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Stronger shareholder action, more robust ESG rules expected in 2022

The SEC is seen as one reason for the momentum

Since becoming the chairman, Gary Gensler has shifted the SEC's guidance on ESG issues and is adding to the momentum for more shareholder activism in 2022.
Since becoming the chairman, Gary Gensler has shifted the SEC's guidance on ESG issues and is adding to the momentum for more shareholder activism in 2022. (Bill Clark/CQ Roll Call file photo)

Activist shareholders may have the upper hand in holding companies more accountable on environment, social and governance issues next year, thanks to a combination of pressure from BlackRock Inc. and other institutional investors and proxy voting rule changes at the Securities and Exchange Commission.

BlackRock, the world’s largest asset manager, said this week it expects companies in which it invests to give more concrete details on climate-related risks and expand board diversity starting in 2022. In an update of its proxy voting rules, BlackRock said it will ask CEOs to explain how business strategies are resilient under “likely decarbonization pathways” and a scenario in which global warming is limited to 1.5 degrees Celsius.

Meanwhile, the SEC issued guidance and rules that will likely bolster activist, ESG-focused investors’ chances to get companies more focused on public policy issues and make it easier for shareholders to shake up corporate boards, as investment firm Engine No. 1 did in replacing three directors at Exxon Mobil Corp. in May.

“Investors and companies may be heading for a bit of a collision course on ESG proposals,” said Paul Washington, executive director of The Conference Board ESG Center. The nonprofit business and research group counts over 1,000 public and private corporations and other organizations in 60 countries as members.

During a Bloomberg Sustainable Business Summit this month, Washington said he anticipates more activity, especially on environmental and social issues, as shareholders build on the successes of last proxy season, in which proposals at United Airlines Inc., ExxonMobil and The American Express Co. found deep investor support.

“I think proponents will be less willing to compromise, because several ‘S’ as well as ‘E’ proposals got either high or majority support, so there is going to be a reluctance on the proponent side to cave in,” he said.

BlackRock, which has about $9.5 trillion in invested assets, also said this week it wants U.S. corporate boards to reflect the increasingly diverse society and workforce. It said company boards should aim to reach 30 percent diversity of membership and have at least two directors who identify as female and at least one who identifies as a member of an underrepresented group.

The firm, which has stakes in thousands of companies around the world, said it may vote against directors who fail to demonstrate a strong commitment to mitigating climate risk and embracing diversity. The asset manager added it would support shareholder proposals on these issues if corporate executives are resistant to change, giving smaller activist investors more clout in the next proxy season.

Social surge

During the 2021 proxy season, the number of proposals submitted at all public companies increased by 11 percent, to 802, according to law firm Gibson, Dunn & Crutcher LLP, the first significant rise in the shareholder resolutions filed since 2016.

Social and environmental proposals saw the biggest increases in terms of types of proposals; shareholder resolutions related to social issues surged 37 percent in the one-year period, while environment-related proposals increased 13 percent.

Less than a fifth of shareholder proposals submitted for companies’ annual meetings received a majority vote during the 2021 proxy season, according to Gibson Dunn. Governance proposals made up about half of these successful proposals, and environmental and social resolutions saw increased investor support in votes.

This is already spilling into the 2022 proxy season, which started in October and will ramp up in the first half of next year.

Last month, Microsoft Corp. shareholders overwhelmingly approved a proposal from Arjuna Capital to have the software company’s board publish a report on the effectiveness of its workplace sexual harassment policies, following allegations that co-founder Bill Gates made inappropriate sexual advances toward employees.

“I don’t see the momentum for ‘Me Too’ slowing down anytime soon,” said Rebecca Boon, a partner at Bernstein Litowitz Berger & Grossmann LLP. “It seems like every single day, we see new public revelations about this type of misconduct, and I don’t see momentum in terms of shareholders demanding real meaningful change to address this issue slowing down at all. If anything, I see it increasing in 2022.”

SEC guidance

Shareholders will likely be more empowered to bring forward stronger proposals thanks to recent guidance from the SEC.

Companies seeking to avoid shareholder votes on ESG issues face a higher burden to have the SEC grant their requests after the agency’s staff in November issued a legal bulletin on no-action requests under a provision known as Rule 14a-8 authorized by the Securities Exchange Act of 1934.

The agency, led by Gary Gensler, a Democrat, said it will be more likely to require companies to hold shareholder votes on public policy issues such as the environment and worker arbitration than it was during the Trump administration as part of its repeal of three legal bulletins issued between 2017 and 2019.

The SEC last month also adopted a final rule that will require companies to provide universal proxy cards in contested director elections, rather than making investors either vote for the company’s entire slate of directors or the dissidents’ slate. Although companies have until Sept. 1 to comply, some may opt in sooner rather than later or face pressure from shareholders to give them more flexibility in voting on directors.

“We absolutely think the investor push on ESG-related items, including shareholder proposals that don’t move forward, will increase, perhaps even stronger than what we’re currently anticipating, especially around climate, human capital, DEI and racial equity,” said Friso Van der Oord. He is the senior vice president of content at the National Association of Corporate Directors, a nonprofit membership organization that helps board directors navigate business challenges and governance issues.

Lowering the barrier for such ESG proposals to get on the ballot in annual meetings will likely incentivize companies to engage much earlier with shareholders on topics such as climate action and racial equity, Van der Oord said in an interview.

“You’ll see a lot more work behind the scenes to get to some consensus agreement on those matters before proxy starts,” he said. “We’ll see a rise in proposals. Perhaps some of those proposals will get withdrawn because of the engagements.”

The SEC is also working on other proposals, such as more guidance on reporting on material ESG issues and potential enforcement actions through a task force formed at the beginning of the Biden administration.

Companies and ESG investors are also waiting for the SEC to come out with its potential rulemaking on climate risk disclosure for public companies. That topic has been the main target of lobbyists’ advocacy on ESG issues this year for companies that support and oppose ESG.

“While the SEC has required climate-related disclosures since 2010, this represents an effort to significantly strengthen their relevance and expand the scope of credit risk assessments,” Marina Petroleka, global head of ESG research at the Fitch Group’s sustainability research division, said in an analyst note this month.

Beyond the SEC, ESG investors are keeping an eye on final rulemaking from the Labor Department. The department in October released a proposed rule to allow retirement plan advisers to look at climate change and other ESG factors as material risks and considerations for their fiduciaries when selecting investments.

“By both correctly noting that certain ESG factors are material and thus can be considered when making an investment decision and that non-material ESG factors are subject to the ‘tiebreaker’ standards from previous department guidance, DOL is ending the chilling effect caused by the previous rule and removing unnecessary and burdensome obstacles to regulate sustainable investing prudently,” a group of 24 House Democrats, led by Rep. Andy Levin of Michigan, said in a letter this week to Labor Secretary Marty Walsh.

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