Shareholder Climate and Social Demands After SEC Policy Change

The SEC is canceling more requests from companies to exclude shareholder proposals related to climate and social issues from their proxies after a significant policy change in November.

The agency said last year it would begin to take broader social policy considerations into account when evaluating requests to weed out proxy proposals that companies view as micromanaging or interfering with regular business transactions.

This policy change on “no-action letters” has encouraged retail investors and activists to be more aggressive with environmental and social proxy proposals, said Derek Zaba, partner at Sidley Austin LLP and co-chair of the practice. activism of the company’s shareholders.

“Some companies choose not to even bother going through the no-action process because they don’t believe there’s a level of success with years past,” Zaba said.

“No action” letters are essentially green lights allowing companies to reject shareholder proposals without fear of enforcement action in the future. If the Securities and Exchange Commission denies a company’s non-action request, the proposed proxy must be submitted to investors for a vote.

According to an analysis by the Sustainable Investments Institute (SII), a nonprofit research organization, the agency rejected about 30%, or 48 of 158 company challenges to shareholder proposals related to environmental or social issues. for the 2022 proxy season. In contrast, the SEC granted only 11%, or 17, of corporate attorneys’ null RFPs.

In contrast, the SEC allowed companies to exclude 49% of proposals from their proxies in the 2021 season and required companies to let shareholders vote on 22% of them, SII found.

About 35% of proxy challenges submitted since September for the 2022 proxy season — which typically runs from April through June — are still awaiting a decision from the SEC. Most of the challenges were submitted after the SEC released its policy update. Another 23% or 37 of environmental or social challenges were withdrawn by companies, usually after a shareholder withdrew their proposal.

‘About the face’

The SEC policy change came ahead of an unprecedented proxy season. Companies face stronger demands from shareholders regarding employee welfare, greenhouse gas reduction, corporate lobbying, human rights and anti-competitive behavior, among other issues.

More than 566 environmental or social-related shareholder resolutions were filed this proxy season, a 13% increase from 2021. More proposals are also hitting the ballots. As of March 31, 343 proposals were awaiting a vote, compared to 194 in 2021, the SII found.

A recent SEC decision on a proposal to CVS Health Corp. marks a significant shift from past policy, said Heidi Welsh, SII’s executive director.

CVS must allow a vote on a stock plan for the company to publicly disclose and adopt a broader employee sick leave policy, the SEC said in a March 18 ruling. The proposal, which aims to shed light on employee well-being, is led by Trillium ESG Global Equity Fund, with co-applicants Portico Benefit Services and Vancity Investment Management.

The SEC said the proposal transcends “ordinary business affairs because it raises human capital management issues with broad societal impact.”

The agency’s response was “an about-face” on decades of no-action letter precedents that treated employee benefits as a solid “ordinary business” matter, Welsh said.

A CVS spokesperson said the company’s benefits package “includes an appropriate and competitive paid sick leave policy,” so the shareholder proposal is not necessary. The company’s annual meeting is scheduled for May 11.

Climatic requirements

Shareholders are bringing more specific demands than ever before, with some saying they were spurred on specifically by the SEC’s policy change.

Banks have come under pressure from activists with proposals for how their lending and underwriting practices can help fossil fuel development, said Katherine DeLuca, partner in the securities and capital markets practice at McGuireWoods LLP. .

The SEC has cleared a proposal that would require of Citigroup Inc. Board of Directors to adopt a policy by the end of 2022 committing it to a lending and underwriting policy that meets international emissions standards.

The pledge would be in line with achieving the International Energy Agency’s “Net Zero Emissions Roadmap by 2050” and United Nations recommendations to the G20 Sustainable Finance Task Force for pledges. credible zero nets.

The SEC said shareholder John C. Harrington and Boston Common Asset Management’s proposal is expected to be voted on at Citigroup’s annual meeting on April 26. The SEC said the resolution did not “seek to micromanage the business.”

Citigroup urged shareholders to reject the proposal, saying it has already committed to “more specific” emissions targets than those sought by the proposal. The stock plan would impose more drastic cuts that would hurt the bank and others, the company said.

Sanford Lewis, a lawyer and director of activist investor association Shareholder Rights Group, said he drafted Citigroup’s proposal – and several others targeting the financial sector – with the November guidance of the DRY.

“As a result, they were able to take the staff exam even though they may not have done it the year before,” Lewis said.

In progress

A number of climate proposals impacting other industries await SEC rulings.

Idaho-based electric utility company Idacorp, Inc. is one of many companies facing shareholder proposals to adopt emissions reductions consistent with the Accord’s goal of Paris to keep the increase in global temperature to a maximum of 1.5°C.

Idacorp asked the SEC to exclude the proposal on the grounds that it has already substantially implemented the requests and is already making public disclosure of its emissions reduction targets.

The SEC has not yet ruled on Idacorp’s debarment request. Idacorp did not respond to a request for comment.

Michael Passoff, CEO of Proxy Impact, a socially responsible investor advisory firm, said he was also looking for stronger climate commitments in his proposal to Idacorp after the SEC policy change.

In years past, the SEC considered that a company simply providing “a report” on climate targets was enough to meet shareholder demands. The agency was unwilling to “arbitrate which science is right,” Passoff said.

Passoff said the Biden administration’s policies are more supportive of more specific climate resolutions.

Past SEC policy allowed companies to omit more specific greenhouse gas reduction proposals under the “ordinary business” exclusions, Welsh said.

Changing tactics

Although affirmative votes on proxy proposals are generally not legally binding, the SEC has said it can persuade corporate leaders to take action.

Activist shareholders have been encouraged by higher voting percentages than in previous years, greater attention paid to ESG issues by investors, and a less cumbersome process for obtaining action on ballots created by policy changes. the SEC, Lewis said.

“Fewer proposals are being barred this year than in previous years, and I think that’s a combination of some inversions but also shareholders adjusting to newer, clearer rules,” Lewis said.

Companies are also changing their tactics, focusing on whether proposals are so specific that they limit management’s discretion over how to achieve the goals sponsors seek, DeLuca said.

It’s hard to see exactly where the SEC draws the line, as it has issued few rulings on such “micromanagement” arguments so far, she said.

The SEC is expected to issue dozens more no-action rulings as the 2022 proxy season hits its stride in the weeks ahead.

Although SEC policy has changed, proxy votes themselves will be the real test of investor sentiment and a potential lightning rod for investor activism if companies don’t act on them, Zaba said.

“A lack of responsiveness can have significant consequences” through investors withholding votes or voting against directors the following year, Zaba said.

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