[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
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HOUSE COMMITTEE ON FINANCIAL SERVICES
MAXINE WATERS, California, Chairwoman
CAROLYN B. MALONEY, New York PATRICK McHENRY, North Carolina,
NYDIA M. VELAZQUEZ, New York Ranking Member
BRAD SHERMAN, California 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
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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
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