The US Securities and Exchange Commission (SEC) has undergone a marked transformation since President Biden was elected. In stark contrast to how it operated under the previous administration, the proxy season just gone saw shareholder proposals on race and climate change backed by the powerful regulator and taken to the vote at companies.
This new orientation was confirmed by the SEC when in March its then acting-head Commissioner Allisson Herren Lee confirmed that climate change was now “front and centre” at the financial regulator.
But now the SEC is facing an important test of its commitment to climate action – one which will indicate the extent to which it has broken with its previous rulings under the Trump administration.
Last month, US retail giant Costco petitioned the regulator to allow it to exclude a shareholder proposal calling on it to adopt short-, medium- and long-term, science-based 2050 Net Zero emissions reduction targets, covering its full value chain (Scopes 1,2 & 3). In its ‘no action’ letter – the official mechanism through which companies seek backing from the SEC to ignore resolutions – Costco argued that the request for such granular targets constitutes micromanagement, and therefore falls foul of the regulator’s Rule 14a-8(i)(7).
“The proposal’s demand that Costco establish arbitrary time-bound short, medium and long-term targets to achieve net-zero emissions by 2050 and effectuate appropriate emissions reductions prior to 2030 would require a wholesale departure from Costco’s carefully considered approach,” the company wrote.
‘This is important; I think many other shareholders will probably want to file proposals in this form if they can, and this is the time of year when people are starting to think about their proposals’ – Sandford Lewis
The micromanagement rule has been used to good effect in recent years by companies seeking to avoid proposals calling for climate targets, particularly those that reference an external benchmark like the Paris Agreement or Net Zero by 2050.
In 2019, most proposals calling for Paris-aligned emission reduction targets were excluded on the basis of this rule. So many, in fact, that the 2020 proxy season saw investors amend the wording of resolutions to ask for disclosure on Paris-alignment, rather explicit targets, in a bid to avoid being knocked back. But even then, filers were often thwarted, as companies successfully argued they had already “substantially implemented” these less stringent proposals, meaning the requests broke another of the SEC’s rules for shareholder resolutions – this time Rule 14a-8(i)(10).
In the 2021 proxy season, however, there were clear signs that the micromanagement argument was becoming less persuasive at the regulator. It batted away, for instance, attempts by US oil & gas giants Chevron, ConocoPhillips and Occidental to exclude proposals calling for substantial reduction targets, including Scope 3 emissions, on that basis.
There is, however, a key difference between the proposals at the three oil majors and the one just filed at Costco: those at the oil giants (which received majority support from investors) did not specify an external benchmark against which the reduction should be measured.
It is here that the proposal at Costco, which was filed by US-based Green Century Capital Management, crucially ups the ante.
How the SEC rules on this more stringent proposal is likely to have important implications for the 2022 proxy season, according to Sanford Lewis, an attorney at US-based legal advisor Strategic Counsel and a veteran observer of shareholder proposal battles.
Lewis, who drafted Green Century’s response to Costco’s ‘no action’ request, said that the proposal is an “important test”.
“Shareholders are waiting to see because this is important; I think many other shareholders will probably want to file proposals in this form if they can, and this is the time of year when people are starting to think about their proposals,” he told RI.
The SEC’s rulings on Occidental and ConocoPhillips this proxy season were described by Lewis as positive developments, but he added, “shareholders should be able to ask for those targets to be benchmarked against well-established, credible external goals, like the Paris Agreement”.
Earlier this week, Chevron announced it would seek to reduce the carbon intensity of its products (Scope 3) by 5% by 2028 – a figure decried as a “snub to investors” by Mark van Baal, Founder of Follow This, the shareholder campaign group that filed resolutions on the topic at Chevron and its rivals ConocoPhillips and Occidental.
In response to Costco’s petition to exclude Green Century’s resolution, the asset manager questioned the SEC’s authority to adjudicate on whether a company is doing enough on climate risks.
“Shareholders, rather than SEC staff, are better positioned to evaluate and to provide their advisory perspective as to whether the board and management’s efforts are sufficient,” it said.
The response also highlights that many of Costco’s peers, including Walmart and BestBuy, already measure their Scope 1, 2, & 3 emissions and are pursuing science-based emissions reductions consistent with the goals of the Paris Agreement.
Thomas Peterson, Shareholder Advocate at Green Century, told RI that the fact that Costco considers short, medium and long-term 2050 Net Zero targets “arbitrary” is a concern and raises questions about “Costco's awareness of the landscape here”.
He added that the company’s claim that setting such targets would require a “wholesale departure” from its existing approach suggests that its current strategy “is really not going to align with the expectations that investors have of companies at this point”.
In what may be a good omen for Green Century’s proposal, yesterday, the SEC blocked the attempt by AutoZone to exclude a proposal calling for a report by the US automotive parts retailer disclosing emissions reduction targets that align with the Paris Agreement. The SEC rejected the company’s arguments that the proposal sought to micromanage or that it had been substantially implemented.
A ruling on Costco’s ‘no action’ request is likely to come in the next few weeks and many investors will be watching closely. The decision the SEC makes at this one company, so early in the 2022 proxy season, could have a major bearing on the wording, scope and ambition of proposals at dozens of other big US companies over the next 12 months.
Neither the SEC nor Costco have responded to requests for comment at the time of writing.