[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
                            
 [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]