June 21, 2021

ESG & Tax Haven Disclosure: House Passes a Weird Bill

Last week – by a single vote – the House passed the “Corporate Governance & Investor Protection Act.” Among other things, the bill would amend the Exchange Act to require new ESG-type disclosures. It consists of 5 parts:

– Title I, the “ESG Disclosure & Simplification Act”

– Title II, the “Shareholder Political Transparency Act”

– Title III, the “Greater Accountability in Pay Act”

– Title III, the “Climate Risk Disclosure Act”

– Title V, the “Disclosure of Tax Havens & Offshoring Act”

This Twitter thread from Ann Lipton walks through some of the nonsensical parts of the bill, while this Accounting Today article gives a more straight-faced recap of the tax component:

The ESG bill would require the Securities and Exchange Commission to create a standard definition of ESG metrics and mandate that the SEC require standardized ESG disclosures. The tax havens bill would provide investors and the public with greater transparency about corporations’ use of tax havens and tax incentives for outsourcing jobs abroad, requiring public companies to disclose their financial reporting on a country-by-country basis about the extent to which they are using tax havens or offshoring jobs.

The overall legislative package would impose greater requirements on companies to disclose their use of offshore tax havens and provide ESG disclosures in a standard way. The legislation comes at a time when various ESG standard-setters have begun working together more closely to align their varying standards, as the SEC and financial regulators in other countries take more of an interest in requiring ESG and climate risk disclosures from companies.

The G-7 finance ministers included language in their announcement this month backing recent moves by the International Financial Reporting Standards Foundation to establish an International Sustainability Standards Board. At the same time, the Organization for Economic Cooperation and Development and the G-7 have also been moving toward country-by-country reporting of taxes by multinational companies to curb tax avoidance strategies along with a global minimum tax rate.

The suggestion that this type of tax disclosure should be included in SEC filings struck me as onerous and unrelated to typical investor-focused disclosures – but Accounting Today notes that the info is already privately provided to the IRS. Making public disclosure about tax loopholes part of a “corporate governance” bill may be an early signal that aggressive tax planning could be flagged as being at odds with ESG, especially as the impact of tax disparities is getting attention internationally and domestically. However, the narrow margin of approval in the House suggests that this legislation is exceedingly unlikely to pass in the Senate.

Liz Dunshee