SEC allows firms to block just 15% of E&S proposals this year

US companies facing tougher time opposing shareholder resolutions on environmental and social issues following new guidelines from US securities regulator.

The US Securities and Exchange Commission has allowed just 15 percent of shareholder proposals touching on environmental or social issues to be excluded by companies so far this proxy season, a drop of 34 percentage points on last year. 

According to data provided by US non-profit the Sustainable Investments Institute (Si2), the previous lowest tally in the past five years was in 2019, when 43 percent of corporate ‘no action’ bids on E&S proposals succeeded. 

In total, 159 ‘no action’ requests have been put forward by companies this year on E&S proposals, just two fewer than in the 2021 proxy season. So far, the SEC has rejected 67 corporate bids to exclude such proposals, compared with 37 last year, with still more decisions pending from the regulator. The number of successful attempts by companies has also fallen dramatically to 24, compared with 79 last year.  

The SEC’s ‘no action’ process allows companies to petition the regulator for its blessing to exclude proposals by appealing to rules governing the process. If successful, these ‘no-action’ letters provide assurance to companies that the SEC will not pursue the matter if the firm omits it from the agenda of its annual shareholder meeting.   

Heidi Welsh, founding executive director of Si2, attributes the fall in the number of successful ‘no action’ requests to recent guidance put out by the SEC, which tipped the balance of power back towards investors.  

“[T]he November 3 Staff Legal Bulletin 14L not only rescinded the Trump era interpretative guidance, it also seems to acknowledge the ascendance of ESG importance to the capital markets,” she says. 

Under President Trump’s administration, the SEC increasingly allowed companies to exclude shareholder proposals on ESG issues – particularly emissions reduction targets – using appeals to the rules around ordinary business, micromanagement and substantial implementation. It was these rules that the regulator, which has been transformed under President Biden, addressed in its latest intervention. 

Sanford Lewis, an attorney at US-based legal adviser Strategic Counsel and a veteran observer of shareholder proposal battles, tells RI that it is “fair to say that more proposals are surviving the ‘no action’ process this year”. 

The SEC’s recent intervention, he says, “provided clear guidance for drafting proposals to avoid exclusion”, particularly on how climate target proposals would be assessed against the ordinary business/micromanagement rule.  

On this, Lewis points to the group of proposals filed at US financial institutions this year asking them to curtail fossil fuel financing in line with credible net-zero scenarios, which “were not treated as ordinary business even though they might have been in a prior year”. 

For the most part, Lewis says: “The proposals that are being excluded are ones that clearly violate the technical requirements of the rule (eg. failure to provide proof of ownership or to offer a time to engage with the company) or clearly did not comply with the new Staff Legal Bulletin on micromanagement.”  

Natasha Lamb, managing partner and portfolio manager at Arjuna Capital, tells RI that the data from Si2 squares with its experience this year. She says the US activist investor has overcome four challenges this season including one – which was blocked at Chubb last year – asking Travelers Insurance to address “how they can reduce the risk of racist policy brutality at the municipal police departments they insure”. 

NorthStar Asset Management also overcame the only ‘no action’ challenge it faced this year – “but it was a hard-fought battle”, Mari Schwartzer, director of shareholder activism and engagement at the US investor, tells RI. “When we file shareholder proposals, we’re always trying to ‘play by the rules’ and get our issues in front of management while weaving through the limitations Rule 14a-8 puts in place, but I think shareholders are tired of having to jump through the hoops that company legal counsel throw at us,” she added.  

The SEC’s Division of Corporation Finance’s shift away from a “restrictive interpretation” of what constitutes a significant policy issue is described as “encouraging” by Jonas Kron, chief advocacy officer at Trillium Asset Management.

“[T]his means that the shareholder proposal rule will function much better – letting issues rise and fall on their merits and investor opinions rather than putting unreasonable burdens and reliance on staffers [who rule on ‘no action’ requests],” he says. “While reaching this logical equilibrium may feel jarring to some, I think folks will quickly adjust to the inherent reasonableness of it.”  

On companies’ response to the new SEC guidance, Lewis told RI that “in some instances companies recognised that proposals were no longer excludable and did not file a ‘no action’ request”. RI reported in November that US retail giant Costco gave up its bid to exclude an emissions target proposal in response to the SEC’s bulletin.  

In other instances, Lewis added, companies are attempting arguments outside the issues addressed in the recent guidance, such as arguing that allowing proposals to go ahead would hurt their position in litigation – an argument that was unsuccessfully attempted by Johnson & Johnson in response to a proposal calling for it to end its global sale of talc-based baby powder over health concerns.