Potential for Reversal of SEC Policy on Net-Zero Shareholder Proposals

Senate Democrat resolution could undo curbs on ESG shareholder voting rights.

If adopted, a resolution introduced by Democrats last week could set back Trump-era US Securities and Exchange Commission (SEC) rules on shareholder proposals to their prior status, except for “problematic” administrative guidance against net-zero proposals.

“A priority is to restore the right of investors to propose that their companies set greenhouse gas reduction targets aligned with net zero or with the Paris Agreement’s 1.5° C temperature increase goal.

“Such proposals have been erroneously excluded under the guise of ‘micromanagement’,” Sanford Lewis, Director at Shareholder Rights Group, told ESG Investor.

Democrats introduced the legislation to reverse Trump-era SEC regulations which limit shareholders’ ability to file proposals on ESG issues last week.

Amendments to SEC regulations last year prompted pushback from investors who see the shareholder proposal process as central to their engagement with companies.

Lewis explained that “strong evidence” linking ESG proposals to better risk management and corporate resilience had been ignored by the prior administration.

“Repeal will sustain shareholders’ role in private ordering toward better ESG disclosure,” he noted.

Amy Borrus, Executive Director of Council of Institutional Investors, commented: “Senate Democrats must think they have the votes to pass a Congressional Review Act on the shareholder proposal rule or they would not have introduced the resolution. But it is not certain they do.

“The business community lobbied hard for the SEC to pass the rule and is probably working just as vigorously to persuade members of the Senate and House of Representatives not to undo it.”

US SEC Acting Chair Allison Herren Lee promoted revision of the shareholder proposal rule earlier in the month.

Lee said that because of the “vitally important nature” of shareholder proposals, she has asked for the development of “proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself”.

Her comments came amid a flurry of actions by the SEC, including the recent announcement of an enforcement task force focused on climate and ESG issues.

Lee also made remarks at a conference about issues of transparency around passive index funds, which lead to doubts how well these can be harnessed for voting.

Doug Davison, partner at global law firm Linklaters and a former supervisor of the SEC’s Division of Enforcement, believes this demonstrates that ESG is a key focus under the Biden administration.

Recent action by the SEC to deny requests from ConocoPhillips and Occidental Petroleum to throw out shareholder motions also indicates that “President Biden’s ‘whole of government’ approach on climate change has shifted the SEC’s likely approach on ESG more generally”, said Davison.

Bryan McGannon, Director of Policy and Programs at US SIF, also sees an upcoming shift with more ESG-related proposals being granted.

This, he said, is in particular due to the announcement of John Coates as Acting Director of the Division of Corporation Finance, widely considered to recognise the importance of ESG.

“In the last several years, investors have been more reluctant to file some proposals out of fear of being denied by the more restrictive interpretations of the previous SEC leadership.

“We think this will change, and expect investors will start making more direct asks of companies in their proposals,” McGannon said.

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