[House Hearing, 117 Congress]
[From the U.S. Government Publishing Office]
E, S, G, AND W: EXAMINING PRIVATE
SECTOR DISCLOSURE OF WORKFORCE
MANAGEMENT, INVESTMENT, AND
DIVERSITY DATA
=======================================================================
HYBRID 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
SECOND SESSION
__________
DECEMBER 8, 2022
__________
Printed for the use of the Committee on Financial Services
Serial No. 117-108
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
______
U.S. GOVERNMENT PUBLISHING OFFICE
50-161 PDF WASHINGTON : 2023
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 ANN WAGNER, Missouri
ED PERLMUTTER, Colorado ANDY BARR, Kentucky
JIM A. HIMES, Connecticut ROGER WILLIAMS, Texas
BILL FOSTER, Illinois FRENCH HILL, Arkansas
JOYCE BEATTY, Ohio TOM EMMER, Minnesota
JUAN VARGAS, California LEE M. ZELDIN, New York
JOSH GOTTHEIMER, New Jersey BARRY LOUDERMILK, Georgia
VICENTE GONZALEZ, Texas ALEXANDER X. MOONEY, West Virginia
AL LAWSON, Florida WARREN DAVIDSON, Ohio
MICHAEL SAN NICOLAS, Guam TED BUDD, North Carolina
CINDY AXNE, Iowa TREY HOLLINGSWORTH, Indiana
SEAN CASTEN, Illinois ANTHONY GONZALEZ, Ohio
AYANNA PRESSLEY, Massachusetts JOHN ROSE, Tennessee
RITCHIE TORRES, New York BRYAN STEIL, Wisconsin
STEPHEN F. LYNCH, Massachusetts LANCE GOODEN, Texas
ALMA ADAMS, North Carolina WILLIAM TIMMONS, South Carolina
RASHIDA TLAIB, Michigan VAN TAYLOR, Texas
MADELEINE DEAN, Pennsylvania PETE SESSIONS, Texas
ALEXANDRIA OCASIO-CORTEZ, New York RALPH NORMAN, South Carolina
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 ANN WAGNER, Missouri
BILL FOSTER, Illinois FRENCH HILL, Arkansas
GREGORY W. MEEKS, New York TOM EMMER, Minnesota
JUAN VARGAS, California ALEXANDER X. MOONEY, West Virginia
JOSH GOTTHEIMER. New Jersey WARREN DAVIDSON, Ohio
VICENTE GONZALEZ, Texas TREY HOLLINGSWORTH, Indiana, Vice
MICHAEL SAN NICOLAS, Guam Ranking Member
CINDY AXNE, Iowa ANTHONY GONZALEZ, Ohio
SEAN CASTEN, Illinois, Vice Chair BRYAN STEIL, Wisconsin
EMANUEL CLEAVER, Missouri VAN TAYLOR, Texas
C O N T E N T S
----------
Page
Hearing held on:
December 8, 2022............................................. 1
Appendix:
December 8, 2022............................................. 33
WITNESSES
Thursday, December 8, 2022
Allen-Ratzlaff, Cambria, Managing Director and Head of Investor
Strategies, JUST Capital....................................... 5
Honigsberg, Colleen, Professor of Law, Stanford Law School....... 7
Rajgopal, Shivaram, Kester and Byrnes Professor of Accounting and
Auditing, Columbia Business School............................. 9
Seegull, Fran, President, U.S. Impact Investing Alliance......... 10
Vollmer, Andrew N., Senior Affiliated Scholar, Mercatus Center at
George Mason University........................................ 12
APPENDIX
Prepared statements:
Allen-Ratzlaff, Cambria...................................... 34
Honigsberg, Colleen.......................................... 64
Rajgopal, Shivaram........................................... 73
Seegull, Fran................................................ 77
Vollmer, Andrew N............................................ 83
Additional Material Submitted for the Record
Hill, Hon. French:
``AON: Key Themes Emerge in the Second Year of Human Capital
Management Disclosure for U.S. Companies,'' dated April
2022....................................................... 90
Huizenga, Hon. Bill:
Letter to Hon. Gary Gensler, Chair, U.S. Securities and
Exchange Commission, dated December 7, 2022................ 101
Wagner, Hon. Ann:
Letter to Hon. Gary Gensler, Chair, U.S. Securities and
Exchange Commission, dated November 28, 2022............... 103
E, S, G, AND W: EXAMINING PRIVATE
SECTOR DISCLOSURE OF WORKFORCE
MANAGEMENT, INVESTMENT, AND
DIVERSITY DATA
----------
Thursday, December 8, 2022
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 9 a.m., in
room 2128, Rayburn House Office Building, Hon. Brad Sherman
[chairman of the subcommittee] presiding.
Members present: Representatives Sherman, Foster, Vargas,
Gottheimer, Casten; Huizenga, Wagner, Hill, Mooney, Davidson,
and Steil.
Ex officio present: Representative Waters.
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.
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 last subcommittee hearing that I will chair for
at least 2 years. I look forward to working with the Republican
side next year.
Today's hearing is entitled, ``E, S, G, and W: Examining
Private Sector Disclosure of Workforce Management, Investment,
and Diversity Data.'' And this is a chance for us to look not
only at E, S, and G but also, ``W,'' for, ``workforce.''
I now recognize myself for 4 minutes for an opening
statement.
During today's hearing, we will examine a number of
important issues regarding the information that is disclosed to
investors. While a number of critical topics come in the areas
of environmental, social, and governance (ESG), and they will
be discussed here, we will also have a chance to look at
workforce (W). The lifeblood of any organization is its
workforce, and it is something about which investors are
concerned.
Since 1988, the European Union has required a report on
human capital investment in relation to salaries, bonuses, and
other benefits. But these disclosures are not required in the
United States and only 15 percent of the [audio malfunction]
official standards for defining the terms, determining what is
disclosed, tabulating the information, ensuring the internal
control of that tabulation, or auditing it.
Meanwhile, the U.S. economy has changed dramatically since
accounting standards were designed. It is not all on the
balance sheet anymore.
Back in my day, or before my day, if you wanted to look at
the book value of a company, you looked at the balance sheet.
They have a plant, they have a factory, they have some land;
that is their book value. Maybe they are worth 10 percent more
than that.
According to the Working Group on Human Capital Accounting
Disclosure, while in 1975, intangibles represented 17 percent
of the value of an S&P 500 company, today it is 90 percent. So,
90 percent of the value of what investors are looking at isn't
on the balance sheet. It is time to have a statement that at
least gives investors information about what is the most
valuable asset not on the balance sheet of most corporations,
and that is their workforce.
For over 5 years, a group of 26 institutional investors,
representing $3 trillion in assets, has petitioned the SEC for
a framework for disclosing information on human capital. And in
August of 2020, the SEC, under the leadership of Jay Clayton,
who was appointed by Donald Trump, adopted amendments to
Regulation S-K to require public companies to include a
description of human capital resources, but not in the kind of
form that those familiar with balance sheets and income
statements would recognize.
First, we need to define the terms so that it is parallel
from one company to another and understood by investors. And we
need to determine how that information is going to be
presented.
Second, we need to tabulate the information and do so in a
method that has internal controls so that we can rely on the
tabulation.
And finally, we need to audit adherence to the definitions,
the tabulation practices, and the internal control system that
leads to that tabulation. We do that for what is now the small
part of the balance sheet, the stuff we put on the balance
sheet. And we need to give investors information about
workforce.
Today, we will also look at the environmental and
greenhouse gas issues. And I know our witnesses, most of them,
are prepared to discuss that as well.
With regard to environmental disclosures, Scope 1 and Scope
2 being proposed by the SEC, I think make a lot of sense. It is
going to be hard to go into Scope 3, and that may be a bridge
too far. It may give us effects way beyond what we are trying
to achieve.
I look forward to learning more about how we can disclose
turnover rates, investment in workforce, and workforce
diversity. And we think we have outstanding witnesses who will
help us do that.
I now recognize the ranking member of the subcommittee, Mr.
Huizenga, for 5 minutes.
Mr. Huizenga. Thank you, Chairman Sherman.
And I appreciate the witnesses for being here and for your
testimony this morning.
I, frankly, I would be lying if I said I was surprised by
today's hearing topic. Sadly, today's hearing isn't about
investor protection, entrepreneurship, or capital markets. It
is about the Majority's latest attempt to legitimize the last 4
years of failed policy, most of that coming out of the SEC.
Unfortunately, or maybe fortunately for American small
businesses, Democrats have been unable to legislate their
climate and social policies. Instead, they have relied on
unelected regulators and bureaucrats to carry out that agenda.
And you don't have to go far to see this playing out. The
Securities and Exchange Commission's pending climate disclosure
rule is a primary example of overly-burdensome regulations done
by administrative overreach. Requiring the SEC to establish
mandatory disclosures on issues outside their expertise would
surely result in a complicated and confusing disclosure regime,
especially to the extent that information is not material for
the company. That is the watchword, ``materiality.''
Let's for a second focus on the topics at hand, E, S, and
G. And for this hearing, the Democrat Majority added, ``W,''
which supposedly stands for, ``workforce.'' I would like to put
forward that maybe it stands for, ``woke.''
Specifically, I want to key in on corporate governance,
which refers to how an organization is managed and how
leadership performs and how stakeholder expectations are met.
I am also disappointed, frankly, that this committee--and I
have to take this moment to say that the committee has not
fulfilled its duty, not to mention its pledges, to me and
others on this committee and in the public to have SEC Chair
Gensler in front of this subcommittee or the Full Committee. It
has been over a year since he has appeared.
But under Chair Gensler, the SEC has experienced several
operational problems that have eroded public trust in the
Commission, preventing it from carrying out its statutory
mandate. Instead of meeting those stakeholder expectations, the
Agency has focused on pushing a far-left liberal agenda that
aims to impact every aspect of our capital markets.
According to an October 2022 inspector general report,
staff attrition at the SEC is at its highest rate in over a
decade. Not only does this diminish the SEC's ability to
protect investors and ensure adequate capital formation, it
reduces the quality of the SEC rulemaking being proposed, which
has been outsourced to temporary and inexperienced staff.
Coupled with consistent short comment periods, a technical
error that disrupted the public comment process, and a complete
lack of proposals that will facilitate capital formation, one
would have to give the SEC low marks for their corporate
governance and workplace management.
Lastly, I would like to provide some commentary on the
issue that has been front and center and, frankly, has caused a
lot of confusion and concern among marketplace participants.
This summer, Chair Gensler gave remarks in which he said,
``Retail investors have greater access to markets than at any
time in the past,'' but left open the possibility of
promulgating a rule on equity market structure reform, which we
learned yesterday will be added to the other 30 rule proposals
that he has given in the last 11 months. And that is going to
be released next week.
Retail participation in U.S. markets has grown across every
demographic, and today, self-directed retail investors make up
a specific portion of daily activity in our markets. The
current state of equity markets is the product of years of
private-sector innovation and prudent, fact-based, and data-
driven public-sector rulemakings.
One of the SEC's chief mission objectives is to maintain
fair and orderly and efficient markets, which is something that
I wholeheartedly support. However, market reform should be
developed transparently with input from affected stakeholders
and with evidence that the proposed changes will achieve the
intended goal. We have yet to be given that evidence.
And without objection, Mr. Chairman, I would like to submit
a letter for the record to Chair Gensler from myself and Mr.
Gottheimer on market structure reform, outlining our concerns.
Chairman Sherman. Without objection, it is so ordered.
Mr. Huizenga. Thank you.
And, Mr. Chairman, Republicans on this committee have
warned our Democrat colleagues time and time again that there
would come a day when they couldn't protect this Administration
any longer. Fortunately, for small businesses and investors,
that day is coming.
I look forward to hearing from many of the officials who
have ignored these warnings and, frankly, ducked Congressional
oversight. That is certainly not going to happen anymore.
I look forward to working with all of my colleagues on this
subcommittee to achieve our shared objectives, making sure we
protect the investors, have fair and orderly markets, and
create market opportunity and capital formation. That is our
real goal and objective.
With that, I yield back.
Chairman Sherman. Thank you.
I now recognize the Chair of the Full Committee, Chairwoman
Waters, for one minute.
Chairwoman Waters. Thank you for holding this important
hearing, Chairman Sherman, and for your strong focus on
investor protection throughout your tenure as Chair of this
subcommittee.
Environmental sustainability and governance metrics, which
include human capital disclosures, are increasingly important
to investors. Earlier in this Congress, the House passed Mr.
Vargas' bill, H.R. 1187, the Corporate Governance Improvement
and Investor Protection Act, which would reform the disclosure
regime for public companies by requiring standardizing the
reporting of several important ESG metrics being discussed
today.
The SEC heard this body loud and clear and has moved
forward on a disclosure agenda that responds to the needs of
our nation's investors and workers. So, I look forward to
hearing the testimony today as we look to inform the SEC of its
work ahead.
Thank you, and I yield back.
Chairman Sherman. Thank you.
I want to thank the witnesses, not only for being here
today, especially today, because we had scheduled this hearing
for 2 days ago, and then, we had a series of 12 votes on the
House Floor. The witnesses rearranged their schedules, and we
appreciate their attendance.
We have a panel of distinguished witnesses: Cambria Allen-
Ratzlaff, the managing director and head of investor strategies
at JUST Capital, and she is particularly focused on the, ``W,''
in today's hearing, ``workforce,''; Dr. Colleen Honigsberg, who
has a Ph.D. in accounting and is a professor of law at Stanford
Law School--I thought I had a good background, being a CPA and
a graduate of Harvard Law, but a Ph.D. in accounting and a
professorship at Stanford shows me how much more I could have
tried to achieve; Dr. Shivaram Rajgopal, a professor of
accounting and auditing at Columbia Business School, and while
he is prepared to talk about both the, ``W,'' and the, ``E,''
environment and workforce, I should point out that Dr.
Honigsberg is more focused here on the workforce; Fran Seegull,
the president of the U.S. Impact Investing Alliance, focusing
on environmental disclosures; and Andy Vollmer, a senior
affiliated scholar at the Mercatus Center at George Mason
University.
Witnesses are reminded that their oral testimony will be
limited to 5 minutes. You will be able to see a timer which
will indicate how much time you have left. I would ask you to
be mindful of the timer so that we can be respectful of both
your fellow witnesses' time and the time of the committee
members.
And without objection, your written statements will be made
a part of the record.
Also, without objection, I would like to enter into the
record a letter signed by the Working Group on Human Capital
Accounting Disclosure, dated June 7th, and signed by the last
two witnesses I introduced, since that letter is pretty much
the reason we are having this hearing.
Ms. Allen-Ratzlaff, you are now recognized for 5 minutes.
STATEMENT OF CAMBRIA ALLEN-RATZLAFF, MANAGING DIRECTOR AND HEAD
OF INVESTOR STRATEGIES, JUST CAPITAL
Ms. Allen-Ratzlaff. Thank you. Chairman Sherman, Ranking
Member Huizenga, and members of the subcommittee, good morning.
My name is Cambria Allen-Ratzlaff, and I am pleased to
appear before you today representing JUST Capital, where I am
managing director and head of investor strategies.
I also co-chair the Human Capital Management Coalition, now
a group of 37 large investors, representing over $8 trillion in
assets.
JUST Capital is an independent, nonprofit research
organization dedicated to measuring how America's largest
public companies create competitive value for their
shareholders, while serving their workers, customers,
communities, and the environment. Our view is that when
companies manage their stakeholder relationships well,
shareholders also benefit.
Every year we survey the American public to identify the
business issues that matter most to them. We then use publicly-
available data to quantify performance of the Russell 1000
Index in meeting those priorities. The vast majority of this
data is hand-collected by our research team, taking 10,000 to
15,000 hours on average.
Once we have reviewed the data and assessed company
performance, we build our annual rankings. We also leverage the
data we collect to understand how performance translates into
investment returns. Our work goes where the voice of the
American public takes us.
Since 2015, we have engaged more than 160,000 Americans,
representative of the U.S. adult population. And we have found
that Americans are remarkably united in what they want
companies to prioritize: workers; wages; and jobs.
This holds across every single demographic group. Our
thesis is that companies that are better at managing their
stakeholder relationships tend to generate more returns for
their investors, and we have consistently observed this to be
true.
For example, if an investor purchased an equally-weighted
index of the top 100 companies in our rankings, which we refer
to as the JUST 100, the index would have generated over 6
percent in excess returns against the Russell 1000 from March
2019. If you were to invest in an index of companies scoring in
the top 10 percent of our worker stakeholder group from the
beginning of this year through December 1st, you would have
generated in excess of a 9.29 percent return.
As U.S. public companies are born from and an integral part
of American society, it is perhaps unsurprising that what is
good for workers, is good for investors. Our reporting system,
however, has been slow to adapt.
Consider this. The only line item data U.S. public
companies are required to disclose on their workforce is head
count. This reporting standard was set in 1973 when over 80
percent of the S&P 500 Market Cap was property, plant, and
equipment. Fast-forward 50 years to today, and 90 percent of
the S&P 500 is based on intangible assets. But it is human
capital, the collective knowledge, skills, and experiences of
the workforce powering economic growth.
But as our financial reporting standards have lagged, as
the Chair noted, this also means that up to 90 percent of
company value may not be reflected in companies' disclosed
financials, and investors have taken note.
Speaking on behalf of the Human Capital Management
Coalition, the Coalition has urged financial and accounting
standard-setters to improve access to workforce data through a
balanced approach where principles-based disclosures are
anchored by four foundational, decision-useful disclosures that
apply to all companies: one, the number of full-time, part-
time, and contingent or contracted labor directly involved in
firm operations; two, labor costs; three, turnover; and four,
workforce diversity data sufficient to understand the company's
efforts to access and develop new sources of talent, as well at
how effective these efforts are.
Without this information, investors are flying blind,
unable to understand how well a company manages its work and
how it impacts a company's overall business risks and prospects
to most efficiently direct their financial capital to its
highest-value use.
Today, even attempting to get this information is
excessively time-consuming. When JUST Capital assessed
workforce disclosure at the 100 largest U.S. employers, it took
a team of 2 very skilled data scientists over 130 hours to
collect data on a discrete number of human capital metrics or
find the data completely unavailable.
If a sophisticated research organization like JUST Capital,
or large global institutions with billions of dollar in
capital, are unable to access decision-useful, comparable,
consistent, and reliable workforce data, small retail investors
are at even more of a disadvantage.
Simply put, companies that are best at harnessing the
awesome power of their workforces are also best-positioned to
generate long-term value for shareholders.
Thank you, and I look forward to your questions.
[The prepared statement of Ms. Allen-Ratzlaff can be found
on page 34 of the appendix.]
Chairman Sherman. Thank you.
Dr. Honigsberg, you are now recognized for 5 minutes.
STATEMENT OF COLLEEN HONIGSBERG, PROFESSOR OF LAW, STANFORD LAW
SCHOOL
Ms. Honigsberg. Thank you, Chairman Sherman and Ranking
Member Huizenga, for the opportunity to testify before you
today.
To give you a sense of my background, as Chairman Sherman
had noted, I began my career with PricewaterhouseCoopers. While
I was there, I became very interested in accounting policy. So,
I returned to school, earning a J.D. from Columbia Law School
and a Ph.D. in accounting from Columbia Business School. I am
now a professor of law at Stanford Law School where I teach
classes on securities law, corporate governance, and
accounting. My recent scholarship focuses on the empirical
study of accounting questions such as human capital disclosure.
This past spring, I was delighted to join forces with my
colleague here today, Columbia Business School Professor
Shivaram Rajgopal, along with other esteemed academics,
including former SEC Commissioners Joe Grundfest and Robert
Jackson, to create the Working Group on Human Capital
Accounting Disclosure.
In June, our group petitioned the SEC to develop rules
requiring public companies to disclose sufficient information
for investors to assess the extent to which firms invest in
their workforce.
I want to highlight in my testimony today that prompt
action on labor cost disclosures is necessary due to two market
trends: the growth of human capital firms; and the increasing
prominence of net loss firms.
First, consistent with the comments of Chairman Sherman in
his opening remarks, let's consider the growth of the so-called
human capital firm in the 21st Century.
An increasing proportion of public companies derive much of
their value from intangible assets. Yet, only about 15 percent
of those firms even disclose information as basic as total
labor costs. As the chairman noted, in 1975, intangibles
represented 17 percent of the value of firms in the S&P 500. By
2020, intangibles represented 90 percent of those firms' value.
Yet, we are using largely the same accounting principles to
assess these assets' value.
Indeed, we can see a little legacy of these rules in
accounting today as different forms of investment are treated
differently. Investments in people receive what I would
consider to be the worst quality accounting treatment, as these
expenditures are neither capitalized nor disclosed.
This creates real problems for valuation of today's public
companies as investors are unable to determine what portion of
cash outflows should be considered an investment in the firm's
future growth and productivity and what portion of cash
outflows merely allow the firm to maintain its current level of
productivity.
Second, an increasing number of public companies report a
loss for accounting purposes, making analysis of firms'
operational costs, the most significant of which is likely to
be labor, more important than ever to understanding a firm's
value.
In 2020, for the first time, more than half of U.S.-listed
companies reported negative earnings. Many of these companies
are young, technology-driven firms, and investors are betting
on their future profitability. But commonly-used valuation
techniques like price-to-earnings ratios cannot be used to
value these firms. Instead, investors must project future
earnings, an analysis that requires reliable information about
costs, margins, and scaleability. But that information is
obfuscated under current accounting principles, as investors
don't get a sufficiently detailed breakdown of firms' cost
structures to identify contribution margins.
As I highlighted in my written testimony, that is why our
working group proposed three recommendations. First, managers
should be required to disclose what portion of workforce costs
they believe to be an investment in the firm's future growth.
Second, workforce costs should be treated in the same way
that research and development costs are: expensed but
disclosed. That would give investors the information they need
to capitalize workforce costs in their own valuation models,
should they choose to do so.
Finally, the income statement should be disaggregated to
give investors more insight into workforce costs.
As noted above, investors in loss-making firms need
information on costs, margins, and scaleability to estimate
future profitability. But under current accounting rules,
scores of costs are aggregated together under generalized
headers such as costs of goods sold or selling, general, and
administrative.
Rather than purely generalized categories, investors need
detailed information on specific operating costs, the most
important of which is labor. Without more detailed cost-level
information, it is difficult, if not impossible, to reliably
value these firms or to stress test the market's valuation of a
firm using fundamental analysis.
Thank you again for the opportunity to testify here before
you today, and I would be delighted to answer any questions
that you may have.
[The prepared statement of Dr. Honisberg can be found on
page 64 of the appendix.]
Chairman Sherman. Thank you so much.
Dr. Rajgopal, you are now recognized for 5 minutes.
STATEMENT OF SHIVARAM RAJGOPAL, KESTER AND BYRNES PROFESSOR OF
ACCOUNTING AND AUDITING, COLUMBIA BUSINESS SCHOOL
Mr. Rajgopal. Thank you.
Thank you, Chairman Sherman, Ranking Member Huizenga, Full
Committee Chairwoman Waters, and esteemed members of this
subcommittee for inviting me to speak today. It is an honor to
be here.
My name is Shivaram Rajgopal and I am the Kester and Byrnes
Professor of Accounting and Auditing at Columbia Business
School, and I was fortunate enough to be on the Ph.D.
committee, so my testimony touches mostly on the, ``E,'' and a
bit on the, ``W,'' part of the hearing. In summary, I express
support for the SEC's proposed climate risk disclosure rules.
But I do have mixed feelings about Scope 3 emissions. I also
underscore the need for mandatory disclosure related to
compensation, workforce turnover, and tenure on publicly-listed
U.S. companies.
Let's start with the SEC's proposed climate rules related
to, ``E.'' I support the SEC's attempt to mandate vigorous,
comparable, consistent data on greenhouse gas emissions across
companies.
My perspective is informed by a research project where my
colleagues and I tried to assess whether the so-called net-zero
pledges of 57 oil and gas companies are credible. These are
just 57 companies, but it took us 6 months to code what these
companies were doing. The underlying data is scattered across
press releases, websites, 10-Ks, and sustainability reports.
There is tremendous variation in the path followed to a net-
zero promise, the GHC scope category the promise covered, the
reporting framework followed, and the verifiability, if any, of
the promised path to this net-zero idea.
Companies routinely follow multiple NGO-sponsored
frameworks such as the TCFD, the GRI, the CDP, and the SASB's
frameworks. On top of that, the four ESG ratings, ISS,
Sustainalytics, Bloomberg, and MSCI provide environmental
ratings that don't converge and are all over the map.
Without rigor, consistency, comparability, and
verifiability of climate risk disclosures, these companies, I
believe, cannot be held accountable for the promises they make
to investors in terms of carbon reduction. This concern is even
more pressing for the investors of ESG funds that claim to hold
publicly-listed stocks that are climate-friendly.
It is also useful to find out that disclosure frameworks
suggested by the SEC are agnostic with respect to investors'
preference about GHG. Comparable and consistent GHG disclosures
can also inform an investigator who wants to bet against, not
for, the direction of high-GHG emitters. If an investor wants
to buy stocks with high-GHG emissions, so be it.
But I do have mixed feelings about the SEC's requirement to
disclose Scope 3 data. Consider a case of a publicly-listed
pizza company that sells prepared pizzas to a retail
distributor. The retail distributor then uses delivery services
to get the pizza to the customers' homes. Asking the publicly-
listed pizza company to calculate Scope 3 emissions related to
those deliveries can potentially be burdensome.
The other conceptual issue to worry about is the
significant double counting of emissions, if one were to add up
all of the emissions across companies. So if Chevron sells jet
fuel to, say, Delta Airlines, for use in a plane made by
Boeing, these are Scope 3 for Chevron and Boeing, and Scope 1
for Delta. And these emissions get counted 3 times, which is
problematic for any decent accounting system. Every Scope 2 or
Scope 3 emission is someone else's Scope 1 emission.
But having said that, if a company has promised a Scope 3
reduction to investors, we need disclosures to check whether
the promise is actually being met.
Let me use the last few minutes I have to touch on and
support the petition that Professor Honigsberg and I signed and
filed with the SEC. In a typical high school economics class,
we teach students that a company creates shareholder value by
combining materials, labor, capacity, and some managerial
talent. But if you take that high school economics model to a
modern-day income statement, it is virtually impossible to get
answers to any of these questions. We effectively have a six-
line income statement. I don't know where materials are,
somewhere in cost of goods sold, but I don't know how much.
Labor is everywhere in every line item, except I don't know
what the labor costs are and what the composition across the
line items in the financial statement might be.
As Chairman Sherman mentioned, barely 15 percent of U.S.
companies tell us what labor costs are in their financial
statements.
In a sense, the information would help us in four concrete
ways: understanding intangibles; understanding the gains shared
between labor and capital; understanding substitution of labor
for AI, automation outsourcing; and understanding spikes in
abnormal turnover.
In summary, I support the SEC's climate risk disclosures
with qualified enthusiasm for Scope 3 disclosures. I also want
to reiterate support--
Chairman Sherman. Thank you.
Mr. Rajgopal. --for my joint statement with the--
Chairman Sherman. Thank you.
Mr. Rajgopal. --on human capital.
Thank you.
[The prepared statement of Dr. Rajgopal can be found on
page 73 of the appendix.]
Chairman Sherman. Ms. Seegull, you are now recognized for 5
minutes.
STATEMENT OF FRAN SEEGULL, PRESIDENT, U.S. IMPACT INVESTING
ALLIANCE
Ms. Seegull. Thank you to the subcommittee for convening
today's hearing.
And thank you to Full Committee Chairwoman Waters,
Subcommittee Chairman Sherman, and Ranking Member Huizenga and
the other esteemed members of the subcommittee for your
leadership.
Let me start by saying that markets can only exist and
operate efficiently when there is a free flow of information.
And that is particularly true of our capital markets.
It is core to the mission of the SEC to empower investors
by engaging and ensuring they are equipped with clear,
comparable, decision-useful data.
As a head of an organization representing a wide range of
investor perspectives, and a former chief investment officer, I
join you today to share our support for SEC action to create
standardized corporate disclosures on human capital management
factors.
I serve as president of the U.S. Impact Investing Alliance,
a nonpartisan organization committed to catalyzing the growth
of impact investing, by which we mean investments that create
financial returns alongside measurable and positive social,
economic, or environmental impact.
Members of our boards and councils include institutional
investors and individuals collectively owning hundreds of
billions of invested assets, in addition to asset and fund
managers collectively overseeing more than $1 trillion in
assets.
Impact investors are motivated by a range of objectives,
both financial and values-based. Some impact investors seek to
create economic opportunity in historically-underinvested
communities. Others look to foster the technology and
innovation that will drive a sustainable 21st Century economy.
But what unites all investors is the need for access to
corporate information that is material, reliable, and
comparable in order to express their individual or
institutional priorities and invest their assets accordingly.
With that context in mind, I would like to make five key
points for the subcommittee's consideration.
First, the U.S. Impact Investing Alliance and the investors
we work with strongly urge the SEC to pursue rulemaking on
corporate disclosures for human capital management factors.
This should include, among other things, the total number of
employees by type, and the total cost of a company's workforce,
turnover rates, and employee diversity demographics at each
level of the company.
Second, we support these standardized disclosures because a
company's workforce is one of its greatest assets, and the
success of all companies is dependent on its workers. As such,
investors are eager to understand how a company attracts,
manages, invests in, and retains its talent, factors that
relate directly to business performance.
Third, such a rulemaking is clearly consistent with the
SEC's mandate to protect investors. Transparency and
accountability are the hallmarks of efficient markets. But the
current lack of information creates market inefficiencies,
harming investors and weakening the financial system. It is in
the long-term interest of both individual companies and the
wider economy to be responsive in disclosing human capital
management factors to investors.
Fourth, such disclosures would improve market efficiency
and would not impose significant burdens on issuers. Corporate
leaders currently navigate a complex web of private disclosure
standards in order to meet investor demands. The SEC should
standardize these disclosures and thereby create clarity and
benefits for issuers, investors, and the broader markets alike.
Lastly, SEC action on human capital management disclosure
is a matter of American economic leadership and
competitiveness. Global regulators are moving forward with
their own disclosure frameworks, placing U.S. investors and
corporations at an information disadvantage if the U.S. does
not pave its own path forward.
We believe the clear and consistent disclosure of human
capital management factors will make existing U.S. issuers
stronger. It will also attract more capital into businesses and
industries that will, in turn, create pathways to economic
opportunity for American workers.
Collectively, these five points show how a streamlined and
standardized corporate disclosure framework on human capital
management factors from the SEC will fortify the transparency,
accountability, and efficiency of our capital markets and, in
doing so, enhance the competitiveness of the U.S. economy for
many years to come.
Thank you to the subcommittee for this opportunity to speak
on such an important topic for U.S. investors.
[The prepared statement of Ms. Seegull can be found on page
77 of the appendix.]
Chairman Sherman. Thank you.
Mr. Vollmer, you are now recognized for 5 minutes.
STATEMENT OF ANDREW N. VOLLMER, SENIOR AFFILIATED SCHOLAR,
MERCATUS CENTER AT GEORGE MASON UNIVERSITY
Mr. Vollmer. Chairman Sherman, Ranking Member Huizenga, and
members of the subcommittee, thank you for inviting me.
My written statement addresses three topics and provides
some information about my background. In these oral remarks, I
would like to summarize a few main points.
As noted in my written statement, my comments are solely my
own and are not on behalf of the Mercatus Center or any other
person or organization.
The subcommittee is considering a possibility of requiring
additional disclosures on workforce management. The question
about new areas of disclosure by public companies comes up
regularly. When Congress or the SEC is considering the
possibility of adding to the already-extensive list of
disclosures required of reporting companies, it should be
guided by a set of basic principles. My written statement lists
several principles.
For example, Congress or the SEC should impose new
disclosure obligations only when it has data or evidence of a
strong need or a serious continuing harm that the private
markets will not solve and that a law could solve.
Congress should evaluate the costs and benefits of possible
new disclosure areas. One cost, of course, is compliance.
Another cost is that investors, even sophisticated investors,
find that disclosure documents under the current system are
already long, complicated, and difficult to understand. New
disclosure areas with detailed information make the problem
worse.
A further cost is that new required disclosures restrict
personal freedom. Congress should always bear in mind that new
laws can reduce liberty. That is a genuine cost to take into
account.
The bills and proposals for more disclosures in the
workforce or human capital management area raise questions
under these criteria. In particular, the need for more
disclosure is open to doubt. The SEC expanded required human
capital disclosures in 2020 and obliged companies to provide
additional quantitative and qualitative information.
It also deliberately decided not to require extra metrics
and statistical information so that each company could discuss
the workforce issues relevant to its own business.
Additional disclosures in the area would certainly raise
costs, especially costs of compliance, but would not
necessarily produce benefits greater than those produced by the
2020 SEC rule.
My written statement also covers two other topics. I
encourage the subcommittee to make progress on reforming the
statutes and rules on capital formation. Congress could reduce
obstacles set up by the public offering process, a complicated
set of exemptions from that process, and the lengthy and
burdensome set of disclosures that reporting companies must
make.
The final topic I touch on in my written statement concerns
the way the current SEC is managing and administering its work.
A majority of the Commission has proposed a long list of major
rules in quick succession, in ways that have disserved the
rulemaking process and the public. The accelerated schedule has
prevented the SEC staff from adequately developing and
preparing draft rules and has denied reasonable amounts of time
for the public to comment. That has diminished the quality of
the proposed rules, and has lowered staff morale and increased
staff departures.
Congress should consider systems to address these problems.
Those are the main points in my written statement. I would
be happy to answer questions.
[The prepared statement of Dr. Vollmer can be found on page
83 of the appendix.]
Chairman Sherman. Thank you.
I now recognize the Chair of the Full Committee, Chairwoman
Waters, for 5 minutes for questions.
Chairwoman Waters. Thank you very much.
I want to address this question to Ms. Seegull.
According to surveys of public company executives, a
majority of the CEOs identified human capital as one of the
most valuable assets within their companies. Although many
companies have taken the initiative to disclose human capital-
related information on their own, including diversity
statistics, others have not.
Further, there are widespread differences regarding how
companies disclose investments in their workforce. For example,
firms in the European Union are required to report human
capital investments and salaries, bonuses, and other benefits,
as well as board diversity information. But because similar
disclosures are not required in the United States, only 15
percent of S&P 500 firms voluntarily do so.
According to the Embankment Project for Inclusive
Capitalism, however, those U.S. companies that do voluntarily
disclose this information outperform those that do not.
As your organization interacts with many investors, can you
please discuss why workforce, or human capital metrics,
particularly diversity-related information, is important to
investors?
Ms. Seegull. Thank you for the question, Chairwoman Waters.
In terms of investor demand among the network of investors
that we work with, in June of this year the U.S. Impact
Investing Alliance joined nearly 50 investor and business
organizations in writing to SEC Chair Gensler, encouraging the
Agency to prioritize standardized disclosures on human capital
management specifically. And that includes diversity data,
which it is worth noting, is already collected by companies in
their EEO-1 data. I think what we are asking here on diversity
in particular is the disclosure of data that is already being
disclosed.
I was reading and enjoying a Harvard Law School and IARS
Institute report on materiality that specifically talks about
human capital disclosure. It effectively is a metastudy of 92
empirical studies that examine the relationship between HR
policies and financial outcomes, including return on equity,
return on investment, and profit margins. And this metastudy
effectively concluded that there is sufficient evidence of
human capital materiality to financial performance to warrant
inclusion in standard investment analysis.
Specifically, as it relates to diversity across corporate
boards, senior management, and overall workforce, we know,
according to studies, that diversity corresponds with better
financial performance and resiliency, as well as a company's
ability to attract and retain talent.
And I will also mention on the diversity piece the
investors that we work with disclose workforce disclosure by
race, gender, and LGBTQ+ and disability status so that
investors can understand the diversity and the strength of
workforce as a way of assessing a company's strength and
allocating capital thereof.
Chairwoman Waters. Thank you very much.
I have a little time left, and I would like to direct this
question to Professor Rajgopal.
As you know, the SEC's proposed disclosure rule applies
only to publicly-listed companies. Would you comment on the
benefits of extending these disclosure requirements to
similarly-situated but privately-held operating companies that
issue unregistered securities, or operating companies that are
wholly and substantially owned by private equity funds, such as
Staples, which is owned by Sycamore Partners, and PetSmart,
which is owned by BC Partners?
Mr. Rajgopal. Thank you, Chairwoman.
Part of the problem with this ESG disclosure idea is that
if you mandate something for the publicly-listed companies,
there is always a possibility of transparency arbitrage. So, if
the rules become harder for public companies, you create
incentives for these people to go private. And then, the exact
problem that you were trying to solve in the public space just
migrates to a different area.
One has to be careful about this information arbitrage
idea, and this has been going on in other domains for a long
time. That is my concern.
Chairwoman Waters. Thank you.
I yield back.
Chairman Sherman. Thank you.
And I now recognize the ranking member of the subcommittee,
Mr. Huizenga, for 5 minutes.
Mr. Huizenga. Thank you.
Mr. Vollmer, is it a correct assertion that any of the
workforce management or diversity data items being considered
here today would already have been disclosed if they were
material to investors?
Mr. Vollmer. I think that is true, since the 2020 SEC
expansion of the rule.
Mr. Huizenga. Okay. And has the materiality standard, which
has been the recognized standard for decades, served the
American investors well?
Mr. Vollmer. It has served American investors extremely
well.
Mr. Huizenga. Okay. Is there a good reason to deviate from
that standard, as each of these bills do?
Mr. Vollmer. I think a materiality qualifier needs to be
included in any additional disclosures that Congress adopts or
the SEC adopts.
Mr. Huizenga. Just a short while ago, Ms. Seegull
actually--and I wrote this down--was talking about workforce
disclosures. And she said really what we are asking for is,
``the disclosure of data that is already disclosed.'' That
didn't make a whole lot of sense to me, other than maybe
mandating it in a certain form through the SEC. And, obviously,
there are costs when you are forcing companies to disclose
information that is not material to investors. Correct?
Mr. Vollmer. The cost can be extremely high.
If you go back to the very beginning when Justice Marshall
adopted the materiality standard for proxy statements in a case
called, TSC, he warned that a corporation and its management
could be subject to liability for insignificant statements or
misstatements and that shareholders could be buried in an
avalanche of trivial information.
Mr. Huizenga. Yes. And an expansion of that is lately, we
have seen some Democrat SEC Commissioners, in their speeches,
call for ESG disclosure mandates on private companies. And the
climate disclosure proposal would impose disclosure
requirements indirectly on private companies through the Scope
3 requirements--Professor Rajgopal had mentioned a pizza
delivery company.
I have Gerber Baby Food in my district, which is owned by
Nestle, a publicly-traded company. So, you are now going to go
and effectively require family-owned small farms that supply
the peas, the carrots, and the corn that is steamed and put in
a jar to now do a Scope 3 disclosure.
And as I talked to one of the farmers, he said, ``I am the
guy who does all the reports.'' They are struggling to make
sure they hit the organic versus the nonorganic, much less
having a compliance department. There is none. It is completely
unworkable, as has been discussed.
But a lot of these ESG mandates that are being discussed
are for publicly-traded, because that is who the SEC regulates.
But wouldn't these direct, much less these indirect disclosure
requirements on privately-held companies be concerning to you
as well?
Mr. Vollmer. I think trying to impose some of these broad
and extensive disclosure obligations on private companies would
be extremely unwise. Not only would you deter people from using
the securities systems to raise capital, but you are talking
about a group of investors for private companies that are
extremely sophisticated and know what information they need to
make investment decisions.
That is how the system operates at the moment. There is
really no need to require large sets of additional disclosures.
Mr. Huizenga. They are sophisticated investors apparently
until it comes to FTX, but that is another hearing that is
going to be coming up.
And I question, frankly, whether it is legal. How do you
have the legal ability to go in and force a privately-traded,
privately-held company to do these types of disclosures that
are not material?
I do want to also quickly touch on, in my last remaining
seconds here, Professor Honigsberg, you had talked about what I
viewed as accounting principles. That is very different than
SEC-mandated disclosures. And as we were chatting up here, I
think that is an area that we can and should discuss. But a 10-
K or a 10-Q is very different than having the SEC come in on an
ESG mandate.
But we ultimately need to know how these mandates help
shareholders and how we make sure that we don't add additional
regulatory burdens on those returns, thus harming mom-and-pop
investors, as well as those institutional investors.
My time has expired, and I yield back.
Chairman Sherman. Thank you.
I would like to comment that I believe our ranking member
is more woke than he may realize.
He tells us that the, ``W,'' for today's hearing is for,
``woke,'' and the, ``W,'' for today's hearing is providing
workforce metrics. So, if it is woke to want workforce metrics,
an investor tries to evaluate a company, we here have to
evaluate the SEC. The gentleman does that, and he focused on
turnover and attrition at the SEC.
If he uses workforce metrics to evaluate entities that he
has to evaluate, why shouldn't investors have workforce metrics
to evaluate companies? And if it is woke to care about
workforce attrition, then I thank the--yes?
Mr. Huizenga. Will the gentleman yield?
I am just trying to fit in.
Chairman Sherman. Good.
Mr. Huizenga. So--
Chairman Sherman. And the fact is that workforce is
material to investors. My fear as an old accountant is that we
are doing a great job of reporting a tiny portion of the
information that is needed.
As the witnesses have pointed out, back in 1975 and
before--and keep in mind, the balance sheet, the income
statement we disclosed is 100-years-old. Back then, even in
1975, 90 percent of the value of the company was the stuff that
is on the balance sheet today. Now, it is 20 percent or less of
the value of the company is what is the balance sheet today. We
need a supplemental statement.
Mr. Vollmer tells us that investors have perhaps been
overwhelmed by too much information but, obviously, workforce
metrics ought to be included, and if you watch CNBC, you will
see that investors want more information.
The ranking member is concerned about our power to require
disclosures from public companies. I say we clearly have that
power under the Commerce Clause. And I would point out that we
ought to provide--that when we are talking about large
companies, we ought to require such disclosures just to keep
things even between the companies that investors are allowed to
invest in and the ones that are privately--that they can't
invest in.
Ms. Allen-Ratzlaff, studies have shown--and these studies
are impressive, at least to some investors--that companies make
better decisions when their decision-making group is diverse.
Should we disclose the diversity of the board, the executive
group, or the diversity of, say, the top 5 percent in
compensation at a company?
Ms. Allen-Ratzlaff. Thank you, Chairman Sherman, for that
question.
Looking at the totality of disclosures that we have
currently today, when you are talking about, for example, board
diversity, that is something that right now, some companies
disclose. Some do not. But investors certainly are looking for
that information. And right now what we have is a situation
where investors essentially are guesstimating more or less the
diversity of boards, even though to your point there is
research showing time and time again that diverse boards--and I
would say diversity across the board--are better at making
decisions. They create more value for shareholders. Period.
That is what shareholders care about.
And I would also point out that we were talking about the
S-K rules which went into effect in November 2020. And JUST
Capital's data shows that 32 percent of companies at the
beginning of 2021 disclosed some type of demographic data.
As of September 2021--
Chairman Sherman. I am going to interrupt. I have limited
time.
Ms. Allen-Ratzlaff. Yes.
Mr. Sherman. But, yes, all of these companies are telling
us things without universal definitions, tabular displays,
internal control, or auditing; they are just doing it on their
own.
And I would point out that Mr. Vollmer says that accounting
standards diminish liberty. We don't give companies the liberty
to decide what is on the balance sheet. We tell them at the
Financial Accounting Standards Board (FASB). And we should have
standards for disclosing other information.
I want to thank Professor Rajgopal for pointing out some of
the accounting difficulties of dealing with Scope 3. I know a
lot of environmentalists--I am always the only accountant in
the room--and they don't know how tough it is.
I want to thank one of the witnesses for pointing out that
if we in the U.S. don't provide information that at least some
investors want, we will lose out to other investment markets.
And, finally, I want to point out that the SEC has been
badgered in this room for the 26 years I have been here for not
getting their job done. Thank God, they are working hard. They
are getting their job done.
And I will now recognize Mrs. Wagner.
Mrs. Wagner. Thank you, Mr. Chairman.
I have been, along with many others, very troubled that the
SEC is deviating from its core mission of protecting investors
and facilitating capital formation. It is as simple as that.
In fact, I, too, sent a letter last Monday to Chair
Gensler, expressing my concerns with this proposed rule to
reform U.S. equity market structures. This soon-to-be proposed
rule appears to have been hastily developed without any
empirical evidence that there is a problem with the current
quality of U.S. equity markets for retail investors.
At a time when our equity markets remain the deepest, the
most-liquid in the world, and provide retail investors with
historically-high access to low-cost investment opportunities,
the SEC's recommendations will have negative consequences on
millions of mom-and-pop retail investors working to simply
secure their financial future.
And I would like to enter, Mr. Chairman, this letter into
the record.
Chairman Sherman. Without objection, it is so ordered.
Mrs. Wagner. And I so look forward to finally questioning
Chair Gensler on this matter in the next Congress. It is long
overdue.
I am further concerned that the SEC is attempting to
implement a partisan policy agenda through additional
government mandates.
Mr. Vollmer, you touched on this some. But would requiring
the SEC to establish mandatory disclosures on issues outside of
its expertise and its mission, such as the proposals before us,
result in a complicated and confusing disclosure regime for
investors and businesses?
Mr. Vollmer. Yes. It already has, and it will continue to
do so if they continue on the same path.
Mrs. Wagner. In your opinion, is the SEC the appropriate
entity for determining reporting metrics and industry standards
when it comes to workforce management and diversity?
Mr. Vollmer. I am not aware that they have that kind of
expertise. In particular, I think that some of the bills and
the proposals would require very detailed disclosures in many
different areas where I am quite sure the SEC lacks the
expertise. But certainly, there are some employee and workforce
areas where the SEC is competent.
Mrs. Wagner. Does piling on additional disclosure
requirements help increase capital formation and encourage
companies to go public?
Mr. Vollmer. Oh, I think there is a major concern with
raising the cost of compliance with the disclosures that the
SEC administers. It deters companies from going public.
Mrs. Wagner. Yes, it does.
Mr. Vollmer. And that deprives lots of retail investors of
opportunities, because the private market offerings exclude a
great many retail investors.
Mrs. Wagner. It is a huge problem currently.
Mr. Vollmer. I agree.
Mrs. Wagner. Mr. Vollmer, can you describe to us how the
SEC lacks statutory authority to adopt the rules in its climate
disclosure proposal?
Mr. Vollmer. I would be delighted, but I don't think you
have enough time. I wrote two separate submissions and filed
them with the SEC about their proposed climate change rules.
The first one is a rather lengthy legal analysis of their lack
of statutory authority. And the core of the point is, if you go
back to 1933, the Securities Act of 1933 set the disclosure
framework that has remained in place. It focuses on certain
subjects, and those subjects all relate to the valuation of the
company: financial performance; financial statements; the
business; and what securities are being offered. Congress was
very precise about these different categories of information.
And that approach has carried forward to today, and the SEC is
not permitted to vary it without Congress' consent.
Congress has not authorized--
Mrs. Wagner. And what kind of regulatory precedent would
that set for the SEC and for other Federal agencies if it would
do so?
Mr. Vollmer. We have already seen that the courts are very
concerned about agencies exceeding their statutory boundaries.
Mrs. Wagner. Right.
Mr. Vollmer. Because then you have regulation by a very
small group of unelected people, rather than having policies
set by this Congress.
Mrs. Wagner. Unelected bureaucrats. I thank you for your
testimony.
I am out of time, and I yield back.
Chairman Sherman. Thank you.
The gentleman from Illinois, Mr. Foster, who is also the
Chair of our Task Force on Artificial Intelligence, is now
recognized for 5 minutes.
Mr. Foster. Thank you, Mr. Chairman.
Our first 2 witnesses commented on the 90percent fraction
of intangibles in the valuation of companies. To me, this
raises questions or worries about whether there may be a
valuation bubble that may at some point be on the verge of
systemic collapse, perhaps triggering a financial crisis if it
is 90 percent of valuations.
I think it was back, roughly, in 2018 that a paper came out
of UC London called, ``Capitalism Without Capital,'' that got
play in The Economist magazine and elsewhere, and it described
the sudden collapse of an English construction firm, I think,
called Carillion, which had 40,000 employees, but apparently
very few tangible assets and very badly-mispriced intangibles.
A recent example of what might trigger this sort of
collapse is the incredible recent breakthroughs in GPT
chatbots, which you may be aware of, where these look like they
are very close to being able to replace computer coders,
Harvard lawyers, and a wide range of people who spend their
days staring at screens.
And this would immediately cause a massive revaluation of
the human capital part of the valuation of firms. There are
thoughtful commentators looking at the performance of these who
think that within a couple of years, Google is going to be
obsolete, that instead of searching the internet, you will
simply ask your chatbot to summarize the total content
available on the internet, and it will give you a nicely-
formatted, concise summary of what you want to know. And this
will immediately--Google has all sorts of intellectual property
and intangibles and a great workforce around its search
business that will be vaporized.
So, how do you view this, and how worried should we be in
Financial Services about the potentially-volatile nature of the
valuation of human capital as AI accelerates its disruption of
the workforce?
I guess I will go in the order that you were called, since
you both mentioned the 90 percent.
Ms. Allen-Ratzlaff. Sure. Thank you so much for that
question. I think we absolutely should be concerned. I think
the 90 percent is huge. And the SEC's job is to make sure that
investors have the information they need to make decisions or
get out of the way. There is nothing more free market than
that. And investors have been raising the same issues that you
have, that we simply have no idea how well companies are
managing their workforces.
It is interesting--I know several years ago, there was a
rule adopted by the SEC on CEO-to-worker pay ratio, and
regardless of your personal or political views across the board
on that, we actually looked through a few of the disclosures.
And in 2 hours, we found 14 companies that said that they
actually have no idea and they cannot tell you what they spend
on their workforce.
Labor cost is a basic part of the income statement on which
every single financial statement is based. So, if there is
something wrong with that, it's the same with the balance
sheet.
Mr. Foster. Before I go on to the next witness, do you have
trouble untangling the cause and effect between profitable
companies and companies that treat their workforce well?
Because you can imagine that a company with a good line of
products is very profitable and is in a position to treat its
workers well, whereas one that is forcing external competition
simply may not be able to. And how do you deal with that?
I am getting nods from our second witness, so if you could
try to answer both of those?
Ms. Honigsberg. Congressman, those are both great
questions. And I think, consistent with my colleague here, I
would say this is all the more reason why we need to provide
this type of information.
For example, there is a recent study that I think is
relevant to your second question. And this study looked at both
capital expenditures and labor cost as a percentage of sales
over the period from 1991 to 2018. They found out capital
expenditures as a percentage of sales remained roughly constant
at about 10 percent. Whereas, labor expenses as a percentage of
sales increased from about 28 percent to close to 50 percent.
Now, this was done with European data. We wouldn't be able
to run this type of study in the U.S., but presumably we would
have a similar trend here.
And so for us, I think we really want to be able to
identify this information. How much are they spending on human
capital? If we see erosion because of AI, we would see that
number actually being able to decrease in a way that we can see
with European data but that we wouldn't be able to see right
now using our U.S. data.
Mr. Foster. Yes. Thank you. And if any of you have a
reading list for a Member of Congress that is sort of at the
level of the UC London paper, and you can submit it for the
record, I would very much appreciate it.
Thank you. I yield back.
Chairman Sherman. Thank you.
I now recognize the gentleman from Ohio, Mr. Davidson, for
5 minutes.
Mr. Davidson. Thank you, Mr. Chairman. And thank you to
everyone for being here. I greatly appreciate you being here,
but I think you have heard from us before, we really feel the
panel would be rounded out with Chairman Gensler here since he
is driving an awful lot of this or attempting to.
We are thankful, or at least I am, that not every sector of
the government was able to get someone in place. I am glad that
Sarah Bloom Raskin is not at the Federal Reserve. I hope the
Federal Reserve stays focused on its own lane.
But this whole idea of ESG dominating our capital markets
instead of fiduciary duty, I think is rightly troubling. I have
had constituents frustrated because they feel like their
pension fund isn't pursuing the best returns. I have had
financial advisors frustrated, and I have jhad ust had ordinary
people in business asking, why are my bigger customers pushing
us to do these things for disclosures net of mandates from
capital markets.
People want to run the business that they built. And if you
look at, say, the most alarmist predictions on sea level rise
or something like that, the idea that you couldn't possibly
make a loan that is for 5 years and understand the risk of
default is hard for people to comprehend.
Mr. Vollmer, when you look at fiduciary duty, has there
been a statutory change that we all missed somehow, that says,
no, ESG is now more important than a fiduciary duty?
Mr. Vollmer. No. There has not been a change. And I think
the foremost consideration of both fiduciaries, asset managers
but also corporate boards, is to produce the maximum returns
for shareholders.
Mr. Davidson. Yes. And as has been discussed already, a
materiality standard there, which could include some other
impacts. But in your testimony, you discussed the accelerated
rulemaking agenda within the SEC, which has led to all kinds of
problems there and problems potentially for our capital
markets. In light of West Virginia v. EPA, there are also
clearly problems for the fact that it is not legal.
Do you believe that an agency with the kind of morale,
staff retention, and leadership problems that the SEC has under
Gary Gensler adequately promotes capital markets in our
country?
Mr. Vollmer. I think that we need to return much more
attention to capital formation and capital access.
Mr. Davidson. Yes. Almost like we could focus on the
mission, not necessarily this other agenda. So yes, I really
appreciate that. I think that is a sentiment broadly shared,
but it's troubling that it is not shared by most of the
positions that the Biden Administration has appointed.
One of the important things is that the Biden
Administration has appointed people whose mean years of
private-sector experience is zero. They are all academia,
thought leaders down this movement.
And speaking of that, Ms. Honigsberg, earlier this year you
participated in a podcast with Joe Bankman, your colleague at
Stanford Law and the father of Sam Bankman-Fried, the now
disgraced and former CEO of FTX. In that podcast, you spent
time with Mr. Bankman trying to outline the importance of ESG
reporting requirements, and you even discussed an example where
a small group of investors was able to force a vote on
ExxonMobil to push for cleaner energy.
Speaking of Exxon and FTX, the FTX case poses some
interesting ESG questions. An analysis by TruG Labs gave FTX a
higher ESG rating than Exxon. As you know, it was largely due
to Mr. Bankman-Fried's approach to what he claimed was,
``effective altruism.'' Perhaps like Robin Hood. I don't know.
I don't know what his logic was.
But, Ms. Honigsberg, do you really feel that a higher
rating for a company like FTX is more merited than Exxon? And
if not, what is this ESG metric missing?
Ms. Honigsberg. That is a great question. And, first and
foremost, I really hope all the victims of FTX get the fullest
extent of justice that they can get under the law. I think we
all think that.
And in hindsight, clearly, it doesn't make sense that a
crypto company would have a higher rating than many other
companies. My understanding of the issue with that was that
Exxon was largely unreceptive to feedback and consideration.
And it also comes down to how we measure ESG, which is
terrible.
For example, Professor Rajgopal and I went through 4
different issuers, and we found that those 4 different issuers
disclosed 70 different metrics just on human capital alone.
Only one of them was disclosing comments. You just don't have
the information to where you can evaluate and companies are
able to cherry-pick.
Mr. Davidson. Yes. I agree that the way you do an ESG is
terrible. So, thank you.
Chairman Sherman. I look forward to next year when I am
sure the then-Majority will have Mr. Gensler here. It will make
my life more interesting and it will boost our ratings on C-
SPAN3.
I now recognize Mr. Vargas from California.
Mr. Vargas. Thank you very much, Mr. Chairman. I appreciate
it. I want to thank Chairwoman Waters, of course, and you as
Chair, and the ranking member, for this hearing. I think it is
very, very important.
Before I get into my prepared remarks, I do want to ask Ms.
Seegull, you were quoted, and I think correctly, that disclosed
information is already disclosed. Within the context of what
you were saying, I thought what you meant to say was that
information is already collected, but maybe it wasn't. I do
want to give you a few seconds to clarify that.
Ms. Seegull. Thank you, Congressman Vargas. Yes. I
apologize if I misspoke.
What I meant to say, if I didn't say it, is that EEO-1 data
on workforce diversity is already collected by large companies
but not disclosed currently to investors. My point was: one,
that it should be disclosed to investors; and two, because the
information is already being collected, it would not impose
significant additional costs on issuers to disclose vital
information to investors.
Thank you.
Mr. Vargas. Thank you. That is what I understood. I think
you misspoke.
It's funny, if you were 80-years-old, they would say you
were senile, because that is what the other side says about the
President. But obviously, you are incredibly intelligent, and
you just misspoke a word, and that happens all the time. But
again, unfairness sometimes. You should have been given the
courtesy to correct that, and I am glad you did correct that.
With that being said, I know this hearing is focused on
workforce management, but Iwould like to look at the totality
of ESG-related disclosures. ESG disclosures are market-driven
initiatives to increase investor education and corporate
transparency information from ESG disclosures, help investors
gain greater insight into what companies are doing to reduce
their carbon footprint, and address important issues like
climate change, diversity, and labor rights, which I do think
are material.
Investors understand that ESG issues are material and need
to be accounted for when accessing market opportunities and
risks. In market economies, it is called complete information
when investors have all the needed metrics to make well-
informed, ethical, and sustainable financial decisions. As a
matter a fact, the data shows, and today we heard testimony,
that corporations that implement sustainability strategies, I
should say, have experienced better financial information, such
as more innovation, higher operational efficiency, and better
risk management.
Additionally, a recent Ernst & Young survey states that a
majority of companies saw higher than expected financial gains
from their ESG initiatives. And companies that incorporate
financial metrics, employee well-being, and customer benefits
in holistic ESG programs saw increased environmental gains as
well.
Just to be clear, it is profitable to be in the business of
sustainability, root stewardship, environment, diversifying the
boardroom, limiting corruption, and taking care of your
workers. These factors materially impact companies' performance
communities and the lives of our constituents. And I applaud
Chairman Gensler and the SEC for their proposed ESG disclosure.
In addition, I am proud to announce that next year, I will be
working on the Congressional Sustainable Investment Caucus. I
look forward to working with Chairwoman Waters, and my
colleagues, hopefully on a bipartisan basis, to highlight the
role ESG plays in our economy.
Ten years ago when I got elected, my good friends on the
other side--and I do have some very good friends on the other
side; I shouldn't be beating then up so much--were all about
beating up the Dodd-Frank Act. Then, when the CEOs of the
banking industry came, they said Dodd-Frank was actually very
helpful. And when we heard from the academics, they said that
Dodd-Frank was very helpful, especially the capital standard.
So, they don't beat up on it anymore.
They used to beat up on the SEC, saying they were too hard
on crypto. In fact, it is kind of interesting, I saw a little
bit of backsliding here today. Because they said, why do they
have to have so many disclosures? Well, now we see why they
should have more disclosures.
But, anyway, all that being said, I do want to ask
Professor Ratzlaff, do you believe that ESG is material
information?
Ms. Allen-Ratzlaff. Thank you so much. And I would love to
say that I am a professor, but I am not. But I do believe that
factors which might be considered ESG--the definition is a
little bit difficult--are already being taken into account by
investors. And I also would like to state that materiality is
not necessarily a requirement. I know I have heard that from
colleagues many times on this panel, but it is simply not the
case.
If we used a materiality standard, we would never know
about executive compensation, for example. There are
materiality standards that are based on a certain percentage of
revenue. There are standards that are based off of just
information that investors have been saying is important. I
just wanted to be very, very clear that investors are looking
for this data.
And to your point, you mentioned FTX. We all saw the leaked
picture of their income statement, and what we don't want to
see is, ``Uh, I am not sure if this is accurate or not.''
Mr. Vargas. Thank you.
Chairman Sherman. The gentleman's time has expired.
I now recognize the gentleman from Arkansas, Mr. Hill, for
5 minutes.
Mr. Hill. Thank you, Mr. Chairman. And thanks to the panel,
a very informed, smart, good panel, and helpful to the
committee's operation.
Like all laws, there are good things and bad things in
those laws. So, there are plenty of things that House
Republicans still object to that were contained in Dodd-Frank,
and I could go into those in great detail, but we are not going
to do that today.
Professor Rajgopal, I thought you made a really good,
thoughtful statement about information arbitrage, which is a
classic in economics, and the Ph.D. in accounting even learns
about it. So, you have this perverse incentive of raising
agency costs and sending people from the public markets to the
private markets. But also, there is the issue of building up a
cost structure that is so high, that even if one's objective to
be a public enterprise is still number one, you are raising the
market cap to justify going public, reducing capital choice to
small and midsized and emerging growth companies, which is why
this Congress and this committee, on a bipartisan basis, has
passed two versions of the JOBS Act in order to drop those
agency costs and those burdens.
In this debate about whether it is the, ``E,'' in ESG or
the, ``S,'' a lot of this is about doing it in the right way
rather than the wrong way to diminish agency costs and not
deter capital formation. There is no use in here of people
calling people names about climate denier, nah, nah nah, blah,
blah, blah. So, I want to thank you for that comment. I thought
it was helpful.
Have you read the 2017 so-called Mark Carney-Bloomberg
Commission Task Force on Climate Disclosure?
Mr. Rajgopal. It is a long document, as I recall.
Mr. Hill. It is a long document. And it requires that those
disclosures be timely, accurate, comparable within industries,
measurable across industries, and not too costly. It has a
whole list of things that they say, and then they end up
saying, while these are great goals, it is going to be very
hard to do this. And, in fact, they say, don't do Scope 1,
Scope 2, or Scope 3. They have a whole metric in that 2017
report suggesting a different emissions-type definition
I think that is why we are not skeptics about doing
disclosure. We want to do it in the right way, in the least-
costly way that brings the most benefit. Let me stop there and,
again, thank you for your comment.
And, Dr. Honigsberg, excellent comments as well. I share
those with the ranking member about accounting standards and
would love to get a memo from you on--a GAAP memo that
addresses workforce-related issues that I assume--do you know
that GAAP or FASB is entertaining working on that? And, really,
I don't want to say it has nothing to do with this committee,
but it is in a KQ disclosure per se, and we were both intrigued
by that.
What is the working group zone out in FASB land on that
topic?
Ms. Honigsberg. First, I would be delighted to work with
your staff on any of these issues.
Mr. Hill. Yes.
Ms. Honigsberg. Now, we have had conversations with FASB
about this. My understanding is that they are more focused and
are actually considering income statement desegregation.
Mr. Hill. Okay.
Ms. Honigsberg. They would look at, for example, breaking
out cost of goods sold into what portion is labor, and what
portion is other elements, but that is FASB. They have a
relatively slow timeline.
Mr. Hill. Yes, they do. We remember it when it was just a
suggestion.
Ms. Honigsberg. Exactly. So to the degree that we can help
them better focus on what would be helpful in valuation, I
think that would be great.
Mr. Hill. Thank you. I think in academics and also in the
coalition-type work, this is not a one-size-fits-all topic in
any way, shape, or form. And, Mr. Vollmer, you have made that
point. So, for industry groups making industry recommendations
to standard-setters is the way to go. It shouldn't be mandated
by Congress. It shouldn't be mandated by Gary Gensler. It
really shouldn't. That is not the way, over the years, that we
have developed this.
Mr. Vollmer, you were the Deputy General Counsel of the SEC
when Chair Clayton created this principles-based approach on
Reg S-K basing it on material information. In your view, has
there been a demonstrated need or market failure that
necessitates a more-prescriptive approach to this topic?
Mr. Vollmer. I think that the SEC's new rule in 2020, which
tried to balance some enhanced disclosures, including
quantitative disclosures but with flexibility, was reasonable
and we ought to give it some time to work.
Mr. Hill. Because people are now studying that. I just read
an Aon study--I would like to insert that into the record, Mr.
Chairman, if I could--the Aon study comparing the first 2
years.
Chairman Sherman. The time of the gentleman--
Mr. Hill. I have a motion. I am asking for your permission
to insert in the record an Aon study on the--
Chairman Sherman. Without objection, it is so ordered.
Mr. Hill. Thank you. I yield back, and I appreciate the
time.
Chairman Sherman. A vote has been called. We will adjourn
this hearing when 300 of our colleagues have completed voting.
And I will now recognize Mr. Casten for 5 minutes, and note
that he is the Vice Chair of this subcommittee.
I also want to note that we do have jurisdiction in this
subcommittee over FASB and PCAOB.
Mr. Casten. Thank you, Mr. Chairman. I will try not to talk
for 300 votes.
I want to focus on the, ``E,'' part of ESG. A 2020 CFTC
report said that climate change poses a major risk to the
stability of our financial system. In 2021, FSOC said basically
the same thing. The IPCC has recently said that if we stay on
the current trajectory, losses from climate change could
approach $23 trillion per year.
I see you nodding, Mr. Rajgopal.
That risk or any risk, if I am an investor and I am
concerned about that risk, I would like to know: number one,
who is contributing to the risk; number two, how do I hedge the
risk; and number three, who is most exposed to the risk, so I
can move my capital around appropriately.
Now, I think your answer is going to be yes. If you say no,
I am going to have to pivot to a friendlier witness, but in
general, Mr. Rajgopal, do you agree that, provided they have
sufficient information, that markets are actually a very
efficient way to allocate risk?
Mr. Rajgopal. Absolutely.
Mr. Casten. Okay. Good. We can move on then.
Going to who is the hedge against that risk. And I was just
sitting here Googling on my phone as of the close of last week.
First Solar is trading at a price earnings ratio of 189.
NextEra is trading at a price earnings ratio of 30. Tesla, as
much as their CEO is going crazy right now and tanking their
stock, they are still trading at a price earnings ratio of 55.
ExxonMobil is trading at 8. Chevron is trading at 10.
Given our agreement about capital markets, would you say
that capital markets are efficiently allocating market capital
in response to hedging out these climate risks or are they just
woke?
Mr. Rajgopal. My read of Exxon is probably similar to yours
in the sense that maybe they see that, in the future,
eventually, for all kinds of reasons, the demand for oil,
especially from transportation, will maybe stabilize, if not
abateeventually, and maybe that is what the markets are looking
at.
Mr. Casten. Yes. And I am not asking you to opine, but we
are actually seeing movements of capital, which is positive,
right? But every time we have seen an industry transition, some
companies have pivoted and adapted and some have whined. And we
know what happens when the markets pivot.
Now, I put this caveat on the front of, if we have complete
information--and this is all about markets moving to hedge the
risk and look at where it goes--when we look at the losses from
climate change, do you think we have sufficiently transparent
information now to make sure that investors can rationally
allocate their capital?
Mr. Rajgopal. Absolutely not.
Mr. Casten. Neither do I. And I ask that because this,
according to me, is about financial stability. It is not about
wokeness. It is about, if we don't have the information, of
course, there isn't an industry in the world that has ever come
to Washington and said, dear Members of Congress, would you
please make our industry more competitive and efficient. It
never happens. So, it is understandable that there is--and
please don't be woke, please don't stop our capital from
going--meanwhile, these losses are coming.
There is a recent study--and I am just picking on one
State. I am intentionally picking a State that we don't think
about in terms of flooding. We have sea level rise, you have
losses. West Virginia is not a State that you think about as a
super flood-prone risk. First Street Foundation recently
estimated that more than 400,000 properties in West Virginia
are at risk of being severely flooded in the next 30 years,
which represents more than one-third of all of the properties
in the State.
If I am an insurer, a mortgage provider, someone who is
holding the residual equity in those, do you think I actually
have enough information to understand and to hedge that risk
right now?
Mr. Rajgopal. Are you asking me if investors have the
information or do the insurers have the information?
Mr. Casten. Let me maybe reframe that.
If there is a lack of complete information--and we had this
conversation a few months ago with Jay Powell when I talked
about flood risk, and I asked, ``Do you think the sophisticated
players will spot this sooner and offload the risk onto the
unsophisticated players?'' And he said, yes--I am
paraphrasing--that would probably happen. That is a risk, I
think, to the stability of the financial system.
Do you see risks to the stability of the financial system
if we don't get this transparency of information? And we could
talk about floods. We could talk about fires. We could talk
about any number of climate risks.
Do we have complete information? If we don't, is there a
stability problem there?
Mr. Rajgopal. Let me, in 30 seconds, try to do the best I
can with that question. That is a very complicated question.
In my view, insurers, especially the property and casualty
(P&C) insurers, write 1-year policies. So, they have to worry
about risk for 1 year. If you are an equity investor or an
insurance company, you probably have a longer horizon. They are
completely different problems.
Mr. Casten. Of course.
Mr. Rajgopal. Like I said, a life insurance policy, where I
have to forecast whether the person I am writing the policy on
will live for 20 years or 30 years or 40 years, is a
fundamentally different kind of contract. Life insurance and
P&C are different, which makes this quite hard.
Mr. Casten. And the CFTC report I mentioned actually
observed that they saw an offloading risk onto Fannie Mae and
Freddie Mac in flood-prone areas.
Thank you.
Mr. Rajgopal. Thank you.
Mr. Casten. Professor Honigsberg, I was hoping to follow up
on this with you. If you would like to follow up offline, I
would love to connect with you.
But thank you, and I yield back.
Chairman Sherman. I thank the gentleman from Illinois.
I would point out that some 368 Members have not voted yet,
so we do have enough time.
We look forward to hearing the questions of the gentleman
from West Virginia for 5 minutes.
Mr. Mooney. Thank you, Mr. Chairman.
There has never been an Administration more hostile to the
fossil fuel industry and, by extension, my beloved State of
West Virginia, than the Biden Administration. When the Obama-
Biden war on fossil fuels began in 2009, coal mining employed
nearly 28,000 West Virginians. Today, that number has shrunk to
half, about 14,000. And just last month, President Biden said,
referencing coal, that, ``we are going to be shutting these
plants down all across America.''
President Biden is putting West Virginians out of work and
suffocating our economy. Biden and his allies here in Congress
have not been able to pass many of their climate change,
climate priorities in Congress through the democratic process.
Instead, Biden is turning to his financial regulators to abuse
their authority and bypass Congress to enact them on his
behalf.
Despite businesses and these job-creating businesses that
are important to my State and all across the country saying it
would be costly and unworkable, the Securities and Exchange
Commission is pushing forward with a rule to require public
companies to disclose all of their emissions, including from
their upstream and downstream suppliers.
My question is for Mr. Vollmer: How is information about
climate emissions actually material to an investors' investment
decisions? In other words, is this just a way to name and shame
fossil fuel companies?
Mr. Vollmer. It is difficult to answer that question
generally because climate change information covers such a
broad range. But I think the better way to think about this and
the short version of the answer is, there are already extensive
required disclosures in the Federal securities laws. They go on
for pages in the Code of Federal Regulations, and they cover
all aspects of the financial performance and operations in
business of reporting companies. And they touch on all of the
matters that would be relevant or important to investors. So,
there is no need for a whole separate second set of disclosures
aimed at climate change risks.
Mr. Mooney. Thank you. Well put.
As a follow up to that, activists contend that ESG
investing is somehow the morally-responsible and more-
profitable thing to do.
Mr. Vollmer, how do the returns for the families who invest
in ESG funds compare to non-ESG funds?
Mr. Vollmer. I am not current with all the recent research,
but the last time I looked at it, it is a highly controversial
and debatable point. The evidence is mixed, and it often
depends on how the questions are asked, how the studies are
done. I think we need to be careful of people who assert that
extensive disclosures in these various areas produce benefits
for investors or tell us more about the returns of some of the
reporting companies, because I am not sure that in the end,
that is really solid.
Mr. Mooney. Okay. Thank you.
I just want to state that under the strong leadership of
our State Treasurer in West Virginia, Riley Moore, we have led
the way in divesting from asset managers who focused on
appeasing woke activists rather than maximizing returns for
American families and retirees who depend on these returns to
pay their bills, their mortgages, their children's college
tution, and to put food on the table.
State Treasurers have a fiduciary responsibility to
maximize returns on investments. At a time when the number of
companies going public has dropped dramatically, the SEC and
congressional--my colleagues on the other side of the aisle
here, the Democrats, would be wise to focus on actions that
encourage business growth rather than pushing for irresponsible
environmental policies.
Thank you, Mr. Chairman. And I yield back.
Chairman Sherman. Thank you.
I want to thank the 320 Members of Congress who have not
voted yet because they give me an opportunity to recognize the
gentleman from New Jersey for 5 minutes.
Mr. Gottheimer. Thank you, Chairman Sherman. I am also
grateful. And thank you to all of our witnesses for being here
today.
A recent scandal uncovered that Sustainalytics, ESG
research, a subsidiary of Morningstar, has published ESG
ratings of companies based on information from the biased
United Nations Human Rights Council that has long promoted
anti-Semitism, undermined U.S. allies, including Israel and
Taiwan, and selectively ignored human rights abuses around the
world. Just this past October, the biased council refused to
even debate the treatment of the Uyghur population in China.
Americans choosing to invest in ESG-focused financial
products expect firms to provide unbiased and relevant data
about how their money is supporting specific ESG goals.
Morningstar's use of the biased United Nations' data is
completely unacceptable.
Ms. Allen-Ratzlaff, if I can ask you a question, please,
does JUST Capital use the United Nations' biased Human Rights
Council as a source for human rights-related ratings?
Ms. Allen-Ratzlaff. Not to my knowledge, no. Our ratings--I
should say that their relative rankings are based solely on
what we hear from the American people are their priorities.
Mr. Gottheimer. Good. It sounds like that is a, no. I am
happy to hear that.
Do you feel it is appropriate for ESG ratings firms to use
potentially-biased information from international organizations
to develop their scores?
Ms. Allen-Ratzlaff. I actually think that you point to an
important problem and issue within ESG in and of itself, that
there is no definition for it. We know that, ``E,'' stands for
environment, ``S,'' stands for social, and, ``G,'' stands for
governance, and that is about it.
That is a private company that has decided to use certain
metrics. Again, we use a relative ranking. I wouldn't view us,
JUST Capital, as a ratings firm. I would view us as looking at
how well companies satisfy the expectations of American
workers, and, again, that translates into value.
Mr. Gottheimer. Right. You have to be careful, because it
could be misleading to investors?
Ms. Allen-Ratzlaff. Actually, yes. Yes. Without any
definition, yes. Absolutely. And I think that is why 90 percent
of Americans, including 86 percent of Republicans, 98 percent
of Democrats, and 88 percent of Independents say it is
important that there are common standardized reporting
structures for companies. I think what we are seeing right now
is that, we start with the free market. That is great. But
right now, we are just not getting high-quality information.
I push back a little bit on the idea that what we are
looking at right now is not of use to investors. It absolutely
is. And to make sure that we are able to create value for, for
example, a beneficiary at a pension fund by telling that
pension fund, I am sorry, you can't consider factors that you
would have considered 30 years ago to understand how well, for
example, your companies that you have bought debt from are able
to pay back that debt. It just concerns me.
Mr. Gottheimer. Thank you.
Ms. Seegull, in your work with Impact Investors Alliance,
how do you help them evaluate ESG research to ensure that their
decisions are not inadvertently supporting outside efforts,
like the anti-Semitic Boycott, Divestment, and Sanctions, or
BDS movement, which the U.S. Congress has overwhelmingly
condemned, or other efforts that can undermine our allies?
Ms. Seegull. Cambria and others have brought up the rating
agencies and the methodologies that these rating agencies use.
The data comes from sustainability reports that are voluntarily
offered with the data points cherry-picked. And so,a what we
have in these ratings is publicly-available information,
unverified, and cherry-picked.
And what we encourage our investors to do is to take
ratings under advisement, to look at underlying methodology,
and to do their own primary research. The problem is that
without standardized, comparable data, which I think we are all
calling for from the SEC on material ESG factors, we are
reliant on these imperfect rating metrics we talked about.
Mr. Gottheimer. Right. And these metrics can be misleading,
and mislead investors and actually get them to support things
that are counter to their values. That is my concern.
And I yield back. Thank you so much.
Chairman Sherman. Thank you.
Mr. Huizenga. Mr. Chairman, I have a letter to submit for
the record that was sent to Chairwoman Waters and Ranking
Member McHenry from the Small Business Investor Alliance
concerning the negative impact increased disclosures could have
on small businesses.
Chairman Sherman. Without objection, it will be entered
into the record.
I want to thank our witnesses today and, again, for
changing their schedule so they could be here today even though
we were going to do this 2 days ago.
The Chair notes that some Members may have additional
questions for these witnesses, which they may wish to submit in
writing. Without objection, the hearing record will remain open
for 5 legislative days for Members to submit written questions
to these witnesses and to place their responses in the record.
Also, without objection, Members will have 5 legislative days
to submit extraneous materials to the Chair for inclusion in
the record.
The hearing is adjourned.
[Whereupon, at 10:46 a.m., the hearing was adjourned.]
A P P E N D I X
December 8, 2022
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