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US SEC moves one step forward in clarifying process for introducing shareholder's climate, ESG proposals

14 July 2022 Amena Saiyid

Public corporations received clarity about which shareholder resolutions they can exclude from a vote under revisions the US Securities and Exchange Commission (SEC) proposed 13 July.

The SEC is seeking changes in the process that governs the inclusion of shareholder proposals in a company's proxy statement, which is a document including information about various proposals on which shareholders get to vote.

However, the changes proposed by the SEC to the regulation known as Rule 14a-8 stopped short of addressing the restrictions that it placed on shareholders in 2020 from bringing up resolutions related to climate, or environmental, social and governance (ESG) concerns. Those restrictions are currently being litigated in a federal district court.

As climate and ESG concerns dominate shareholder meetings, the SEC said "the shareholder proposal process has become a cornerstone of engagement between shareholders and company management."

In May, for example, nearly all of Chevron's shareholders forced the oil major to account for the reliability of its methane emissions disclosures, while a slim majority of ExxonMobil's shareholders were able to require the company to account for a devaluation of its fossil fuel assets in a net-zero scenario.

Critical approach

Moreover, the SEC noted that shareholder proposals provide a critical approach for investors to express their views, provide feedback to companies, exercise oversight of management, and raise important issues, such as climate risk and reporting of GHGs, for the consideration of their fellow shareholders in a company's proxy statement.

Under these most recent changes proposed to Rule 14a-8, the SEC said it is seeking to revise just three of the 13 substantive bases that it said companies may use to exclude shareholder proposals from their proxy materials.

Specifically, the SEC said public corporations may only be able to exclude resolutions from a shareholder vote if they already have implemented "essential elements" or if the resolutions seek to address "the same subject matter by the same means."

The proposed changes were supported by SEC Chairman Gary Gensler and two other commissioners—Allison Herren Lee and Caroline Crenshaw—who see them as improvements to the shareholder proposal process.

"I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought," Gensler said in a 13 July statement prior to the vote.

He said the proposed amendments to Rule 14a-8 also would "help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders."

Repeated voting on same issue

However, Commissioner Hester Peirce was joined by the most recently confirmed commissioner, Mark Uyeda, in opposing the proposal.

Peirce said "shareholders' ability to vote in corporate elections is not at issue. Rather, the proposal we are considering is about whether shareholders have to vote on the same issues over and over again."

Both Uyeda and Peirce contended that they needed the revisions made in 2020 to Rule 14a-8 to properly take effect before seeking more changes.

The changes made in 2020, however, are embroiled in litigation brought by a coalition of investor groups led by the Interfaith Center for Corporate Responsibility (ICCR) that also includes the nonprofit As you Sow. These groups claim the 2020 rule, which they want vacated, limited their rights by making it difficult to raise climate risk issues through individual resolutions filed with public corporations.

SEC sidestepped litigious issues

According to the lawsuit filed in the US District Court for the District of Columbia, the prior rule required that a shareholder own only $2,000 of stock for a single year, but the 2020 rule requires a shareholder to own as much as $25,000 of stock, depending on the number of years for which the shareholder has held the shares.

The 2020 regulation also barred shareholders from aggregating their holdings together to meet this threshold, and also set a higher threshold for resubmitting a proposal the following year. The rule also prevents shareholders from using a third party to file on their behalf.

Prior to the 2020 regulation, Rule 14a-8 said a shareholder proposal could not be resubmitted if it received less than: 3% of the vote if previously voted on once; 6% of the vote if previously voted on twice; or 10% of the vote if previously voted on three or more times. The 2020 regulation increased the levels of support a shareholder proposal must receive to be eligible for resubmission at the same company's future shareholders' meetings from 3%, 6%, and 10% to 5%, 15%, and 25%, respectively.

In the 13 July proposal, the SEC did not tinker with the resubmission thresholds, saying "we continue to assess the impact of these amendments."

However, it did acknowledge that the SEC staff received 11 "no-action" requests to exclude shareholder proposals from companies asserting the resubmission exclusion between 15 October, 2021 and 10 May, 2022. The SEC said the no-action requests represent an increase in requests compared to the 2020 and 2021 proxy seasons, adding "this increase is likely due to the higher resubmission thresholds under Rule 14a-8(i)(12) adopted in 2020."

Investors welcome the clarity

Nonetheless, ICCR CEO Josh Zinner told S&P Global Commodity Insights' Net-Zero Business Daily that the SEC proposal "does not impact the issues captured in the September 2020 rule change, which ICCR sued in to vacate under the Administrative Procedure Act."

"What the SEC did today was important, but it certainly is not enough. We would have hoped they would roll back the [2020] regulation," As You Sow President Danielle Fugere, who is also the group's chief counsel, told Net-Zero Business Daily.

Fugere said the changes the SEC proposed 13 July will return the shareholder proposal process to the pre-2020 system, which was more rational and effective and enabled more shareholders to withstand company challenge.

She added that the 2020 regulations made it difficult for shareholders to bring forward proposals because they were either deemed too specific, bordering on micromanagement, or too broad for inclusion.

Posted 14 July 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst

This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.


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