entrepreneurship, and Capital Markets will come to order. | |
| Without objection, the Chair is authorized to declare a recess | |
| of the subcommittee at any time. And, in fact, I do intend to | |
| declare a recess, probably around 4:15 p.m., to allow Members | |
| to vote in the end of the first vote on the Floor, and resuming | |
| probably a half hour later so that Members will have a chance | |
| to have voted on the second vote that we expect to happen this | |
| afternoon. | |
| Also, without objection, members of the full Financial | |
| Services Committee who are not members of this subcommittee are | |
| authorized to participate in today's hearing. This is the first | |
| hearing of this subcommittee in the 117th Congress, and I do | |
| want to thank everyone for being here. | |
| And I'd like to point out that with the Chair of our Full | |
| Committee being an ex officio member of this subcommittee, this | |
| subcommittee has four Full Committee Chairs as members of this | |
| subcommittee, because we have the Chairs of the Financial | |
| Services, Oversight and Reform, Agriculture, and Foreign | |
| Affairs Committees serving with us here today. | |
| As a reminder, all Members should keep themselves muted | |
| when they are not being recognized by the Chair. This will | |
| minimize disturbances while Members are asking question of our | |
| witnesses. The staff has been instructed not to mute a Member | |
| except when the Member is not being recognized by the Chair and | |
| there is inadvertent background noise. | |
| Members are also reminded that they may only participate in | |
| one remote proceeding at a time. If you are participating | |
| today, please keep your camera on, and if you choose to attend | |
| a different remote proceeding, please turn your camera off. If | |
| Members wish to be recognized during the hearing, please | |
| identify yourself by name to facilitate recognition by the | |
| Chair. | |
| Today's hearing is entitled, ``Climate Change and Social | |
| Responsibility: Helping Corporate Boards and Investors Make | |
| Decisions for a Sustainable World.'' | |
| And I have just been informed that our Full Committee Chair | |
| Maxine Waters will not be joining us for an opening statement, | |
| and accordingly I recognize myself for 5 minutes to deliver an | |
| opening statement. I'll then recognize the ranking member of | |
| this subcommittee, Mr. Huizenga, for his opening statement. | |
| For hundreds of years, boards of directors and investors | |
| have focused pretty much on one thing: Can the corporation pay | |
| dividends? The chief measure of this was earnings per share. | |
| The accounting profession for centuries has developed a system | |
| to define, measure, tabulate, audit, and report earnings per | |
| share. Those who defined earnings per share controlled what a | |
| corporation would do, since its board would instruct its | |
| executives to do whatever was legal and ethical in order to | |
| achieve earnings per share. And this met societal expectations, | |
| since society simply wanted corporations to create and maintain | |
| profitable businesses. | |
| Today, we have different expectations. In addition to | |
| shareholders, we have stakeholders. All of us are stakeholders. | |
| Society at large protects the corporation and its property, | |
| educates its workforce and their children, and stakeholders | |
| also want to know what the corporation is doing. And the | |
| shareholders themselves want more information than earnings per | |
| share. They especially want information about the effect on | |
| climate change. | |
| Keep in mind that over the last 40 years, the number of | |
| weather events costing over a billion dollars has increased by | |
| 300 percent. So, climate change is real and it is affecting us. | |
| And we know who is affected most: disadvantaged communities and | |
| communities of color. For example, during Hurricane Katrina, | |
| more than one-third of those residents who were forced to leave | |
| their homes were African Americans, and half of those who died | |
| from that hurricane were African Americans. | |
| So, those looking at corporations want to know, how is the | |
| corporation affected by future climate change, how will it be | |
| affected, and how is its behavior designed to minimize climate | |
| change? We have a host of other social issues to deal with, and | |
| with each of them we want to define numerical standards. We | |
| don't want an extra page or two added to the report of the | |
| corporation, the 10-K, loaded with greenwash and denial | |
| statements. We need to define and hopefully have numerical | |
| standards and measures to tabulate. We want to change the | |
| behavior of corporations, both in causing them to prepare for | |
| climate change and to hopefully minimize their effect on | |
| climate change. | |
| And there are those who argue that this is not important, | |
| it is not material, that the only things that are material are | |
| things that change earnings per share by at least a few | |
| pennies. First, these issues are material to shareholders; and | |
| second, there is a reputational risk that will affect earnings | |
| per share. So if you focus only on earnings per share, you are | |
| not going to be in a position to predict future earnings per | |
| share. And investors themselves are interested in these social | |
| issues, not just on earnings per share. | |
| Now, we can't turn the Form 10-K into a telephone book. We | |
| need to be selective, and sometimes issues may arise that are | |
| important that may not be as important in future years. Right | |
| now, I'm working with others on getting disclosure of | |
| involvement in Xinjiang Province in China, so that we will know | |
| whether forced labor is part of a corporation's supply chain. | |
| Hopefully, 10 years from now, that won't be an issue. But we do | |
| know that climate change and the corporation's effect on other | |
| environmental issues and environmental justice will be | |
| important to stakeholders and shareholders in the future. | |
| We do know that we want to disclose whether the corporation | |
| is engaged in political contributions that are hidden from the | |
| public, so-called ``dark money,'' and for those who say that is | |
| not material to investors, tell me on the record whether you | |
| would invest in a company that gave $20 million to the | |
| Communist Party of the United States or one of its dark money | |
| subordinate entities. | |
| We want to focus on executive pay versus average pay, and | |
| whether the corporation is paying taxes, or taking advantage of | |
| tax havens. There are a host of issues that I think are serious | |
| enough to require the corporations to disclose them and for | |
| shareholders to want to focus on them. | |
| With that, I recognize Ranking Member Huizenga for 5 | |
| minutes. | |
| Mr. Huizenga. Thank you, Mr. Chairman. So, what exactly are | |
| ESGs? Many claim that Environmental, Social, and Governance | |
| (ESG) investing is an investment strategy that focuses on | |
| incorporating criteria into investment decisions in addition to | |
| the traditional focus on investment financial returns. However, | |
| ESG data criteria spans a range of issues including, among | |
| others, measures of companies' carbon emissions, labor policies | |
| [inaudible.] | |
| Chairman Sherman. Mr. Huizenga, if you can suspend until | |
| the majority of us can hear you? | |
| Mr. Huizenga. Okay. Can you hear me now? I am not sure | |
| what's happening. | |
| Chairman Sherman. We can hear you now. | |
| Mr. Huizenga. Okay. I'll pick up partway through, assuming | |
| that you are dealing with the timing properly to put some time | |
| back on. Correct, Mr. Chairman? | |
| Chairman Sherman. You have almost 4\1/2\ minutes. | |
| Mr. Huizenga. Okay. Well, this data spans a range of | |
| issues, deals with what are frankly policy decisions, not | |
| business decisions. And, whether the CEO and the chairman of | |
| the board of directors is the same person or whether the | |
| company issues dual-class shares shouldn't be the role of this | |
| body. | |
| It is clear that demands for ESG information have increased | |
| recently. The amount of money in ESG-specific exchange-traded | |
| funds went from taking in $8 billion in 2019, to $31 billion in | |
| 2020. According to Bank of America's global research, it is | |
| estimated that the amount invested in ESG funds could increase | |
| by $20 trillion over the next 2 decades. Because of these | |
| increased demands, many companies have responded by voluntarily | |
| increasing the amount of ESG information that they disclose. By | |
| all means, companies should focus on providing meaningful | |
| material disclosure that a reasonable investor needs to make | |
| informed investment decisions. After all, companies and not | |
| bureaucrats are best equipped to determine-- | |
| Chairman Sherman. Once again, Mr. Huizenga, I wonder if you | |
| can suspend, and I will ask staff to freeze the clock. Can | |
| others hear Mr. Huizenga? I cannot. | |
| We've frozen the clock at 3:17, and now we can hear the | |
| gentleman. | |
| Mr. Huizenga. I am trying to reconnect on my Bluetooth. I'm | |
| sorry. I am trying to reconnect to the internet, the Wi-Fi | |
| here, and make sure that's connected properly. | |
| Chairman Sherman. We can hear you now. | |
| Mr. Huizenga. Okay. Sorry about that. Hopefully, the | |
| internet is--I am in my office. I can't do much more than be in | |
| my office to get a signal. | |
| So with that, individual businesses should be able to | |
| create an optimized value for their shareholders and potential | |
| investors. What should not happen is that the government | |
| mandates ESG disclosures. As we had talked about, and maybe it | |
| got cut out, doing this voluntarily is proper, but having | |
| government mandates to do it should not be. | |
| These disclosures only name and shame companies that we all | |
| know; for some, naming and shaming what they perceive as | |
| corporate brilliance has been fun and trendy and some even have | |
| profited from the practice. Additionally, compliance with these | |
| types of mandatory disclosures only wastes precious private | |
| sector resources that could otherwise be used to create jobs, | |
| increase wages, grow the company, expand capacity, and maximize | |
| shareholder value. | |
| To date, there is very little concrete evidence that over | |
| the long term, ESG investing outperforms broad market indexes. | |
| Politically-motivated disclosure requirements only increase | |
| costs and add yet another hurdle for companies who are looking | |
| to go public, while discouraging other companies from doing so. | |
| Over the last several decades, activist shareholders, corporate | |
| gadflies, and misguided politicians have hijacked the SEC to | |
| operate well outside its mandate and push nonmaterial social | |
| and political policies. | |
| In fact, a February 2021 report from the Global Financial | |
| Markets Center at Duke University School of Law goes so far as | |
| to say that securities law should be rewritten so that the SEC | |
| can regulate to, ``fight climate change, systemic racism, and | |
| income and wealth inequality.'' This is not part of the | |
| tripartite mission of the SEC. Instead of focusing on policies | |
| that solve societal ills, the SEC must remain focused on | |
| protecting investors; maintaining fair, orderly, and efficient | |
| markets; and facilitating capital formation. | |
| While some today may encourage or even embrace SEC mission | |
| creed, the reality is that government-imposed mandates will not | |
| lead to greater prosperity or protect investors. At the end of | |
| the day, the goal should be to create an atmosphere that | |
| increases capital formation, strengthens job creation, and | |
| boosts economic growth. When you talk about closing the gap on | |
| income and quality, that's how we do it. The subcommittee | |
| should be looking for ways to make our public markets more | |
| attractive, and more competitive, not examining ways to | |
| increase regulatory and compliance burdens on the private | |
| sector. | |
| The title of this hearing says, ``Helping Corporate Boards | |
| and Investors Make Decisions for a Sustainable World.'' The | |
| chairman said, ``We want to change the behavior of | |
| corporations.'' This is not helping, this is mandating, and not | |
| all of us agree with the chairman. Some may have those | |
| different expectations. So, it is amazing to me the mental | |
| gymnastics that are being used to justify this path forward, | |
| and what we need to do is to make sure that we are dealing with | |
| policy, not social engineering, plain and simple. With that, I | |
| yield back. | |
| Chairman Sherman. Thank you. | |
| Today, we welcome the testimony of our distinguished | |
| witnesses. | |
| Andy Green is a senior fellow for economic policy at the | |
| Center for American Progress, and was a counsel to former SEC | |
| Commissioner Kara Stein. | |
| Heather McTeer Toney is a climate justice liaison at the | |
| Environmental Defense Fund, and a senior advisor at Moms Clean | |
| Air Force. Previously, she served as mayor of Greensville, | |
| Mississippi, and as regional administrator for the EPAs | |
| southeast region. | |
| Veena Ramani is senior program director of capital market | |
| systems at Ceres, a sustainability nonprofit organization that | |
| works with investors and companies. | |
| James Andrus is the investment manager of the Board | |
| Governance and Sustainability Program for CalPERS, which has | |
| some of my money, and I believe it is the largest institutional | |
| investor. | |
| And Vivek Ramaswamy is founder and executive chairman of | |
| Roivant Sciences, and he is an entrepreneur and author, as | |
| well. | |
| Witnesses are reminded that your oral testimony will be | |
| limited to 5 minutes. You should be able to see the timer on | |
| your screen that will indicate how much time you have left, and | |
| a chime will go off at the end of your time. I would ask that | |
| you be mindful of the timer and quickly wrap up your testimony | |
| if you hear a chime. And without objection, your written | |
| statements will be made a part of the record. | |
| Mr. Green, you are now recognized for 5 minutes. | |
| STATEMENT OF ANDY GREEN, SENIOR FELLOW FOR ECONOMIC POLICY, | |
| CENTER FOR AMERICAN PROGRESS | |
| Mr. Green. Thank you so much, Chairman Sherman, and Ranking | |
| Member Huizenga. I am Andy Green, a senior fellow at the Center | |
| for American Progress. These remarks reflect my own views. | |
| The problems facing our world from climate change to | |
| systemic racism to economic inequality are problems that | |
| investors directly face, too. Disclosure and accountability | |
| aren't about subjective outcomes and preferences; they are | |
| about making the economy work. Information and accountability | |
| are the lifeblood of competition and the broadly distributed | |
| economic opportunity that makes capitalism in America work if | |
| we hold true to it. | |
| Consistent, comparable, and reliable information, the | |
| government's corporate accountability tools, and strong banking | |
| regulation enable investors and the public to help align | |
| outcomes for the long-term shared interests of all: investors; | |
| companies; workers; and the public. When those outcomes are not | |
| so aligned, financial crises, corporate scandals, taxpayer | |
| bailouts, pollution, racism, and economic inequality occur far | |
| more easily. Climate change is a systemic risk to the U.S. | |
| financial system, and many ESG matters pose glowing threats | |
| including existing threats to investor protection, retirement | |
| security, and economic growth. | |
| Climate change will destroy assets and hamstring recovery | |
| and growth. The need to transition to net zero will leave | |
| behind those who are laggards. As scholar Graham Steele has | |
| outlined, climate's impacts on the financial system will flow | |
| through and amplify existing vulnerabilities, in particular, | |
| leverage, interconnectedness, and concentration. The less that | |
| investors are speculative will do more to prevent what Steele | |
| terms a climate ``Lehman Brothers moment,'' where working | |
| families, investors, and taxpayers will be left holding the | |
| bag. | |
| We need equitable solutions for communities of color, | |
| agricultural communities, many of which are communities of | |
| color, too, and all Americans, who are similarly geographically | |
| impacted. Capital can move across borders in minutes, yet | |
| working families are far more bound to the communities in which | |
| we all live. We need to lean against the downward pressure that | |
| mobile capital can place on worker wages and environmental | |
| standards, and more, both within the country and | |
| internationally. | |
| Laissez-faire rules, including around the capital markets | |
| and financial regulations, get you concentrations of wealth and | |
| economic power, and ultimately, deep distressed in the | |
| political system that enabled that. Equity is only one of the | |
| reasons why I feel so strongly about a focus on financial- | |
| sector transparency and accountability around the emissions in | |
| finances, and the labor practices, and tax risks that are | |
| enabled, and other ESG issues. | |
| Ultimately, it is far more equitable to hold accountable | |
| the large financial firms that are financing, underwriting, and | |
| trading in climate risk or labor risk in financial products and | |
| bringing those finance emissions, for example, down in line | |
| with the Paris Accord and the best science, that is, to smack | |
| the community banks and credit unions who are serving working | |
| families and farmers. Bringing down emissions across the | |
| financial system will reduce the climate impacts on those | |
| communities and on all of us. Getting net zero by 2050 is the | |
| best way to reduce climate financial risk and protect | |
| investors. | |
| Similarly, holding the financial sector accountable on | |
| worker empowerment, systemic risk, taxpayer and human rights, | |
| and democracy, sends powerful signals via the marketplace that | |
| we are all in this together, investors and the public. | |
| The United States has for far too long been a laggard in | |
| sustainable finance. Correcting that presents an opportunity | |
| for better markets and for American leadership in the world. To | |
| date, the subcommittee has considered a number of important | |
| bills, all of which advance sustainable finance, and which I | |
| supplemented with a range of recommendations in my written | |
| testimony. All of these areas interact with one another in | |
| multiple ways and progress across them together reinforces the | |
| effectiveness of all of them. | |
| Our history of predicting past financial consumer and | |
| investor protection crises is poor, but we have the opportunity | |
| to get it right this time. I hope we seize that opportunity. | |
| Ultimately, it is about enabling capitalism to work. Thank you | |
| very much. I look forward to answering your questions. | |
| [The prepared statement of Mr. Green can be found on page | |
| 51 of the appendix.] | |
| Chairman Sherman. Thank you, and thank you for not using | |
| absolutely all of your time. | |
| Ms. Toney, you are now recognized for 5 minutes. | |
| STATEMENT OF HEATHER MCTEER TONEY, CLIMATE JUSTICE LIAISON, | |
| ENVIRONMENTAL DEFENSE FUND, AND SENIOR ADVISOR, MOMS CLEAN AIR | |
| FORCE | |
| Ms. Toney. Thank you, Chairman Sherman, Ranking Member | |
| Huizenga, and members of the subcommittee. Thank you for | |
| holding this very timely hearing to discuss the necessity to | |
| normalize climate change and social responsibility as a | |
| consideration of corporate boards and investors. I truly | |
| approximately the opportunity to testify about the very real | |
| risk to investors, markets, and communities, particularly | |
| Black, Brown, and marginalized areas that are disproportionally | |
| impacted when corporations fail to calculate the risk of | |
| climate change. | |
| I am here today in my capacity as the climate justice | |
| liaison for the Environmental Defense Fund, and as senior | |
| advisor to Moms Clean Air Force. Together, we are a community | |
| of over 3.7 million parents, members, and allies who tackle our | |
| planet's biggest environmental challenges through science and | |
| partnership, economics, and advocacy. I previously served as | |
| Administrator for the EPA's Southeast Region under President | |
| Obama, and I am also a former mayor, having served my hometown | |
| of Greenville, Mississippi, for two terms. | |
| I have recently served as a climate justice advisor to two | |
| Fortune 500 companies. But my most important job is as a mom. I | |
| am the mother of three children, ages 25, 15, and 4, and it is | |
| through this lens that I share my expertise on the impact of | |
| climate change as a risk impact to corporations. | |
| It is also with great pleasure that I sit alongside | |
| colleagues who are no strangers to this work or our | |
| organizations. This subject is not new to us. But what's | |
| unfortunate is that the warnings we all shared over 10 years | |
| ago were not heeded. Right now, today, we are experiencing in | |
| real time the devastation, physical, and financial loss borne | |
| by those most unable to stand the burden due to failures of | |
| corporations to adequately prepare and disclose their climate | |
| risk. | |
| I am going to focus on the impacts felt by what I call the, | |
| ``invisible investor,'' and that's the American taxpayers | |
| invested in the infrastructure and assets of our communities | |
| nationwide. More often than not, the brunt of these expenses | |
| fall on communities most at risk to the impacts of climate | |
| change | |
| When I was mayor, I was blessed with a really good | |
| corporate partner, Mars Food, Incorporated. They operated Uncle | |
| Ben's Rice, now known as Ben's Original Rice, in Greenville, | |
| Mississippi, for over 40 years. They not only supply needed | |
| jobs to the community, but they also hold an important role as | |
| a major public asset. They occupy over 80 acres, 250,000 square | |
| feet of space and produce 100,000 tons of rice annually. It is | |
| the largest Mars Food factory in the world. Sitting right on | |
| the Mississippi River, it serves as an anchor to a majority of | |
| the African-American community that has been working hard to | |
| overcome systemic poverty for generations. | |
| During my time of public service, I had to manage not one, | |
| but two, 500-year flood events. Both events caused extensive | |
| and expensive damage to the infrastructure of the community: | |
| roads; bridges; and water systems. They were all impacted by | |
| the heavy rainfall and the incessant storms that battered the | |
| City of Greenville year after year. | |
| Quite frankly, the tax base of the City couldn't handle the | |
| existing infrastructure needs, let alone the added pressure of | |
| becoming resilient to climate impacts. It is the type of | |
| activity that would cause a major business or corporation to | |
| close up shop and move somewhere else. Nevertheless, the Mars | |
| Food climate sustainability plan took into account the asset | |
| placement, needs, preparation, and mitigation necessary to | |
| continue strong global economic growth while supporting local | |
| community needs. | |
| Their willingness to not only assess climate risk, but | |
| share the information, meant that I was prepared to account for | |
| the necessary support: street upgrades; police and fire in case | |
| of emergency; water system points of weakness; potential levee | |
| breaches; and places to point the Army Corp of Engineers to for | |
| review. All of these calculated costs added value to the | |
| company while protecting the invisible investor: the citizens | |
| of my City who, through their tax dollars, were able to defer | |
| and reinvest repairs to other places where it was needed. | |
| How I wish that same energy could have emerged in Texas | |
| with the recent winter storms and the energy debacle that arose | |
| from the complete failure of publicly-traded energy | |
| corporations to prepare, let alone disclose their climate | |
| risks. While you will certainly hear that voluntary climate- | |
| risk disclosures create a better opportunity for corporations | |
| to self-regulate, while protecting their proprietary | |
| information, the bottom line is that the astronomical rates in | |
| the deregulated system represent a failure of market | |
| incentives. It also demonstrates that some oversight is | |
| necessary to protect those most at risk from the economic | |
| fallout of these intense climate-weather events. | |
| These are the ``invisible investors,'' because the people | |
| pay a high price when there is a market crash. They cannot | |
| short-sell their stock in the community. They are not able to | |
| redistribute the loss among other assets. The invisible | |
| investors are not able to categorize the outrageously high | |
| electric and water bills as a capital loss and reduce their tax | |
| rate. | |
| How our government, corporations, and communities respond | |
| right now will determine whether or not we have learned for our | |
| historic history of systemic racism and exclusion by following | |
| the science and listening to community experts in order to | |
| create a more efficient and equitable process that saves our | |
| economy, ecosystem, and lives at the same time. I stand ready | |
| to answer any questions. Thank you. | |
| [The prepared statement of Ms. Toney can be found on page | |
| 107 of the appendix.] | |
| Chairman Sherman. Thank you. | |
| Ms. Ramani, you are now recognized for 5 minutes. | |
| STATEMENT OF VEENA RAMANI, SENIOR PROGRAM DIRECTOR, CAPITAL | |
| MARKET SYSTEMS, CERES | |
| Ms. Ramani. Thank you, Chairman Sherman, Ranking Member | |
| Huizenga, and members of the subcommittee. Thank you for the | |
| opportunity to appear before you today. My name is Veena | |
| Ramani, and I represent Ceres, a nonprofit organization that | |
| works with hundreds of influential investors and companies to | |
| tackle the world's greatest sustainability challenges, | |
| including the climate crisis. My testimony draws from Ceres' | |
| long history in working on climate change risk management and | |
| climate change disclosure. | |
| Climate change is not only an environmental issue; it is a | |
| systemic financial risk. The physical impacts of climate change | |
| are happening all around us. Just this past year, we've lived | |
| through the worst wildfire season, the busiest hurricane | |
| season, and the hottest year on record. Combined damages from | |
| these and other extreme weather events totaled close to $100 | |
| billion in 2020. | |
| These impacts are landing disproportionately on low-income | |
| communities, rural communities, and communities of color. As my | |
| fellow panelists have reiterated, climate change, public | |
| health, and racial inequality don't exist in silos. They are | |
| deeply intertwined and, in turn, affect financial market | |
| stability and broader economic well-being. | |
| Companies are adjusting at different speeds to this new | |
| normal. Many companies are seeing and embracing the lucrative | |
| opportunities being created by the shift to a net zero economy. | |
| We've seen companies set goals, innovate, and evolve their | |
| business strategies. Actions like this remain the exception | |
| rather than the rule. In fact, last year, when Ceres assessed | |
| the climate risks of major banks, we found that more than half | |
| of their syndicated loans faced significant transition risks | |
| because many of their clients are not prepared for the shift to | |
| a net zero economy. | |
| Investors have known about the physical and transition | |
| risks for years. Most investors understand that climate is not | |
| just a financial risk; it is a material risk. But the latest | |
| understanding from the Federal Reserve and other regulators is | |
| that the climate crisis is a systemic risk that threatens the | |
| very stability of financial markets. | |
| In the face of the climate crisis, companies, investors, | |
| and regulators need to make consequential decisions, and they | |
| need to make them now. The foundation for this is starting to | |
| be laid. Companies are starting to integrate climate change | |
| into their risk management. Investors are including climate | |
| change in shareholder proposals, their dialogue with companies, | |
| and their investment analysis. Financial regulators have | |
| started to include climate change factors into their | |
| supervision of key industries. | |
| But, there's a catch. Companies, investors, and regulators | |
| don't have access to quality, actionable, and reliable climate | |
| change disclosures at scale. You cannot make good decisions | |
| without good information. To address climate change risks in | |
| financial markets, decision-makers first need information on | |
| the nature of the risks that markets face, and for this, | |
| companies need to provide information on their climate change | |
| performance, strategies, and approach. | |
| It is important to note that there has been an uptick in | |
| voluntary climate change disclosures driven by investor demand | |
| and the pioneering work done by key groups in this space like | |
| GRI, SASB, CDP, and others. But even though the volume of | |
| disclosure has grown, the quality of disclosure remains | |
| variable. Investors and regulators are still not getting | |
| decision-useful insights. | |
| Federal Reserve Governor Lael Brainard actually summarized | |
| the core of the problem just last week, when she said, | |
| ``Current voluntary disclosure practices are an important first | |
| step, but they are prone to variable quality, incompleteness, | |
| and a lack of actionable data.'' | |
| The SEC has issued guidance that explains how its existing | |
| disclosure rules could be applied to climate risks, but to | |
| date, the guidance has not been strongly enforced. A clear, | |
| right, and urgent action to address the climate crisis, robust | |
| climate change disclosure, is key. Decisive action is needed by | |
| the SEC because this is fundamental to the success of | |
| companies, investors, and regulators. Ceres has called on the | |
| SEC to robustly enforce the existing interpretative guidance on | |
| climate change. And just yesterday, Acting Chair Allison Lee of | |
| the SEC issued a statement directing SEC staff to enhance their | |
| focus on climate-related disclosure. We would welcome this as a | |
| critically important step in the right direction. We also call | |
| on the SEC to build on this new focus and adopt and enforce | |
| rules for climate change disclosure. | |
| In closing, companies, investors, and regulators lack vital | |
| information on climate change, and in a very real way, they are | |
| flying blind. Again, you cannot make good decisions without | |
| good information. And given the scale of the risk and the | |
| important decisions that need to be made, climate change | |
| information does not just need to be good; it needs to be as | |
| good as possible. I thank you for your attention and I'm happy | |
| to answer questions. | |
| [The prepared statement of Ms. Ramani can be found on page | |
| 83 of the appendix.] | |
| Chairman Sherman. Thank you for adhering to our time | |
| limits. | |
| Mr. Andrus, you are now recognized for 5 minutes. | |
| STATEMENT OF JAMES ANDRUS, INVESTMENT MANAGER, BOARD GOVERNANCE | |
| AND SUSTAINABILITY PROGRAM, CALIFORNIA PUBLIC EMPLOYEES' | |
| RETIREMENT SYSTEM | |
| Mr. Andrus. Chairman Sherman, Ranking Member Huizenga, and | |
| members of the subcommittee, thank you for the opportunity to | |
| testify at today's hearing. My name is James Andrus, and I'm an | |
| investment manager for the Board Governance and Sustainability | |
| Program for the California Public Employees' Retirement System | |
| (CalPERS). I am pleased to appear before you today on behalf of | |
| CalPERS. We applaud and support the subcommittee's focus on | |
| building a sustainable and competitive economy. I will provide | |
| an overview of CalPERS, discuss our governing principles, and | |
| discuss climate risk, charitable political expenditures, human | |
| capital management, and board diversity. | |
| CalPERS is the largest defined benefit public pension fund | |
| in the United States, with approximately $450 billion in global | |
| assets. Ultimately, CalPERS' primary responsibility is to our | |
| beneficiaries. Since December 2019, we have considered climate- | |
| related risks to be among the top three risks to the long-term | |
| value of our portfolio. Our view aligns with the U.S. National | |
| Climate Assessment's finding that climate change exacerbates | |
| existing vulnerabilities in communities across the United | |
| States, presenting growing challenges to human health and | |
| safety, quality of life, and the rate of economic growth. | |
| Climate change is a systemic risk, so it is critical that | |
| investors can access clear disclosures of the risks it poses to | |
| long-term value creation by the companies in which they invest. | |
| Accordingly, we help lead global initiatives like Climate | |
| Action 100+, an initiative which CalPERS co-founded to engage | |
| the systemically important carbon emitters to mitigate climate | |
| risk in our global equity portfolio. However, initiatives like | |
| Climate Action 100+ are poor substitutes for policy and | |
| regulatory action. | |
| In positive international developments, the International | |
| Accounting Standards Board has issued guidance that promotes | |
| including certain climate risk items in financial statements. | |
| This is an important development, and one U.S. policymakers | |
| should consider thoughtfully. 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. The materiality | |
| of corporate political spending was recently reaffirmed by | |
| companies themselves in the aftermath of the January 6th attack | |
| on the U.S. Capitol Building. | |
| I want to highlight Justice Kennedy's words from Citizens | |
| United v. the Federal Elections Commission, because they make | |
| clear that the Supreme Court envisioned wide disclosure of | |
| political contributions. | |
| Justice Kennedy wrote: ``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. This transparency enables the electorate to make | |
| informed decisions and give proper weight to different speakers | |
| and messages.'' | |
| Justice Kennedy's expectation has not been fulfilled, but | |
| it is more apparent now than ever before that it should be. | |
| The convergence of the current economic, climate, and | |
| public health crises, as well as the mounting call to advance | |
| racial equity, have accelerated investors' focus on effectively | |
| managing human capital. The value of human capital management | |
| disclosures is straightforward. Businesses depend on the | |
| workforce as a source of value creation which, if mismanaged, | |
| could harm long-term performance. Researchers have found that | |
| high-quality human capital management practices correlate with | |
| lower employee turnover, higher productivity, and better | |
| corporate financial performance, producing a considerable and | |
| sustained alpha over time. | |
| There remains a substantial lack of board diversity in U.S. | |
| companies. NASDAQ has stated that the U.S. currently ranks 53rd | |
| in board gender diversity, according to the World Economic | |
| Forum. Third-party analysis shows that as many as 70 percent of | |
| NASDAQ companies' boards lack a woman or a racially diverse | |
| person. | |
| The Office of the Illinois State Treasurer published a | |
| White Paper entitled, ``The Investment Case for Board | |
| Diversity,'' which provides an extensive and comprehensive | |
| review of academic and practitioner research on the value of | |
| gender and ethnic board diversity for investors. The | |
| examination finds that the gender and racial ethnic composition | |
| of corporate boards does indeed have a material and relevant | |
| impact on company performance. | |
| Requiring standardized disclosures of relevant information | |
| is necessary to close the information gap. In line with this | |
| view, we strongly support a further comprehensive review of the | |
| disclosure requirements of Regulation S-X and Regulation S-K, | |
| with a greater focus on investor needs. We look forward to | |
| working with the subcommittee and the committee to discuss | |
| these issues as well as the policy proposals set forth in | |
| today's hearings and more proposals in the future. | |
| Thank you, Chairman Sherman and Ranking Member Huizenga, | |
| for inviting me to participate in this hearing, and I look | |
| forward to your questions. | |
| [The prepared statement of Mr. Andrus can be found on page | |
| 40 of the appendix.] | |
| Chairman Sherman. Thank you. | |
| And finally, Mr. Ramaswamy, you are recognized for 5 | |
| minutes. | |
| STATEMENT OF VIVEK RAMASWAMY, FOUNDER & EXECUTIVE CHAIRMAN, | |
| ROIVANT SCIENCES | |
| Mr. Ramaswamy. Thank you, Chairman Sherman, Ranking Member | |
| Huizenga, and members of the subcommittee. My name is Vivek | |
| Ramaswamy. I offer strictly my personal viewpoints and not | |
| those of any organization with which I'm affiliated. | |
| I was born and raised in Ohio. I spent 7 years as a biotech | |
| investor. For three of those years, I also attended law school. | |
| In 2014, I founded a biotech company that I led as CEO until | |
| last month, and I'm now writing a book about stakeholder | |
| capitalism, a topic that's central to today's discussion. | |
| Stakeholder capitalism refers to the idea that companies | |
| should serve not only their shareholders but also other | |
| societal interests. And big tech, big banks, and big business | |
| have roundly endorsed the idea. Milton Friedman didn't like it | |
| because it might lead companies to be less profitable, but my | |
| concerns are different. I worry that stakeholders' capitalism | |
| represents a threat to the integrity of American democracy | |
| itself. | |
| For companies to pursue societal interests in addition to | |
| shareholder interests, companies and their investors have to | |
| first define what those other societal interests ought to be. | |
| And that isn't a business judgment; it is a moral judgment. | |
| Speaking as an American, I do not want our capitalist elites to | |
| play a larger role than they already do in determining our | |
| society's core values. The answers to those questions ought to | |
| be answered by America's citizens through our democratic | |
| process, publicly through open debate, and privately at the | |
| ballot box. Personally, I don't know if that is a Republican | |
| idea or a Democratic idea. I consider it an American idea. | |
| It is puzzling to me that stakeholder capitalism is viewed | |
| as a liberal idea. Many progressives who love stakeholder | |
| capitalism abhor Citizens United precisely because it permits | |
| corporations to influence our elections and our democracy. | |
| Stakeholder capitalism is Citizens United on steroids. It | |
| demands that CEOs use corporate resources to implement the | |
| social goals that they want to push. | |
| In the pharmaceutical industry, does rejecting stakeholder | |
| capitalism mean putting profits ahead of patients? No. But | |
| putting patients first means actually putting patients first, | |
| including ahead of other social causes. It means we don't care | |
| about the race or gender of the scientist who discovers a cure | |
| to COVID-19. Or whether the manufacturing or distribution | |
| process that delivers a vaccine most quickly to patients is | |
| carbon-neutral. | |
| Conflicts of interest actually lie at the heart of this | |
| debate. In the real world, most conflicts are actually | |
| financial. If I am a public company CEO and I decide to use the | |
| corporate piggy bank to make a donation to my high school, or | |
| to the temple where I worship, that should raise a red flag, | |
| since my high school or my temple have nothing to do with my | |
| business. | |
| But why is it any different if a CEO uses the corporate | |
| piggy bank to make a donation to a climate change organization | |
| or to a specific racial advocacy group? Many CEOs did exactly | |
| that last year and they were applauded for it, but in both | |
| cases, the CEO derives a personal benefit from using the | |
| company's piggy bank to make a donation. That is a conflict of | |
| interest and I find it curious that there's no mandated | |
| disclosures about that. | |
| Many CEOs are surely going to advise you to mandate these | |
| ESG-related disclosures. My whole advice to you is this: Ask | |
| yourself what these business leaders hope to achieve for | |
| themselves in that process. Some of them may hope to distract | |
| you from other regulatory issues that pose real risks to their | |
| business. For example, in Silicon Valley, disclosing climate | |
| risks is easy. Respecting user privacy, now that's hard. When | |
| choosing between constraints on matters that relate to the core | |
| of your business versus matters that don't, self-interested | |
| CEOs are generally going to choose the latter. | |
| I also have other concerns that I would be glad to address | |
| in the Q & A. I think mandatory disclosures tend to impose | |
| burdens on companies, they tend to favor incumbents over | |
| startups, and they make it harder for startups to go public. I | |
| also think that these policies might contribute to a GSE-linked | |
| asset bubble akin to the pre-2008 housing bubble that was | |
| driven by government policy just for homeownership. But those | |
| are secondary issues. The bigger issue is the threat to | |
| American democracy itself. | |
| If we are honest, let's acknowledge that the debate today | |
| is not actually about protecting investors. It is about | |
| fighting climate change. And I'm not saying that is a bad goal, | |
| but I do think that is what is going on here. And if that is | |
| true, then I urge you to just be frank and to just say that. | |
| Protecting investors isn't the main reason. It is a | |
| justification. | |
| If the goal were to protect investors, there are many, many | |
| other disclosures you would mandate ahead of climate risks on a | |
| wide range of topics, for example, about the health and dietary | |
| practices of company employees or the social or political | |
| commitments of the company's CEO. If we pretend that protecting | |
| investors is the real reason for these climate disclosures, we | |
| risk opening that Pandora's Box. | |
| So, in closing, speaking to you as an American, I urge you, | |
| as Members of Congress, to implement your chosen policies | |
| through the front door rather than sneaking them in through the | |
| back door. Do not use companies as instruments to accomplish | |
| what you cannot get done directly as legislators. Unlike you, | |
| CEOs are not democratically accountable and that might make | |
| them a convenient solution in the short run, but in the long | |
| run you will create a monster that you cannot put back in its | |
| cage. And that is not just bad for Republicans or for | |
| Democrats; it is bad for America. | |
| Speaking as an American, I don't want to live in a | |
| corporatocracy. I don't want to live in a one-dollar one-vote | |
| system. I don't want to live in a modern version of Old World | |
| Europe where a small group of elites decide what is good for | |
| society and the rest of the world. I want to live in a | |
| democracy where everyone's voice and vote counts equally. Thank | |
| you. | |
| [The prepared statement of Mr. Ramaswamy can be found on | |
| page 99 of the appendix.] | |
| Chairman Sherman. Thank you. | |
| I now recognize myself for 5 minutes of questioning. And to | |
| the witness who just spoke, I would say that we are walking | |
| through the front door here. The SEC is part of the | |
| democratically-elected government, and we're using a | |
| democratically-elected government to try to achieve at least | |
| some corporate recognition of important social impacts. | |
| I do want to commend the SEC for just yesterday, Acting SEC | |
| Chair Allison Lee announced that she has directed the Division | |
| of Corporation Finance to enhance its focus on climate-related | |
| disclosures in public company filings. I think that is relevant | |
| even to your earnings per share investors who will want to know | |
| what risk factor the company has from climate change, but also | |
| whether it is in a position to attract investment and attract | |
| clients and enhance its reputation because it is doing | |
| something helpful for the environment. | |
| The ranking member said that ESG funds don't necessarily | |
| outperform. I'm sure that there's a lot of information in our | |
| financial statements where you could say companies that spend | |
| more on advertising don't overperform, and don't underperform. | |
| But we disclose a lot of information to shareholders, who may | |
| decide that in the future, such companies--such as companies | |
| with diverse boards will overperform in the future whether | |
| they've overperformed in the past or not. | |
| My first question is again on board diversity. Mr. Andrus, | |
| NASDAQ recently issued a proposal to require all of its | |
| companies to make certain disclosures regarding the diversity | |
| of their boards. We are considering--and I see him here, so I | |
| guess the Foreign Affairs Committee has adjourned for a bit-- | |
| Congressman Meeks' Improving Corporate Governance Through | |
| Diversity Act, which the House passed last year, and which | |
| would put in place similar requirements for all public | |
| companies. Can you tell us, as an institutional investor, what | |
| a diverse board signals to you about a company and how it | |
| affects your investment decision? | |
| Mr. Andrus. A diverse board signals that the company has | |
| considered the talents of the entire population in selecting | |
| board candidates. This is not happening currently. More than | |
| half of U.S.-based public companies have all White boards. We | |
| are 53rd in terms of gender diversity, which means that 52 | |
| countries have more women on their boards than U.S. companies. | |
| And this is the baseline from which we're working. So in order | |
| to basically consider the talents of the entire population, we | |
| need to make certain that boards do this and place diverse | |
| people on their boards. | |
| Chairman Sherman. Thank you for that answer. | |
| Ms. Ramani, in 2019, the European Commission issued | |
| guidance providing a framework for corporate climate-related | |
| disclosures. Last year, the U.K. announced that it will be | |
| putting in place the mandatory climate-disclosure risks for the | |
| London Stock Exchange. And last fall, New Zealand announced it | |
| will implement requirements based on the recommendations of a | |
| task force on climate-related financial disclosures put forward | |
| by a group convened by the G20. | |
| Do any of these, the E.U., New Zealand/G20--I know the U.K. | |
| hasn't fully filled out what their plan is--provide a good | |
| model for us to use to define and have numerical standards for | |
| the issues we're talking about here today? | |
| Ms. Ramani. Thank you, Chair Sherman. Our recommendation is | |
| to premise any rules that we create for climate change | |
| disclosure on the framework that has been offered by the Task | |
| Force on Climate-Related Financial Disclosures (TCFD). The | |
| reason I suggest this is because the TCFD is a framework that | |
| was created largely by the financial community to essentially | |
| generate information that they could use in understanding the | |
| risk, the financial risk of climate change in terms of their | |
| own portfolios and in terms of the capital markets within which | |
| they function. That's one of the reasons that we do support the | |
| Climate Risk Disclosure Act, because it is premised on the TCFD | |
| and because it has a very appropriate focus on generating | |
| disclosure-- | |
| Chairman Sherman. Thank you. I just want to add one thing, | |
| and that is how important it is that companies disclose how | |
| much they are paying to Third-World governments for petroleum | |
| and other mineral extraction. The risk that the money is | |
| stolen, and the people of the country don't even know how much | |
| is coming in, is a terrible risk for that country. That's also | |
| a reputational risk for the petroleum company as well. | |
| Now, let's move on to the ranking member of the | |
| subcommittee, Mr. Huizenga, who is recognized for 5 minutes. | |
| Mr. Huizenga. Thank you, Mr. Chairman. And I'm going to | |
| briefly note that Chair Yellen, soon to be Secretary of the | |
| Treasury Yellen, said in 2017, at the Jackson Hole Conference, | |
| that the section that you are talking about, Section 1503, was | |
| the worst part of the Dodd-Frank Act, flat out. So, just to set | |
| the context there. | |
| Mr. Ramaswamy, we've had a lot of conversations here on | |
| this committee about IPOs and about investor ability to go in | |
| and be a part of the financial system. And I'm curious from | |
| your perspective as someone who has worked in the private | |
| sector extensively, and in both private and public companies, | |
| is this going to promote private companies to go public and | |
| offer up that opportunity for citizens to engage in the public | |
| sphere of finance? | |
| Mr. Ramaswamy. Look. As you are aware, in recent years | |
| there has been a trend of fewer companies going public and | |
| choosing to remain private. There's a lot of factors driving | |
| that trend, but all else being equal, added disclosure | |
| requirements are a reason why many companies choose not to go | |
| public. | |
| In my opinion, would one additional risk factor relating to | |
| climate risks singlehandedly be a deterrent for companies to go | |
| public? I don't personally think that would be the single- | |
| handed straw that breaks the camel's back. However, I do think | |
| that that opens the Pandora's Box, which opens the door to, if | |
| we're really being intellectually honest and limiting ourselves | |
| to identifying factors, risk factors that protect investors, | |
| there is a much longer list of factors that are more material | |
| to investors than the climate-related risks of a particular | |
| corporation that, if incorporated into the added disclosure | |
| regime, would collectively prevent companies from being able to | |
| successfully go public. | |
| Mr. Huizenga. Over the years, compiling mounting parts of | |
| the regulatory side has stopped that. You used the term, | |
| ``corporatocracy.'' I was going to call it a, ``mercantilist | |
| government.'' I'll lay out my nerd card here and add and | |
| reference Star Wars, when Queen Amidala was talking in the | |
| senate and she was addressing the Trade Federation, the | |
| Corporate Alliance, the Intergalactic Banking Plan, the | |
| Commerce Guild, and the Techno Union. That's the direction in | |
| which it seems that we could be going here as we have | |
| executives and companies playing a fundamental role in | |
| determining society's core values and policies rather than | |
| government doing that. And I'm curious if you could expand on | |
| your experiences that shaped your concern with this? | |
| Mr. Ramaswamy. Yes. Based on my first-hand experiences, I | |
| believe that corporations accrete greater power when they are | |
| responsible not just for determining the rules of the road and | |
| the market for products and services, where to build a | |
| manufacturing plant or where to build a research facility, but | |
| also whether to prioritize climate change over prices for | |
| consumer goods or to prioritize one conception of diversity | |
| over another. Corporations then actually have not only a lease | |
| on the things that we buy in the marketplace for goods and | |
| services, but the ideas that we consume in the marketplace of | |
| ideas. | |
| And today's companies, especially in Silicon Valley, but on | |
| Wall Street and Silicon Valley included, are some of the most | |
| powerful companies in the history of the world. Even the Dutch | |
| East India Company, which had a private militia of its own and | |
| a private currency, still didn't have the ability to influence | |
| what we thought, what we prioritized in terms of our moral | |
| values, or what we could read or what we could discuss in open | |
| forums like this one. That is what today's technology companies | |
| and corporations across American control today. So, we ought to | |
| be really concerned about giving them even greater power. | |
| And I'm going to close this answer with a brief reference | |
| to something that many of you may be familiar with, which is | |
| that there's a body of law relating to Congress delegating its | |
| responsibilities to administrative agencies. The Administrative | |
| Procedure Act (APA), as many of you know, governed that body of | |
| law. But at least that puts guard rails around what the | |
| Alphabet Soup of the FEC, FDA, SEC, FTC, and so on, are able to | |
| administer. The Administrative Procedure Act says they have to | |
| at least go through certain procedures before implementing | |
| certain rules as law. | |
| When we do this with corporations using disclosures, | |
| regimes, or other tools to get corporations to implement social | |
| values that ought to be adjudicated through our democracy, | |
| there are no such constitutional guard rails. And the new | |
| alphabet soup of AAPL, AMZN, MSFT, or GOOG is not constrained | |
| by the same constitutional constraints as even the | |
| administrative agencies that you delegate your responsibilities | |
| to through the APA. | |
| Mr. Huizenga. I've been concerned about elected government | |
| at all levels seemingly having this wish to give up their | |
| constitutional responsibilities, their constitutional duties to | |
| bureaucracies and others, who then get to make tough decisions | |
| in a vacuum rather than being held directly accountable for | |
| those difficult decisions. And so, as we're closing out our | |
| time, I appreciate your view on this and I hope that we're | |
| going to be able to make sure that we're creating an atmosphere | |
| that allows more of these private companies to go public. With | |
| that, I yield back. | |
| Chairman Sherman. Thank you. I want to thank the ranking | |
| member for pointing out that Dodd-Frank was such an excellent | |
| piece of legislation that even its worst provision was a good | |
| provision. | |
| And I will now recognize Mr. Foster for 5 minutes. | |
| Mr. Foster. Thank you. | |
| Mr. Andrus, and Mr. Green, following the Supreme Court's | |
| Citizens United decision, publicly traded companies, often with | |
| deep pockets, can and do engage in significant political | |
| funding. These companies are not required to disclosure the | |
| funding of their political activities, even to their own | |
| shareholders. This means that shareholders have no way of | |
| knowing whether the companies they are investing in are engaged | |
| in political spending or what kind of spending those companies | |
| are engaged in or the purposes. For example, shareholders and | |
| CEOs are unlikely to be in the same tax brackets, so | |
| shareholders might be very interested to discover if the | |
| investments that they've made are being used by those running | |
| the company to influence politicians to shift taxes in a way | |
| that increases taxes for shareholders while dropping it for | |
| CEOs. But they have no way of knowing that. | |
| Now, more than ever, investors are also exercising their | |
| political voice with their money as are customers and | |
| consumers. And investigative investors are more sophisticated | |
| than ever and are concerned with with more than just a | |
| company's bottom line and their balance sheet. hey understand | |
| the reputational risk of having questionable political | |
| contributions made by a company in which they consider | |
| investing. | |
| So, Mr. Andrus, and Mr. Green, what sort of serious | |
| problems come up when investors are unaware that companies that | |
| they hold equity in are funding significant political | |
| activities? We can start with Mr. Andrus if that-- | |
| Mr. Andrus. There are a number of issues that come up. | |
| First, all we're asking for is transparency and the | |
| information. We're not questioning whether or not the | |
| expenditures should be made, but if made, it should be | |
| disclosed so that we would have the information so that we can | |
| make proper investment decisions. It is important to point out | |
| that investment decisions include voting decisions such as | |
| voting on boards and voting on executive compensation. So, we | |
| need that particular information. | |
| Some of the things that can happen are what we saw on | |
| January 6th, and when you unpack it, the concern is | |
| substantial. It is critical that some of those investments | |
| could lead to insurrection within our own government. I know | |
| some people downplay that, but that is a serious concern that | |
| money, i.e. shareowners' money, is being used in that | |
| particular capacity. At a minimum, it should be disclosed if | |
| companies choose to make those sorts of contributions. | |
| Mr. Foster. Okay. Mr. Green? | |
| Mr. Green. Thank you. I would very much add that right | |
| now--and this goes to the point by the witness a couple of | |
| minutes ago--these determinations are being made by companies, | |
| by elite insiders, by corporate CEOs, and a small number of | |
| other corporate elites. And the real question is about how | |
| investors' money is being utilized. So, if you don't have the | |
| transparency, you don't know whether a company's position | |
| around any number of issues, whether it is climate change or | |
| worker treatment or any number of issues, is being matched by | |
| what is going on and what types of positions they are taking in | |
| Washington. If this money was not important, why are companies | |
| spending any money engaging in the process at all? It is not | |
| charity. It goes to the deep interests of companies, and | |
| investors are the ones who ultimately are the ones whose money | |
| is at risk and they need to understand that. | |
| Mr. Foster. Thank you. And one of the biggest issues that I | |
| see personally is the potential misalignment of interests | |
| between those running the companies as individuals and those of | |
| the shareholders, that without that transparency there is no | |
| guarantee that those interests will be even approximately | |
| aligned when it comes time to invest and try to affect our | |
| political system. My time has just about expired, so I yield | |
| back. | |
| Chairman Sherman. Thank you. | |
| Mr. Stivers is recognized for 5 minutes. | |
| Mr. Stivers. Thank you, Mr. Chairman. I appreciate it, and | |
| I appreciate all of the witnesses for their testimony. | |
| Mr. Ramaswamy, in the chairman's own words, he said at the | |
| beginning of this hearing in his statement that shareholders | |
| want this information. In your experience, don't shareholders | |
| already have the ability to get this information? | |
| Mr. Ramaswamy. Yes. You raise an important point, | |
| Congressman Stivers, which is that the distinction between a | |
| worthy disclosure and a mandatory disclosure. Just because a | |
| disclosure may be worthy to particular investors does not alone | |
| mean it ought to be a mandatory disclosure, because investors | |
| elect their corporate boards every year. A majority of | |
| investors, actually in most cases in most States, can actually | |
| amend the corporate bylaws to demand whatever disclosure it is | |
| that they want. | |
| That's not to say that there's no space for mandatory | |
| disclosures, but it is only to say that just because a given | |
| disclosure may even be worthy does not automatically mean that | |
| it has to be a mandatory disclosure because investors in | |
| particular companies are able to wield their own power to | |
| shareholders to demand disclosures in a particular case. | |
| So, first, the question is, is the information worthy or | |
| not, material for investors; and second, even if it is | |
| material, are investors able to get that information on their | |
| own? There is then the separate question of whether a | |
| particular class of disclosures is required to be mandatory and | |
| what effect that ought to have or ought not to have on | |
| decisions that Congress or the SEC makes to mandate those | |
| disclosures? | |
| On that last question, one of the arguments that I find at | |
| least intellectually persuasive is that there may be negative | |
| externalities of certain company's behaviors that ought to be | |
| internalized into their own decision-making, and that the | |
| investors who own those companies may want to know how they can | |
| internalize those negative externalities as well. | |
| And one point I'd just like to inject into this, and | |
| somebody raised January 6th earlier, I think it is an important | |
| point that the negative externalities for American democracy of | |
| a small group of institutional elites adjudicated through the | |
| corporate board room mandating and in concert with the work of | |
| the SEC mandating particular disclosures is monolithically | |
| enforcing a particular agenda that many Americans may not agree | |
| with, but not only do they not agree with it, they may not have | |
| an opportunity to have their voice heard equally. And we | |
| convert from the system of one person, one vote, instead into a | |
| system of one dollar, one vote. And I'll tell you, if I may, | |
| Congressman Stivers, to sort of share a short story to | |
| demonstrate the principle of what I mean. Before, when I used | |
| to go to temples as a kid when my parents used to take me to | |
| India, there used to be a system where every pilgrim had to | |
| wait in line, patiently wait their turn to get to the front of | |
| the temple. But today, when you travel to those temples, you | |
| can actually pay a little bit of extra money and get to the | |
| front of the line, and some of the people can pay a lot of | |
| money and get to the very front of the line. And to me, that's | |
| not the way that a religious institution is necessarily | |
| supposed to work at its best. | |
| I feel the same way about our democracy, in that with a | |
| small group of institutional leads in the corporate board rooms | |
| adjudicated through mandated SEC disclosures on top of that to | |
| be goaded into doing more of this are able to convert our | |
| system, our democracy, into a one-dollar, one-vote system | |
| instead of a one-person, one-vote system, which tells the | |
| people who show up at the ballot box every November that their | |
| vote doesn't matter as much as the vote of somebody in the | |
| corporate board room, because of the number of dollars that | |
| they control in the marketplace. | |
| And to me, the use of that market power to translate into | |
| social currency in matters that aren't corporate matters, but | |
| aren't commercial matters, but are matters relating to moral | |
| values, normative questions like how we ought to address | |
| climate change, or what conception of racial justice matters | |
| over a different one, or how we tackle issues of racial equity, | |
| those are questions that ought to be adjudicated through open | |
| public debate and spheres like this one, not necessarily | |
| through the corporate board room. | |
| And while the chairman made a good point in the very | |
| beginning, I do think that this is a further direction in | |
| goading companies to be able to take on further responsibility | |
| in mission creep in a way that has a negative externality for | |
| the integrity of American democracy itself. And if the | |
| discussion is going to sound on negative externalities for the | |
| environment, or negative externalities for other social | |
| principles that we care about, I think that at least, in that | |
| cost-benefit analysis of whether to mandate a disclosure, we | |
| ought to also take into account the possibility of a negative | |
| externality for American democracy, including Americans who may | |
| feel disaffected by decisions made by corporations privately in | |
| the board room. | |
| Mr. Stivers. Thank you. Now tell me, Mr. Ramaswamy, our | |
| republic, our constitutional republic is intentionally messy | |
| with checks and balances for the very reasons you've talked | |
| about. Could you talk about some of the problems that would be | |
| created by the fact that corporate elites could influence and | |
| implement an agenda without checks and balances? | |
| Mr. Ramaswamy. I'll share a very short funny story. I was | |
| having dinner with the CEO of a big bank about a year and a | |
| half ago, I won't say which one out of respect to him. He was | |
| asked at the dinner if he wanted to be President of the United | |
| States. And his answer, without missing a beat was, of course, | |
| he wants to be President. He just doesn't want to run for | |
| President. And everyone in the room laughed, not because what | |
| he said was so ridiculous, but because what he said was so | |
| obviously true. And I think a lot of the messiness of our | |
| democratic process is part of what makes it beautiful. We | |
| shouldn't sidestep it to get to our solutions via the simpler | |
| corporate route instead. | |
| Mr. Stivers. Thank you, Mr. Ramaswamy. | |
| I yield back the balance of my time. | |
| Chairman Sherman. I now recognize Mr. Meeks for 5 minutes. | |
| Mr. Meeks. Thank you, Mr. Chairman. It's good to be with | |
| you for this very important hearing. | |
| My question goes to Mr. Andrus. Several Republican Senators | |
| recently sent a letter criticizing NASDAQ's decision to require | |
| its listed companies to disclose the demographic composition of | |
| their boards as they relate to race and gender. More | |
| specifically, the letter stated that such requirements were | |
| ``narrow'' and ``miss the mark.'' However, that letter failed | |
| to examine why the SEC's current disclosure rules, which leaves | |
| diversity to be defined by companies, has led to vague and less | |
| useful disclosure. So my question is, why are the SEC's current | |
| diversity disclosure requirements inadequate in your opinion, | |
| if they are? | |
| Mr. Andrus. We have to discuss what they are, but | |
| basically, all a board has to do is say that they considered | |
| diversity or that they have a diversity policy. They don't have | |
| to take any real steps to diversity. And so, they are | |
| inadequate because they have done absolutely nothing to change | |
| where we are. The baseline where we are is that more than half | |
| of U.S. publicly-traded companies have all White boards. And | |
| roughly 16 percent of those companies have no women on the | |
| board. | |
| So when we are in that particular baseline and it has-- | |
| there has been a lot of talk about corporate elites or | |
| something like that, those same corporate elites that are being | |
| said to be in favor of ESG or whatnot are the ones who have | |
| basically placed us in this particular situation. We need real | |
| policy work to actually address the crisis that we are in and | |
| to actually create some board diversity. It has worked in other | |
| countries that have had gender-related policies that have been | |
| able to add women to the board. The California initiative has | |
| been very successful in adding women to the board and will be | |
| successful in adding racially diverse and LGBTQ people to the | |
| board. | |
| And so, we need a Federal response that will actually kick- | |
| start what should have happened over a decade ago when the | |
| issue was being addressed by the SEC. We know now that that | |
| response was totally inadequate. We need a more adequate | |
| response. | |
| Mr. Meeks. Thank you. And also let me ask you this | |
| question. My bill, the Improving Corporate Governance Through | |
| Diversity Act, requires more specific disclosures around board | |
| demographics, but the bill also requires disclosures around the | |
| demographics of companies' senior management. So my question to | |
| you is, is C-suite diversity as important as board-level | |
| diversity? | |
| Mr. Andrus. In some cases, the C-suite diversity is even | |
| more important than board-level diversity. We focused on board- | |
| level diversity, because that's where shareholders interact | |
| with the corporation. We have the right to vote on the boards | |
| and we monitor what the board activity happens to be, and so | |
| that has been what we have focused on. | |
| So it is very welcome that your bill also focuses on | |
| executive diversity, which is an area in which we need a | |
| substantial amount of work. And then, when we are thinking long | |
| term, it means that those companies will consider the talents | |
| of all of the people within the country, add all of the talents | |
| within the country, and in the following years we could expect | |
| to see more diversity within the C-suite, which will actually | |
| lead to even more board diversity, which is needed. | |
| Mr. Meeks. Thank you. Let me try to squeeze this in quickly | |
| to Ms. Ramani. I'm proud that the Biden Administration has | |
| reentered the Paris Climate Agreement, but let me ask this | |
| question quickly. Institutional Shareholder Services, or ISS, | |
| which is a firm well known in the industry in advising its | |
| investors on vote recommendations for board elections of | |
| various corporate matters, has set out to analyze what | |
| corporations are doing to reduce emissions. But even still, an | |
| overwhelming 250 companies in the S&P 500 Index have no target | |
| at all. | |
| Why is it so crucial for these companies to set targets and | |
| what can these companies do to not only ensure that their | |
| pledges relate to their lending and financial activity, but | |
| also to their stocks and bonds that they manage? | |
| Ms. Ramani. Thank you for the question, Congressman. We at | |
| Ceres believe that companies should set goals and adjust and | |
| evolve their business strategies for climate change to meet the | |
| financial risk of climate change. So, we very much appreciate | |
| the fact that we've reentered the Paris Climate Agreement and | |
| are looking for companies to set goals that are aligned with | |
| the signs of climate change, because those goals would then | |
| meet the risks that climate change poses to them, to their | |
| investors, and to financial markets at large. | |
| Mr. Meeks. Thank you. I think my time has expired. | |
| I yield back. | |
| Chairman Sherman. Thank you. There has been a little change | |
| in plans. We won't find it necessary to adjourn the hearing for | |
| votes, because Mr. Casten will be able to sit in, and he'll | |
| take over maybe 30 minutes after they initially call the first | |
| vote. And hopefully, he'll be able to stay with us and be our | |
| substitute Chair for 30 minutes thereafter. | |
| With that, I recognize Mrs. Wagner for 5 minutes. | |
| Mrs. Wagner. Thank you, Mr. Chairman. | |
| Banks and other financial firms are proactively making | |
| significant investments in renewable energy and they are doing | |
| it without the heavy hand of regulation or political pressure. | |
| That's because the free market is responding to increased | |
| interest, I think, in green energy in particular. Just this | |
| morning, Wells Fargo announced it recently surpassed $10 | |
| billion in tax equity investments in the wind, solar, and fuel | |
| cells industries. | |
| Mr. Chairman, I'd like to submit this press release for the | |
| record. | |
| Chairman Sherman. Without objection, it is so ordered. | |
| Mrs. Wagner. Thank you, Mr. Chairman. In addition, Wells | |
| Fargo committed to providing $200 billion in financing to | |
| sustainable businesses and projects by 2030. But it is not just | |
| one firm making these substantial investments. Many of | |
| America's largest financial institutions have made multi- | |
| billion dollar sustainable finance commitments without | |
| government mandates. Instead of pushing forward prescriptive | |
| proposals on small businesses and adding additional barriers to | |
| capital formation, this committee needs to, I think, prioritize | |
| regulatory reforms that will lift up our economy and get | |
| Americans back to work. | |
| Mr. Ramaswamy, does the fact that many institutions are | |
| investing in and financing green energy projects negate the | |
| need for enhanced regulation and disclosure on ESG issues? | |
| Mr. Ramaswamy. Thank you for the question, Congresswoman, | |
| and I believe that it does. I obviously think that the market | |
| working in a particular direction sends us signals as to where | |
| additional regulation is and isn't needed. But I'd actually | |
| like to take that one step further to highlight a separate | |
| concern that I have even in the direction of the private market | |
| already and I think the private market is, in part, not | |
| operating as a truly free market, but actually in response to | |
| regulations and to regulatory incentives which already exist, | |
| which have distorted the private market already in the | |
| direction of potentially creating the early stages of an ESG- | |
| linked asset bubble. | |
| And in order to understand why, there are certain factors | |
| relating to the 2008 financial crisis that we have to take into | |
| account. I think it is instructive. I'm offering this not as a | |
| history lesson, but potentially as the early signs of a | |
| warning. The standard explanation for the subprime mortgage | |
| bubble before 2008 was that predatory lenders were greedy | |
| sharks who took advantage of the opportunity to ultimately make | |
| loans that they shouldn't have made. But in reality, the | |
| question is where all of those predatory sharks got all that | |
| money in the first place? And, of course, all of you know, | |
| perhaps better than I, that the roots of this began with | |
| government policy to spur homeownership, including through the | |
| birth of quasi government-- | |
| Mrs. Wagner. Thank you, Mr. Ramaswamy. I appreciate the | |
| history lesson here, but I have more questions. | |
| Mr. Ramaswamy. Yes. | |
| Mrs. Wagner. What would be the impact on small businesses | |
| such as those back in Missouri's second congressional district | |
| and Main Street investors with 401ks saving for retirement if | |
| we allow shareholders' capitalism and ESG disclosures to drive | |
| our markets, I think, to your point? | |
| Mr. Ramaswamy. Look, I think that a big part of the trend | |
| here is that mom-and-pop investors have in part benefitted from | |
| fee-free investment vehicles through passive index funds over | |
| the course of the last 10 years. And many of the drivers of | |
| this new ESG movement, you would know better than I, but even | |
| many of the firms who may advocate for ESG-related disclosures | |
| are actually in the traditional active management industry, in | |
| the mutual fund industry, which charge higher fees to mom-and- | |
| pop investors. | |
| Now, I think that part of what may be going on here is that | |
| making up for the absence of superior returns compared to | |
| passive index funds, we are now seeing the masquerade of | |
| morality as justifying those higher fees in the first place. | |
| Mom-and-pop investors, including older Americans, actually tend | |
| to be extremely generous, but they would rather be generous--I | |
| serve on the board of the Philanthropy Roundtable, which | |
| actually records this information, and says that elder | |
| Americans are among the most philanthropic. But they would tend | |
| to pick the causes they want to donate to on their own rather | |
| than handing it over to a mutual fund manager that ultimately | |
| picks companies that embody their own causes. | |
| Mrs. Wagner. You are absolutely correct. And would you say | |
| that these burdensome regulations have a more significant | |
| impact on younger companies compared to, let's say, larger | |
| companies? | |
| Mr. Ramaswamy. They do. I think that larger companies tend | |
| to be able to bear additional disclosure requirements and | |
| additional regulatory requirements, which actually tend to | |
| favor incumbents over start-up companies. | |
| Mrs. Wagner. And certainly as an entrepreneur and based on | |
| your experience as an entrepreneur and executive, do you think | |
| your companies would have been more or less likely to | |
| accomplish their goals in terms of producing marketable | |
| products if they were required to make ESG disclosure? | |
| Mr. Ramaswamy. Putting my companies to one side, I think | |
| that in general, all things being equal, start-up companies | |
| tend to be more poorly barren of regulatory requirements and | |
| disclosure requirements than large companies. They actually | |
| counterintuitively help large companies as a consequence. | |
| Mrs. Wagner. Thank you. I yield back. | |
| Chairman Sherman. Thank you. I'm going to ask Mr. Casten to | |
| be temporary Chair for the next 4 minutes, and I'm going to | |
| recognize Mrs. Axne for 5 minutes. | |
| Mrs. Axne. Thank you, Mr. Chairman. Thank you so much for | |
| having this hearing, and I thank all of the witnesses for being | |
| here today. This hearing, of course, is all about sustainable | |
| corporate practices which can generate long-term growth both | |
| for the economy and for the company. And I want to focus on | |
| just one piece of this, which is tax avoidance, and my bill to | |
| require public country-by-country reporting. | |
| I sure don't believe that anyone thinks that shifting | |
| profits to tax havens like the $60 billion of profits booked in | |
| the Cayman Islands every year or outsourcing all of the work to | |
| a country with weak labor standards and laying off American | |
| workers are how a company wants to perform long term. | |
| Unfortunately, right now though, investors don't know if | |
| companies are using gimmicks like that or where multi-national | |
| corporations are really generating their profits. | |
| Mr. Andrus, it is good to see you again. You testified here | |
| last Congress regarding U.S. current tax disclosures, that the | |
| lack of transparency creates an information gap whereby | |
| management may be well aware of risks being taken while | |
| shareowners are being left in the dark. | |
| If you had public country-by-country disclosures of | |
| financial information like tax payments, revenues, and | |
| employees in a country, would CalPERS and other institutional | |
| investors likely consider that information when making | |
| decisions about capital allocation? | |
| Mr. Andrus. Yes, we would consider that information, and I | |
| think you placed it in the right perspective. Because it is not | |
| only returns, it is risk and returns, and we've seen abuses | |
| that could cause substantial problems for corporations in which | |
| we invest. I think country-by-country reporting would alleviate | |
| that. And it is information that is easily available to the | |
| management of the company and easily disclosed. | |
| Mrs. Axne. Thank you. I couldn't agree more. I know | |
| investors representing at least $2 trillion in assets under | |
| management have now backed country-by-country financial | |
| disclosures as a critical path to counter that risk. And former | |
| SEC Chairman Jay Clayton, in testimony before this committee, | |
| also recognized public country-by-country disclosures as an | |
| increasing part of how sophisticated investors are looking at | |
| companies. So as you can tell, support for these disclosures | |
| now extends well beyond the usual corners of sustainable | |
| investments, and includes mainstream investors, credit | |
| reporting agencies, financial analysists, small businesses, et | |
| cetera. | |
| And already, the Global Reporting Initiative an ESG | |
| standard-setter followed by more than 78 percent of companies | |
| in the DOW Jones Industrial Average, has brought its new tax | |
| standard on country-by-country reporting online this year, | |
| which is great, meaning that we can expect voluntary | |
| disclosures by corporations as soon as January 2022. | |
| But, Mr. Green, I'd like to ask you, can you explain a | |
| little of why voluntary disclosures like that won't be enough, | |
| and give us the kind of information that investors need? | |
| Mr. Green. Yes. We have had a regime of voluntary | |
| disclosure in these areas, it has been the slow-moving norm, | |
| but we have not achieved wide-ranging comparability, | |
| reliability, and consistency that investors need for the | |
| capital markets to work. Let's remember, capitalism works | |
| because lots of different investors, millions and millions of | |
| investors deploy their money based on the information they | |
| have, and when that money is deployed based on the information | |
| that everybody has money, the capital markets will yield | |
| competitive returns for all of us. | |
| When you don't have that, when the information is only | |
| available to the insiders, to those who are already in control, | |
| you are not going to have the efficiency and sustainable long- | |
| term outcomes that you need in capitalism. And that's why | |
| getting this information out there is so essential. You need | |
| mandatory standards so that you don't have holes in the market | |
| where those who have the inside information are keeping it from | |
| everyone else who would otherwise move their money somewhere | |
| else. Everyone is at risk. | |
| Mrs. Axne. Thank you for that. And I'll tell you, that's | |
| why we need action at the SEC either directly or through my | |
| bill the Disclosure of Tax Havens and Offshoring Act, to your | |
| point to establish a clear, comparable standard for all public | |
| companies. Thank you so much. | |
| I hope we can get this done to finally provide our | |
| investors with the information they need here, and to make sure | |
| that we know that businesses are generating real, sustainable, | |
| long-term growth. I know that I, and other investors, want to | |
| be able to support businesses that are keeping money in the | |
| American economy. Thank you so much. | |
| And I yield back. | |
| Chairman Sherman. Thank you. I thank Mr. Casten for | |
| stepping in as Chair for 4 or 5 minutes, and it is possible | |
| that we will get this hearing done before they close the first | |
| vote, which means that may be the only time I call upon Mr. | |
| Casten to step in. | |
| I now recognize Mr. Hill. | |
| But I'll also point out to Mr. Huizenga that at the end of | |
| the hearing, I will give him one minute for a closing | |
| statement, and after him, I will take one minute for a closing | |
| statement. | |
| Mr. Hill? | |
| Mr. Hill. Thank you, Chairman Sherman, and Ranking Member | |
| Huizenga, for arranging this hearing so that we can talk about | |
| these legislative proposals. I'd like to focus my remarks in | |
| the climate disclosure arena. It is something we've talked | |
| about in our committee several times before. Mr. Green, in his | |
| very good testimony, stated that we, meaning the United States, | |
| are not great at predicting, ``financial crises.'' He says | |
| we're very poor at those predictions, in his testimony. I think | |
| that is a fair point. | |
| And Lael Brainard, a Governor of the Federal Reserve, was | |
| quoted saying that there are varying and different approaches | |
| to current disclosures and that those could be improved. I | |
| think that's a good point. It reminds me of the ancient Chinese | |
| proverb, ``Those who have knowledge, don't predict, and those | |
| who predict, don't have knowledge.'' So, this is an imperfect | |
| science. | |
| Going back to when I was college, we were talking about the | |
| coming Ice Age in the United States. We studied that in our | |
| science courses. And then, as I was graduating in the late | |
| 1970s, we were told that Denmark would be underwater due to | |
| changing climate conditions within 4 decades. So, bottom line, | |
| those events did not take place, so I think predictions in this | |
| area are challenging. | |
| And Mr. Bloomberg's task force that has been mentioned, | |
| that Mike Bloomberg runs on behalf of the G-20 and fundraises | |
| for, he says that climate disclosure should be reliable, | |
| verifiable, and objective. They should be comparable among | |
| organizations and sectors, and they should be timely. And so we | |
| can accept that as great wisdom from Mike Bloomberg on how to | |
| do climate disclosure. | |
| And what I'm arguing is we have a materiality standard. We | |
| require all companies to disclose things in their financial | |
| statements that meet those timeliness issues, and accuracy and | |
| reliability issues, and they don't go beyond that, because I'm | |
| arguing that so much of this is not as predictable as some of | |
| our friends would suggest. | |
| And I think that one example that's always given is the | |
| hurricane data and that we should be disclosing at banks the | |
| risk of greater hurricanes. But looking at NOAA's numbers since | |
| 1853, there are not more, and they are not more intense in | |
| terms of making landfall in the United States. In fact, the | |
| worst one ever was in 1935, in Miami. | |
| But what is different, and I think it is relevant and I | |
| think banks do disclose it is the issue, if you look at the | |
| American Meteorological Society, they concluded that while | |
| neither U.S. landfalling hurricane frequency nor intensity | |
| shows any significant trends since 1900, growth in coastal | |
| population and wealth have led to increasing hurricane-related | |
| damage in the coastline. And the same could be true of wildfire | |
| risk out in Southern California. We are building and | |
| encroaching in areas that have natural risk, not necessarily | |
| enhanced risk. And if it is enhanced, so be it. | |
| And I think companies recognize that risk of fire and | |
| liability, and risk to residential construction in LA County, | |
| where you shouldn't be building. And we've built too much | |
| density on America's seacoast, potentially. I think if you look | |
| at that, the lender has that responsibility to disclose that | |
| kind of risk, and the property and casualty company. And I | |
| believe they do that, and I believe our existing prudence in | |
| both financial regulation and at the SEC give you that | |
| authority right now. | |
| So, Mr. Ramaswamy, I am interested as a CEO in what more | |
| could we tell the SEC? If people can't measure it, how can the | |
| SEC come up with a standard? I'm curious about your reflections | |
| on that. | |
| Mr. Ramaswamy. Thank you. I will wear my hat as someone who | |
| was trained as a scientist before going into business. And I do | |
| believe that we face a separate issue that you touched on, | |
| which is a crisis of public trust in science. That is the last | |
| thing I would want to see happen to exacerbate that crisis, in | |
| part, by overstating the certainty of our claims in order to | |
| advance a particular agenda, when acknowledging that even in | |
| the face of uncertainty, we may need to make decisions that, | |
| with the best of information available, we still need to make. | |
| I think that we ought to be transparent about that, rather | |
| than getting into what I see as a race to the bottom between, | |
| as we have less public trust in scientists, the scientific | |
| community, including in the climate community in my opinion, | |
| overstate the certainty of their claims as assuming that only a | |
| fraction of that's going to be believed, when, in fact, people | |
| believe even less of it as a consequence. So, I think you put | |
| your finger on an important issue. | |
| Mr. Hill. Thank you. I yield back, Mr. Chairman, and thank | |
| you for the hearing. | |
| Chairman Sherman. Thank you. | |
| And let's go on to Mr. Casten. | |
| Mr. Casten. Thank you. And thank you, Mr. Chairman. I am | |
| proud to have served as your temporary substitute Chair today. | |
| I am also proud to have worked with Senator Warren on the | |
| Climate Risk Disclosure Act and was very pleased to see Allison | |
| Lee's statement yesterday directing the Division of Corporation | |
| Finance to enhance its focus on climate relief disclosures. | |
| I just want to respond a little bit to the comments of my | |
| good friend, Mr. Hill. There is such a danger in politicizing | |
| science. This science is settled, and my goodness, let us not | |
| continue that nonsense any longer. We know that the Earth is | |
| warming and we have to do something about it. | |
| Mr. Hill also raised this question of materiality, and, Mr. | |
| Green, I just want to ask you a simple question. Who should | |
| define materiality, investors or management? | |
| Mr. Green. It's quite clear that it needs to be investors | |
| and it needs to be clear, simple, standardized disclosures that | |
| the SEC determines. It should not be left in the hands of | |
| management, where it is been for far too long, and we've seen | |
| the result. | |
| Mr. Casten. I quite agree. | |
| Mr. Andrus, as a representative of the investor class here | |
| today, if you were given the opportunity to invest in a company | |
| that didn't much care for Generally Accepted Accounting | |
| Principles (GAAP), and said they wanted to insist on voluntary | |
| disclosures for their off-balance sheet transactions, would you | |
| invest in them? | |
| Mr. Andrus. No. | |
| Mr. Casten. How about if they wanted to use voluntary | |
| disclosures for related-party transactions? Any red flags | |
| there? | |
| Mr. Andrus. Yes. There are red flags there. | |
| Mr. Casten. Okay. Can you tell me briefly, why you would | |
| like those companies to provide consistent standard | |
| disclosures? | |
| Mr. Andrus. Because, one, we want the truth. I think what | |
| this hearing is about and what we're looking for is basically | |
| information. We get that information through honest and fair | |
| disclosures. And that's only what we're looking for. And that | |
| allows us to make better investment decisions. So in answering | |
| your question, we want to make better investment decisions, and | |
| we get that by getting better information, and we get that | |
| through disclosures. | |
| Mr. Casten. Hear, hear. I now want to agree with my | |
| colleague Mr. Huizenga, but there are real problems with ESG. | |
| As a reporting methodology, I would encourage all of my | |
| colleagues, if you haven't read it, to read the Commodity | |
| Futures Trading Commission (CFTC) report that recently came | |
| out, ``Managing Climate Risk in the U.S. Financial System.'' | |
| They make the very compelling argument--I think it is an MIT | |
| study--that there is no correlation between ESG rankings, even | |
| between firms that rank, not because there's a problem with | |
| ESG, but because that's a problem with voluntary disclosure | |
| methodologies. If everybody disclosed their off-balance sheet | |
| transactions in a different way, there wouldn't be a | |
| correlation. That's a problem. It is not a problem with the | |
| ESG, per se. It is a problem with voluntary disclosures. | |
| And I also just want to really emphasize something. I can't | |
| stress enough to folks on both sides of the dais, because I | |
| think all of us have maybe slipped up a little bit. This is not | |
| about naming and shaming. This is about connecting risk and | |
| reward. If I have a portfolio of investments, and I think I'm | |
| overexposed to a given commodity, or a given currency, or a | |
| given industry, or a given region, I may want to reweigh my | |
| portfolio. Maybe I like the overall asset holding I have. I | |
| want to hedge against it. | |
| Ms. Ramani, my follow-up question is for you. In the | |
| absence of consistent, mandatory disclosures of climate | |
| impacts, can you quantify the exposure that your portfolio has | |
| to a changing climate? And can you identify ways to hedge out | |
| that risk? | |
| Ms. Ramani. Was that question to me, Congressman? | |
| Mr. Casten. Yes. | |
| Ms. Ramani. Oh, that's great. Sorry. I think that in the | |
| absence of consistent, comparable, and reliable information, | |
| investors just can't do what they need to do in terms of | |
| integrating climate change into their investment analysis. And | |
| that's the problem that we have right now, Congressman. Thirty | |
| years ago when Ceres started to work on climate and | |
| sustainability disclosure, our problem was that companies were | |
| not disclosing. We've solved that problem. | |
| Right now, the issue is not with disclosure quantity. It is | |
| with disclosure quality, because there are so many standards | |
| that companies can use to talk about issues like climate | |
| change, the information they are putting out there is not | |
| consistent. Because companies have the ability to pick and | |
| choose issues, to pick and choose the way that they talk about | |
| issues, investors are not getting the information that they | |
| consider to be reliable in terms of their investment analysis. | |
| And one point that hasn't been raised here before, is that the | |
| vast proportion of climate change disclosures is not externally | |
| verified. Rules for climate change disclosure, I believe, can | |
| fix these problems. | |
| Mr. Casten. Thank you. And I'm out of time, but I really | |
| appreciate your comments because this is about market | |
| efficiency, it is about making sure that investors have the | |
| right information to understand the risks they face, and | |
| allocate against those. In other words, it is about making sure | |
| that the markets accurately price risk, and that shouldn't be | |
| partisan, and goodness knows, let's move forward on this. Thank | |
| you. | |
| And I yield back. | |
| Chairman Sherman. Thank you. Just an update, we'll be | |
| hearing from Mr. Davidson. I will then go to Mr. Cleaver, and | |
| then unless some other person who is a member of this | |
| subcommittee shows up, our final questioner will be Mr. Barr. | |
| Mr. Barr, thank you for joining us for this subcommittee, and | |
| if somebody who is actually a member of the subcommittee comes, | |
| I'm sure you'll enjoy hearing their wisdom before imparting | |
| yours. | |
| I now recognize Mr. Davidson for 5 minutes. | |
| Mr. Davidson. Thank you, Mr. Chairman. I also thank the | |
| ranking member, and I thank our witnesses. I appreciate your | |
| testimony today and your virtual presence. Hopefully, we'll all | |
| one day be restored to physical presence. | |
| Mr. Andrus, in your opening statement, you cited a study | |
| that said companies with diverse boards are shown to perform | |
| better than those without diverse boards. If that is the case, | |
| isn't this a perfect example of a free market adjusting itself? | |
| But if other companies see this, wouldn't it be in their best | |
| interest to follow suit? Why would we need the government to | |
| tell public companies how to organize and structure their | |
| boards if the market will tell them that a diverse board is | |
| more high-performing? | |
| Mr. Andrus. We need to tell boards to diversify to ensure | |
| that they use all of the talents that are available within the | |
| country, and also, mindfully guard against the risks of | |
| operating with all White boards. So, it is not only that the | |
| boards perform better, but if you are sitting on a board, most | |
| people aren't going to step down to allow anybody else to-- | |
| Mr. Davidson. Would term limits be just as effective as | |
| these kinds of disclosure requirements? | |
| Mr. Andrus. No, they will not be. Other countries have | |
| basically gone harder on it, and demanded that women be placed | |
| on boards, and that has been effective, and that has not | |
| basically made performance weaken whatsoever. | |
| Mr. Davidson. Thanks for your answer. I do think that the | |
| market shows that diverse boards can participate. And I think | |
| that really one of the big things that I think it shows is that | |
| diverse boards aren't only encompassed by the categories that | |
| we spend so much time on. For example, I think it was a great | |
| thing that the Supreme Court finally has somebody who didn't go | |
| to an Ivy League law school. That is a form of diversity as | |
| well. | |
| And, look, I would like to just highlight from a | |
| practitioner, Mr. Ramaswamy, as you might be aware, in December | |
| of 2020, NASDAQ sent a proposed rule to the SEC that would | |
| require most NASDAQ-listed companies to have, or to explain why | |
| they don't have, at least two diverse directors. | |
| When you consider this rule, taken in conjunction with | |
| proposed ESG disclosure requirements, what are the long-term | |
| effects on our capital markets when a rogue social agenda is | |
| imposed on public companies? At some point, is it the | |
| shareholder or the stakeholder that is supposed to be | |
| represented? | |
| Mr. Ramaswamy. I would add one further example that's maybe | |
| more pertinent to your point, which is one of the largest | |
| investment banks in the world announced in January of last year | |
| at Davos, at the World Economic Forum, that it would not take | |
| any company public if it did not have at least one diverse | |
| director, when they did not define what, ``one diverse | |
| director'' even meant. It was left to the discretion of this | |
| particular investment bank. | |
| And I think one of the issues at stake here, even from a | |
| disclosure standpoint, if we're going to go down that road, is | |
| that diversity of metrics that can be measured on a checkbox | |
| form--race, gender, and so forth--are supposed to have been | |
| proxies for diversity of thought when, in fact, the diversity | |
| of thought that we bring to the board, the board room benefits, | |
| I can say from firsthand experience, from diversity of | |
| thoughts, from diversity of experiences, from diverse | |
| prospective. | |
| But we create a systemic risk of a different kind by having | |
| discharged the responsibility to create a diverse appearance in | |
| the board room that we may actually foreclose the appearance, | |
| the actual diversity of thought, that skin-deep metrics were | |
| supposed to serve as a proxy for in the first place and | |
| disclosure is going to be a very difficult measure for solving | |
| that deeper problem of entering diversity of perspectives in | |
| the board room. I think, at the very least, it would open up a | |
| Pandora's Box of seeing whether we represent diverse political | |
| perspectives in the board room or diverse social perspectives | |
| in the board room. That's going to be very difficult to capture | |
| through any disclosure regime. | |
| Yes, I worry about separately-- | |
| Mr. Davidson. Let me just ask quickly, how would you comply | |
| with the current ERISA and human resources (HR) laws to inquire | |
| as to whether you have sufficiently diversified a board? When | |
| you look at HR practices, many of the things they are looking | |
| for in these disclosures, you cannot even ask those questions | |
| appropriately in the HR setting, for example, sexual | |
| orientation? | |
| Mr. Ramaswamy. Sexual orientation is one of those examples | |
| that I have concerns with, where if you are also looking for | |
| diversity in terms of sexual orientation in the board room, you | |
| are also at odds with many HR and legal business practices that | |
| prohibit asking employees or potential directors about their | |
| respective sexual orientation. So, that's just one example of | |
| where, potentially, anti-discrimination policy may be | |
| intentional with the diversity measures even from a disclosure | |
| perspective or from a State level, for example, in California a | |
| mandated perspective that may come into tension with one | |
| another. | |
| Mr. Davidson. Thanks so much. I really appreciate your | |
| comments today, and I look forward to talking with you on this | |
| policy area in the future. I yield back. | |
| Chairman Sherman. Is Mr. Cleaver still with us? He was on | |
| my screen a second ago. If Mr. Cleaver is not there, I see no | |
| other Democrats--it is a Democrat's turn, and I see no other | |
| Democrat. | |
| I now recognize the gentleman from Ohio, Mr. Gonzalez. | |
| Mr. Gonzalez of Ohio. Thank you, Mr. Chairman. | |
| And thank you to our witnesses. I first want to reference | |
| something that Mr. Casten, I think suggested, that Mr. Hill was | |
| denying climate change. He certainly did not do that. He, in | |
| fact, cited multiple objective data points from government | |
| sources and pointed out the fact that climate projections have | |
| not been as accurate as some would like, but that's not climate | |
| denial. He knows I work on climate change in the Science | |
| Committee. I think it is a noble goal. But Mr. Hill was just | |
| simply stating facts. | |
| Additionally, comparing the materiality of climate | |
| disclosures and GAAP accounting, as if those are somehow the | |
| same and we have similar objective measures for both is sort of | |
| an interesting thing to suggest. | |
| But I want to actually start with something, Mr. Green, you | |
| answered earlier, and I'm glad the question was posed this way. | |
| The question was posed, ``Who is better at understanding | |
| climate risks, investors or managers?'' And you said, | |
| ``Investors.'' And I think that is probably right. I am sure | |
| that we're not talking about that here. This hearing is about | |
| government mandates, not investors. | |
| And so, I will ask Mr. Ramaswamy. You said it once before. | |
| As a shareholder in a company, do you have the ability to get | |
| disclosures from public companies? | |
| Mr. Ramaswamy. Of course you can. Yes, sir. You do. | |
| Mr. Gonzalez of Ohio. Of course. Thank you. And to follow | |
| up on a point that you made earlier, I am really concerned | |
| about the legislation being considered here today, and using | |
| disclosures to address social or moral issues which, again, I | |
| agree these are all issues we need to solve. I think the | |
| question is, do we do this through financial disclosures in the | |
| Financial Services Committee or do we legislate it through the | |
| Energy and Commerce Committee and the Science Committee? | |
| What do you see as the dangers of doing it this way through | |
| disclosures and regulation as opposed to through the | |
| legislative process? I think you have stated it really well, | |
| but I would love to hear it again. | |
| Mr. Ramaswamy. To build on a couple of points that I made | |
| without repeating the points that I've already made, I will add | |
| two more to my oral opening statement, which are as follows. I | |
| think using disclosure as a low-resolution, blunt instrument to | |
| accomplish potentially worthy social goals may actually be a | |
| disservice both to the social goals as well as to the | |
| underlying actual capital formation objectives of the financial | |
| disclosure regime in the first place. I stated earlier that | |
| with respect to the latter, you would tend to favor industry | |
| incumbents over smaller startup companies. One disclosure alone | |
| isn't going to be the straw that breaks the camel's back, but | |
| collectively, if you apply an equivalent standard to include | |
| mandatory disclosures of equivalent materiality to say, | |
| climate-related disclosures, that collectively could be many, | |
| many more straws that do break that camel's back for the | |
| startup. | |
| On the other hand, you also have the inability to actually | |
| precisely allow firms, even if you are coming at the issue from | |
| the standpoint of a climate activist, for firms to be able to | |
| discharge their responsibilities simply by complying with the | |
| minimalist standards of disclosure. And I think that whether | |
| this is a conservative concern or a liberal concern, I don't | |
| know. But from both angles, I worry that disclosure is too | |
| blunt and low resolution of an instrument to actually | |
| effectuate the end itself, rather than acknowledging that what | |
| might be at issue here isn't really about protecting investors, | |
| but about dealing with the relevant social issues, doing that | |
| through the front door transparently through public debate, by | |
| the way, in a way that I believe would enhance public trust in | |
| the process of what we're actually accomplishing, rather than | |
| indirectly adjudicating these issues through the back door of | |
| disclosure and enforcing those into our public companies. | |
| There's one more concern I would like to address, but I | |
| will yield my time back to you. | |
| Mr. Gonzalez of Ohio. No, no, please. | |
| Mr. Ramaswamy. Okay. So, the other class of concerns that | |
| we haven't touched on today, that I think is important, is the | |
| risk factor on the global stage from a geopolitical | |
| perspective. Everything that we're talking about here is for | |
| U.S. public companies or for public companies that have | |
| reporting requirements in the United States. Let's acknowledge | |
| that there's a growing base of companies in China and in other | |
| parts of the world, but in China in particular, where there are | |
| no such mandatory reporting requirements and I think that this | |
| entire ESG movement is, in fact, a geopolitical boon to China | |
| in the following way. | |
| By requiring U.S. companies to own up to the negative | |
| externalities that they contribute to, but not requiring the | |
| same regime of companies abroad in China, we are creating a | |
| false moral equivalence or worse between the work of companies | |
| and actors here in the United States versus those in | |
| dictatorial regimes in places like China. And I believe that | |
| the Chinese government and other great power rivals on the | |
| world stage understand this phenomenon well; to be able to know | |
| that our greatest asset is not our nuclear arsenal, but is our | |
| moral standing on the global stage. | |
| And when the same actors and the same companies criticize | |
| both public policy here in the United States as well as their | |
| own behavior, be it Disney or the MBA or Marriott, but remain | |
| silent to true macro aggressions in China, that disparity is | |
| actually part of what undercuts our moral standing on the | |
| global stage. And so, the link between stakeholders' capitalism | |
| and geopolitics is something that, I think, hasn't been | |
| investigated enough. Thank you. | |
| Mr. Gonzalez of Ohio. I couldn't agree more, and I thank | |
| you. | |
| I yield back. | |
| Chairman Sherman. Seeing no Democrat, I will recognize | |
| another Republican, and I will commend Mr. Barr for his | |
| patience, but I will commend Mr. Steil for his decision to | |
| choose to serve on our subcommittee and recognize him first. | |
| Mr. Steil. Thank you very much, Mr. Chairman. I appreciate | |
| you holding today's hearing. | |
| Back to Mr. Ramaswamy, I really appreciate your last | |
| comments about the importance of the United States' global | |
| competitiveness and how placing burdens on U.S.-based publicly | |
| traded companies uniquely vis-a-vis non-publicly traded | |
| companies, but most importantly vis-a-vis foreign companies | |
| places such a disadvantage on U.S. companies, and ultimately on | |
| U.S. workers and U.S. consumers. I thought that your last | |
| comment was very strong. | |
| As many of my colleagues know, and as you may know, I have | |
| been very concerned about proposals that would really erode the | |
| tried and true principle of materiality, in particular as it | |
| relates to ESG disclosures on these U.S. publicly traded | |
| companies. I would argue that our existing materiality | |
| standards actually serve investors quite well. If information | |
| on climate change, diversity, or other common ESG metrics is | |
| material, I agree, it should be disclosed. | |
| I think the question is whether or not the SEC should deem | |
| that issue itself material. And I think deeming these de facto | |
| issues material could really drive up confusion, drive up | |
| compliance costs, discourage businesses from going public, and | |
| put us at a competitive disadvantage against global | |
| competitors. And as you correctly noted, vis-a-vis China, in | |
| particular. | |
| The SEC's mission, as we are well aware, is to protect | |
| investors, facilitate capital formation, and maintain fair, | |
| orderly, and efficient markets. Mr. Ramaswamy, would you agree | |
| that mandated ESG disclosures, irregardless of materiality, run | |
| contrary to the mission of the SEC and the goal of our | |
| securities laws? | |
| Mr. Ramaswamy. I am not a securities law expert. Though I | |
| am trained as a lawyer, I think you all may be greater experts | |
| than I on that topic. But as I understand it, as both someone | |
| who has lived under the regime of the SEC as well as having | |
| studied it, I believe that the mandate of the agency ought to | |
| be constrained to protecting investors, not because other | |
| objectives aren't important, but because other agencies or | |
| other bodies may be better suited to look after the underlying | |
| content of concerns, and instead, allow the SEC to do its job | |
| well of requiring investors to have the information they need | |
| to make sound decisions and to be protected in the process. | |
| Now, I do believe that, if I may--I think that the two | |
| points I would raise is if there is a discussion about ESG- | |
| related disclosures, in that discussion has to be included the | |
| idea of a point that I raised in my opening statement, which | |
| was the nonfinancial conflicts of interest of a CEO. It is | |
| well-established that if the SEC is going to look after one | |
| class of disclosures above those of any other, it is the | |
| conflicts of interest of the people who lead our public | |
| companies versus the principal agent conflicts they may | |
| experience relative to the shareholders whom they are supposed | |
| to represent. | |
| And I worry that the social causes and even the well- | |
| intentioned social motivations of many of these CEOs including, | |
| but not limited to, Silicon Valley today are intentioned with | |
| the underlying objectives of their shareholders in ways that at | |
| least ought to be disclosed. I gave the analogy of someone | |
| donating to their high school. | |
| Mr. Steil. I am going to jump back in. This is a little | |
| challenging virtually. I only have so much time left, and I | |
| want to get you on another topic that I think is really | |
| important. You spoke, I think very eloquently, about how these | |
| nonmaterial ESG metrics could burden companies in the United | |
| States vis-a-vis international competition. I think another | |
| area that is worth noting is the impact that this has on large | |
| companies versus small companies. Large, publicly-traded | |
| companies in the United States may have large compliance teams, | |
| and large legal operations to be able to navigate through some | |
| of this. | |
| Can you speak to how these types of nonmaterial disclosures | |
| would burden some of the smaller, emerging growth publicly- | |
| traded companies in the United States? | |
| Mr. Ramaswamy. They would very much help big four | |
| accounting firms that ultimately are responsible for | |
| administering these requirements for companies that want to go | |
| public, for lawyers and investment bankers who ultimately serve | |
| as gatekeepers for taking companies public. But they would be | |
| an added cost on our already costly process for startup | |
| companies that do want to go public. | |
| And, in closing, I think that one guard rail to your point | |
| about the internationalism of this is a point for consideration | |
| for the members of this committee might be to say that at least | |
| if you are going to adopt a mandatory form of disclosure, for | |
| example, on climate-related disclosures, whether to consider a | |
| minimum constraint of whether equal foreign powers, like in | |
| China, are willing to adopt similar constraints equivalently so | |
| that we don't undermine the competitiveness of companies both | |
| large and small globally. | |
| Mr. Steil. Let me jump in for the final 10 seconds. I like | |
| your thought. We need to look at emerging growth companies in | |
| the United States, make sure we are lowering those burdens and | |
| making sure that that benefit is to United States' companies, | |
| not foreign companies. | |
| With that, I yield back. | |
| Chairman Sherman. Thank you. I request unanimous consent to | |
| submit for the record a letter from the FACT Coalition in | |
| support of Mrs. Axne's Disclosure of Tax Havens and Offshoring | |
| Act, and country-by-country tax disclosure. | |
| Without objection, it is so ordered. | |
| I see the only Member who has not spoken, and that is our | |
| friend from the Full Committee, Mr. Barr. I will recognize him, | |
| and unless another Member comes in, I will then recognize Mr. | |
| Huizenga for one minute. | |
| Mr. Barr? | |
| Mr. Barr. Thank you, Mr. Chairman, for allowing me to | |
| participate in this hearing. | |
| And Ranking Member Huizenga, thank you as well. | |
| And to our witnesses, thank you for the vigorous | |
| conversation. It has been interesting indeed, and very timely. | |
| I have to say I wanted to listen to the testimony because I | |
| have been very alarmed by the growing trend of politicization | |
| of access to capital. Over the last several years we have | |
| witnessed financial firms publicly commit not to do business | |
| with certain legal companies in politically unpopular | |
| industries like the fossil energy sector. | |
| And these decisions were not based on the creditworthiness | |
| or the financial soundness of the borrower, but rather were | |
| driven by a number of non-pecuniary factors. Political pressure | |
| from vocal critics, public relations pressure from activist | |
| groups, the moral judgment of corporate leadership all | |
| contributed, but none of those factors should play a role in | |
| determining which legally operating business receives a loan | |
| from a bank, or gets investments through retirement funds, or | |
| is sold a commercial insurance policy. Any decision should be | |
| explicitly and exclusively dependent on objective risk-based | |
| underwriting standards. | |
| The politicization of access to capital threatens jobs and | |
| compromises entire industries based on the misguided opinions | |
| of a select few. If you would allow me the indulgence of just | |
| making one final editorial comment before my questions, and | |
| that is, I do not believe that this ESG movement is in any way | |
| about managing climate-related financial stress. What I believe | |
| this is really about is causing financial distress for | |
| particularly politically incorrect industries. The coal | |
| industry in my home State of Kentucky being a prominent | |
| example, a victim and the workers therein a victim of political | |
| correctness and the politicization of access to capital. | |
| And these mandatory climate disclosures are not about | |
| providing material information to investors; they are about the | |
| government putting its heavy hand on the scale to discriminate | |
| against certain legally operating businesses, to pick winners | |
| and losers in the marketplace and to politicize access to | |
| capital. In case you didn't know where I stood, I did want to | |
| just make that comment. | |
| I do think individuals should have the freedom to | |
| contribute their resources to political, social, and charitable | |
| causes. I think it is fine if someone wants to invest in the | |
| ESG fund, or invest in a climate-related cause with their own | |
| dime, but that's the individual's choice. When such choices are | |
| made for shareholders by agents acting at the corporate level, | |
| using the investor's own capital, then at best, we are inviting | |
| abuse, resource misallocation, malfeasance, and inefficiency. | |
| But at worst, we are enabling a practice that looks a lot | |
| like theft, theft from shareholders and investors, the actual | |
| owners of the corporation, by corporate directors and officers | |
| either voluntarily or by government mandate, and redirecting | |
| their money and their resources away from the core mission of | |
| the company and into an unrelated political errand. That, to | |
| me, is immoral. It is offensive. | |
| Mr. Ramaswamy, in your opinion, should the moral judgments | |
| of investment managers, banks, and other financial firms | |
| dictate which legally-operated firms get financing, especially | |
| if those opinions are based on unrelated social causes? | |
| Mr. Ramaswamy. With all due respect, I do not. And I think | |
| that is a conflict of interest that I believe is more material | |
| to investors than any of the other social factors that we have | |
| discussed today. Because if there's one thing that protects the | |
| integrity of our public capital markets, it is making sure that | |
| investors are aware of the conflicts that a given CEO or a | |
| manager bears when making decisions using shareholders' | |
| capital. | |
| And if one manager is going to use shareholder capital to | |
| garnish their personal reputational brand, or burnish their own | |
| social causes at the expense of other social causes, investors | |
| ought to know about that sooner than they ought to about other | |
| broader social-related climate risks or other. | |
| Mr. Barr. Mr. Ramaswamy, last question here. In terms of | |
| investor returns, I have no issue if investors choose to | |
| allocate their money to ESG funds if there is transparency and | |
| if there is an appetite for them. But I have a problem if asset | |
| managers who exclusively offer ESG options limit customers' | |
| options to invest in fossil energy, for example, as an | |
| alternative. | |
| Do you agree that investment advisors or retirement plan | |
| sponsors should advise their clients based on what will drive | |
| the highest returns or make clients aware if non-financial | |
| factors are driving particular asset-allocation or investment | |
| advice? I do worry that investors are getting hoaxed, because | |
| asset managers are politicizing the allocations of their | |
| capital as opposed to maximizing shareholder value. | |
| Mr. Ramaswamy. I agree with your comments, and I believe | |
| that's actually a relevant area for future inquiry with respect | |
| to disclosure requirements. | |
| Mr. Barr. Mr. Chairman, thank you for allowing me to | |
| participate today, and as you can tell, I am interested in this | |
| topic, and I yield back. | |
| Chairman Sherman. Thank you. | |
| I now recognize the Chair of the Full Committee, Chairwoman | |
| Waters. | |
| Chairwoman Waters. Thank you very much, Congressman | |
| Sherman, for holding this hearing. This is so very important | |
| with us getting into all of the ways by which we can deal with | |
| the whole issue of climate change. But I'd like to ask a | |
| question regarding the impacts of climate change on the | |
| communities of color and climate risk as an exposure. | |
| Ms. Toney, may I address this question to you? Series of | |
| segregationists and other racist policies have left communities | |
| of color, particularly Black communities, disproportionately | |
| vulnerable to the physical and health risks of climate change. | |
| For far too long, this important topic has been left out of the | |
| conversation. Reports coming from Texas show that Black and | |
| Latinx communities have been hit the hardest during Texas's | |
| historic freeze, compounding the disproportionate damage done | |
| to these same communities from increased extreme weather events | |
| like hurricanes and flooding. | |
| Drawing on your extensive experience as an environmental | |
| regulator, an environmental justice advocate, and as a former | |
| mayor of a major minority city, can you please discuss how | |
| corporate disclosures of climate risk can help communities or | |
| government better access the risk their communities face and | |
| help them take action to address these risks? | |
| Ms. Toney. Thank you, Chairwoman. Absolutely. The impact | |
| comes very hard and heavy. And it has been interesting | |
| listening to this dialogue because we have talked ad nauseum | |
| about how investors are impacted and whether or not this is a | |
| moral decision without realizing that some of the decisions | |
| that are made in the lack of disclosure is a decision in and of | |
| itself. The labor force that is working in these places, | |
| investors need to know whether or not the climate impacts of | |
| how people are actually out gathering food if it is a food | |
| company, how that happens in that particular marginalized | |
| community. And they are making these decisions right now. | |
| The companies know--for example, airlines are looking at | |
| climate to determine how the jet stream goes and how the future | |
| of infrastructure needs to be designed with respect to the air | |
| traffic ways and to the runways when we're thinking about how | |
| something like coffee beans are grown, or where water | |
| disparities are in our country. These are issues that are | |
| impacted by climate. These are issues where the labor force is | |
| often Black and Brown. These are places where the assets of the | |
| company are located in Black and Brown communities and | |
| investors need to know whether or not the climate impact and | |
| the disproportionate nature to communities of color will impact | |
| their bottom dollar. | |
| This is another important thing that I put into my | |
| testimony, and I hope everyone has an opportunity to read it. | |
| There is a study that has been done by Rice University and the | |
| University of Pittsburgh that shows specific evidence that once | |
| a climate disaster happens, White counties actually increase in | |
| terms of their average wealth, while Black and Brown counties | |
| decrease. There is an increase in the economic disparity when | |
| after climate disasters, investment is not done. And it is | |
| historic and it is systemic. This is not new to the Federal | |
| Government. HUD, FEMA, EPA, these are all regulatory agencies | |
| from the Federal Government, and the SEC is no different. So we | |
| must consider these as we talk about this issue. | |
| And last point, Chairwoman, if you will allow me, I think | |
| it is interesting to note that sometimes we tend to think that | |
| we are starting from a place of equality and we are not. Black | |
| and Brown communities are coming from the back. It would be | |
| lovely if we were all starting from a place of one person, one | |
| vote, but that is just not true. That is not our democracy. It | |
| is not our history. We are trying hard to come back and restore | |
| what should be happening and that is what the Biden | |
| Administration has said. And I think the way that they have | |
| outlined this and the way that we use climate as a bridge to | |
| equality is an opportunity that we have never had in our | |
| country and I am hopeful that we can all get on the same page. | |
| Chairwoman Waters. Wow. I love that statement, and I'm | |
| going to quote you, ``climate as a bridge to equality.'' Thank | |
| you very much. | |
| I yield back the balance of my time. | |
| Chairman Sherman. Thank you, Madam Chairwoman. | |
| Ms. Toney. Thank you, Madam Chairwoman. | |
| Chairman Sherman. I now recognize Mr. Huizenga for a one- | |
| minute closing statement. | |
| Mr. Huizenga. Thank you, Mr. Chairman. | |
| And, Mr. Ramaswamy, if you are still on, I'm looking | |
| forward to your book that's upcoming, ``WOKE, INC.'' Despite | |
| claims that this is not about naming and shaming, pretty | |
| clearly it is. Political spending is naming and shaming. | |
| Diversity disclosure and sexual orientation and family status | |
| is naming and shaming. Pay structure, tax structures, and just | |
| because many of us oppose government-mandated nonmaterial | |
| disclosures does not mean that we aren't concerned about these | |
| particular issues. | |
| What the main question should be is, does this make us more | |
| competitive and attractive in a global economy? Large companies | |
| may be able to handle this. But this is going to damage small | |
| and medium-sized companies, especially those startups. And this | |
| bill, these sets, this issue is dealing with U.S. public | |
| companies, not privately-held companies, not foreign companies, | |
| and it begs the question, when will the push start to include | |
| privately-held companies as well? That is the slippery slope of | |
| this issue. And with that, I yield back. | |
| Chairman Sherman. Thank you. | |
| Mr. Ramaswamy, I want to thank you for focusing our | |
| attention on how the study of the Dutch East India Company can | |
| inform modern decision-making. You point out that we want a | |
| system of one person, one vote. Unfortunately, we live in a | |
| world where a corporate board can spend millions of dollars, | |
| overwhelming buy one vote at the ballot box. McCain-Feingold | |
| was designed to present that. At a minimum, we could force | |
| disclosure. | |
| You indicate that disclosure is a blunt instrument. It is | |
| actually the least blunt instrument. The second still would be | |
| to tax or subsidize a behavior, and the most blunt would be to | |
| prohibit or require a behavior. I think it may be unfair to | |
| public companies that we force these disclosures only on them, | |
| and I will happily go down that slippery slope and say the | |
| disclosures should be of all large companies, and we might even | |
| exclude a few of the smallest public companies. | |
| And finally, I do not think it is theft when a corporation | |
| that I might be a shareholder in spends money on planting | |
| trees, weatherizing a facility or otherwise reducing its effect | |
| on global warming. I do think it is theft when the company | |
| spends its money secretly on a political cause opposed to my | |
| interest and will not even reveal it. | |
| With that, we stand adjourned. Thank you. | |
| [Whereupon, at 4:01 p.m., the hearing was adjourned.] | |
| A P P E N D I X | |
| February 25, 2021 | |
| [all] | |
| </pre></body></html> | |