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New SEC guidance set to help science-based target proposals get through at US firms

US securities regulator issues new guidance on exclusion rules for shareholder proposals ahead of 2022 proxy season

The US Securities and Exchange Commission (SEC) has said that “going forward” it will not agree to exclude shareholder proposals calling for emissions reductions targets at US companies “so long as the proposals afford discretion to management as to how to achieve such goals”.

The powerful securities regulator made the statement in new guidance, published yesterday, outlining its interpretation on rules – particularly the Ordinary Business rule (Rule 14a-8(i)(7)) – used by companies to petition the SEC for permission to exclude proposals from investors – often to referred to as ‘no action’ requests.  

In its latest 'Staff Legal Bulletin’, the SEC rescinds three previous instances of guidance it put out under the Trump Administration – a period in which shareholders found it increasingly difficult to get ESG-orientated proposals – particularly ones calling for climate targets – on the ballot at company annual meetings.  

On companies’ use of the micromanagement objection, which is covered under Rule 14a-8(i)(7), the SEC said that its staff would now “take a measured approach to evaluating companies’ micromanagement arguments – recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement”. 

Under Rule 14a-8(i)(7) a company can exclude a proposal that probes “too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”  

It 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. 

But there has already been signs of this shift at the SEC since President Biden came to power. During the 2021 proxy season, for example, 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. 

What has not yet been tested is the new SEC’s interpretation of micromanagement in relation to proposals calling for science-based targets, such as those that align with the Paris Agreement’s goal of limiting warming to 1.5°C – RI reported last month that a new proposal at Costco is a litmus test for the SEC on this very issue.  

In the new guidance, the SEC, however, hinted that such proposals could now be more likely to get supported, stating that: “The staff may also consider references to well-established national or international frameworks when assessing proposals related to disclosure, target setting, and timeframes as indicative of topics that shareholders are well-equipped to evaluate.” 

The SEC said that the approach outlined in the new bulletin not only conforms more faithfully to the spirit of the rules, but also that they help “avoid the dilemma many proponents faced when seeking to craft proposals with sufficient specificity and direction to avoid being excluded under Rule 14a-8(i)(10), substantial implementation, while being general enough to avoid exclusion for ‘micromanagement’.” 

This fate befell many of the Paris-alignment proposals filed over the last several years. In 2019, for example, most proposals calling for Paris-aligned emission reduction targets were excluded on basis of the micromanagement 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. 

Another aspect of Rule 14a-8(i)(7) addressed by the SEC in its guidance was its interpretation of proposals touching on issues of social policy. The regulator acknowledged that it had placed “undue emphasis” on the significance of “a policy issue to a particular company at the expense of whether the proposal focuses on a significant social policy”. 

The SEC said the significance of the issue being raised would now play a larger factor in whether it deemed it to be excludable.  

Danielle Fugere, President of US non-profit As You Sow, a prolific filer of shareholder proposals, welcomed the new guidance. “This guidance, which underscores the original purpose of Rule 14a-8 — to allow shareholders to raise and vote on important issues — is timely and necessary. At this time of global upheaval, the stakes couldn’t be higher,” she said. 

“The SEC’s new guidance essentially resets the 14a-8 standards to the fair and functioning process that existed prior to changes by the last administration. Those prior changes significantly undercut shareholder rights,” added Sanford Lewis, an attorney at US-based legal advisor Strategic Counsel and a veteran observer of shareholder proposal battles.   

Staying with US financial regulators, yesterday, the New York State Department of Financial Services (DFS) announced that it was establishing a new Climate Risk Division, which will be headed up by its Director of Sustainability and Climate Initiatives, Dr Yue (Nina) Chen.  The DFS was the first US financial regulator to join the Network of Central Banks and Supervisors for Greening the Financial System and has already laid down climate expectations to the banks and insurers it supervises.