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SEC will not object to shareholder proposals with social significance such as climate change

04 November 2021 Amena Saiyid

Shareholders may now have a say on how companies announce their net-zero goals to limit GHG emissions across their supply chains.

The US Securities and Exchange Commission (SEC) issued a legal bulletin 3 November that said its staff will no longer use the "ordinary business" or "economic" relevance" exceptions to its Rule 14a-8 to exclude proposed resolutions that bring up issues of social significance.

Rule 14a-8 lists criteria for submitting and including votes on shareholder resolutions. The rule until this summer allowed major companies to exclude votes on shareholder resolutions that sought greater transparency on carbon reduction plans on the grounds that they were already included in "ordinary business plans."

The SEC bulletin, which has the backing of SEC Chairman Gary Gensler, said it would rescind its earlier sets of non-binding bulletins, where the staff took "a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally 'significant.'"

"Going forward," the SEC said, "the staff will realign its approach for determining whether a proposal relates to "ordinary business" with the standard the Commission initially articulated in 1976, which provided an exception for certain proposals that raise significant social policy issues, and which the Commission subsequently reaffirmed in the 1998 Release."

Gensler said the bulletin will provide greater clarity to companies and shareholders on these matters, "so they can better understand when exclusions may or may not apply."

Flavor-of-the-day regulatory approach

Unlike Gensler, SEC Commissioners Elad Roisman and Hester Pierce in a joint statement called the action a "flavor-of-the-day regulatory approach."

They said the bulletin does not say "What criteria, timeframe, or proof support a finding that a topic is socially significant or has a broad societal impact? The new bulletin does not say."

The SEC action follows several months of reviewing the revisions to shareholder resolution rule and related legal bulletins that the commission issued during President Donald Trump's administration. Acting SEC Chair Allison Herren Lee had announced the review in March.

President Joe Biden has made it a priority of his entire administration to tackle climate change, and part of that effort involves encouraging more companies to disclose their climate risks and reporting their GHG releases.

At the UN COP 26 meeting on 3 November, US Treasury Secretary Janet Yellen emphasized the need for transparency and enhanced "climate-related data and disclosures to improve the information available to investors, market participants, and regulators."

Clarifying stance on socially significant issues

The SEC bulletin clarifies the commission's stance on social significant issues like climate change as it becomes an increasing focus of shareholder proposals, with resolutions seeking greater transparency on climate-related actions and emissions disclosures.

During the proxy voting season in June, at least eight votes cast for climate or broader environment, social, and governance (ESG) issues included adding climate-savvy directors to ExxonMobil's board of directors to requiring the oil corporation to report on its GHG emissions.

California-based Shareholder Rights Group, an association of investors formed in 2016, welcomed the SEC action, saying it will empower shareholders to pursue ESG proposals at their companies, as ESG issues affect long-term value as well as posing externalities that may otherwise affect portfolio values.

"The shareholder voice plays a critical role in ensuring companies are addressing issues that create risk and opportunity and can affect shareholder value, including greenhouse gas emissions targets and actions, addressing social justice, demonstrating success in diversifying workplaces and boardrooms, reducing the harmful impact of social forums like Facebook, and reducing plastic waste," As You Sow President Danielle Fugere, wrote in a 3 November statement.

US Congresswoman Maxine Waters (Democrat-California), who chairs the House Financial Services Committee that oversees the agency, said on 4 November the SEC's action "begins restoring shareholders' rights by making it a little bit easier for shareholders' proposals to qualify for inclusion in a company's proxy voting materials."

Repeal restrictive rules

However, she said, the SEC needs to do more to empower shareholders to better guide and course-correct the management of the companies they own. "The SEC must repeal the restrictive changes it implemented at the end of the Trump administration because shareholders need better access to the proxy," Waters said.

The SEC is facing a lawsuit from some of these shareholder groups—Interfaith Center for Corporate Responsibility (ICCR), As you Sow, and individual investor James McRitchie—over changes that President Donald Trump's administration made in September 2020 to the rule.

These groups, which welcomed the 3 November bulletin, claimed the revisions "severely" impaired their ability to file resolutions that would change how companies are governed. The SEC is bound by a court-imposed timeline to respond to a motion seeking summary judgment from a federal district court by 10 November.

ICCR CEO Josh Zinner told Net-Zero Business Daily 4 November that the latest SEC bulletin "doesn't impact the litigation, but this is a very important legal bulletin that we're very pleased to see from the SEC."

Zimmer said this bulletin essentially rescinds legal bulletins 14 I, J, and K, and guidance from the Trump-era SEC that had significantly expanded the ability of companies to exclude shareholder proposals from their proxies through the no-action process. "This bulletin could potentially ease the path for more shareholder proposals related to climate risk to appear on company proxies," he added.

The Shareholder Rights Group, which includes As you Sow and Ritchie among its members, said the SEC's staff rulings and legal bulletins, 14 I, J, and K, had laid down "numerous problematic new interpretive hurdles to successfully filing proposals."

The SEC for its part said it will no longer interpret the concept of "micromanagement" to preclude advisory proposals that might be asking a company to adopt a particular strategy such as establishing GHG reduction targets aligned with net-zero or the 2015 Paris Agreement that seeks to limit global warming to 1.5 degrees Celsius.

As an example, SEC cited its decision in March to deny requests by ConocoPhillips to omit a vote on proposed shareholder resolution to set specific interim GHG reduction targets in its quest for net-zero carbon emissions. At the time, the SEC took a similar stance with Occidental.

"The proposal requested that the company set emission reduction targets and it did not impose a specific method for doing so. The staff concluded this proposal did not micromanage to such a degree to justify exclusion," the SEC said.

Sanford Lewis, who heads the Shareholder Rights Group, said the SEC's new guidance essentially "resets" the 14a-8 standards that existed prior to changes by the last administration that significantly undercut shareholder rights.

Posted 04 November 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst

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