December 12, 2019 at 5:00 am ET
In November, headlines across the world loudly decried President Donald Trump’s confirmation that his administration plans to officially withdraw from the Paris Climate Agreement.
While this unfortunate news has rightfully received significant attention, global sustainability efforts received another major, albeit quieter, setback, this time in the arcane world of U.S. financial regulation.
In particular, the U.S. Securities & Exchange Commission, the federal agency tasked with protecting investors, voted for a proposed rule that would limit investors’ ability to engage with the companies they own through what is known as a shareholder proposal.
One of the signature features of U.S. capital markets is the ability of investors to work directly with management through these proposals. In a shareholder resolution, an investor files a proposal on issues of interest on which they want the company to take action. SEC rules determine eligibility and require that companies include those proposals on the corporate ballot at annual meetings.
Over the past few years, as investor interest in Environmental, Social and Governance (ESG) issues has skyrocketed, shareholder proposals have become a critical part of ESG integration efforts. The number of ESG resolutions filed at U.S. companies has grown by 11 percent in the last 10 years, while average support has increased from about 18 percent to nearly 26 percent. Common shareholder proposals now include issues relating to human rights, investments in workers, board diversity and environmental sustainability, to name a few.
However, the SEC’s proposed rules increase the initial submission thresholds and dramatically raise the percentage vote a proposal must receive to be resubmitted. Regarding the latter, a proposal would need to achieve support by 5 percent of voting shareholders in its first submission. And proposals submitted two and three times in the prior five years would need to reach at least 15 percent and 25 percent support, respectively. Previously, the requirements were 3 percent, 6 percent and 10 percent, respectively.
This is problematic because sustainability issues are inherently forward-looking, and not all investors will have the expertise to form a view on emerging sustainability issues right away. That is why it’s so important that investors can submit, and resubmit, resolutions on ESG topics that matter for long-term value creation.
If finalized, the SEC’s proposed rules on shareholder proposals would erect taller hurdles, particularly for smaller and medium-sized investors seeking to use the process to elevate climate-related and other ESG issues with corporate leaders. The result is less accountability for management — and less action on ESG issues from corporate America.
Unfortunately, this is not the only recent setback for investor rights. The SEC also proposed a rule this month that would increase the regulation of so-called proxy advisers, third-party companies that provide recommendations to investors on how to vote in corporate elections, which often includes advice on ESG resolutions. If enacted, the rule will undermine the reliability of this source of advice by giving management the opportunity to review proxy advisers’ recommendations, in turn potentially influencing them, and likely leading to more delays in an already byzantine process.
Moreover, the SEC recently proposed to give managers significant discretion in human capital disclosures, making it more difficult for investors to get comparable information between companies and hold management’s feet to the fire for investments in human capital.
The net effect of these quiet changes is a major setback for ESG integration efforts, cutting off discussion of emerging issues before investors have the chance to analyze them and integrate the latest thinking into voting behavior.
While official sector action on ESG issues has been mixed and will likely continue to be so, investors around the world have been succeeding in persuading major companies to support responsible investment precisely because it is beneficial for long-term value. That’s why these proposals from U.S. regulators are lose-lose policymaking — bad not just for investors but also, ultimately, for corporate America.
Will Martindale is Director of Research and Policy for the UN-backed Principles for Responsible Investment (PRI), the world’s leading authority on responsible investing. PRI represents more than 2,500 signatories worldwide — asset managers and asset owners — with over $86.3 trillion in assets.
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