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SEC seeks to ease barriers for investors’ ESG proposals

Proposal comes amid record levels of shareholder-driven votes and as Republicans ramp up criticisms of the agency

The proposals would "help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders,” said SEC Chairman Gary Gensler.
The proposals would "help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders,” said SEC Chairman Gary Gensler. (Tom Williams/CQ Roll Call file photo)

The Securities and Exchange Commission on Wednesday proposed expanding investors’ ability to resubmit proposals on environmental, social and governance issues as the 2022 proxy season sees record levels of votes and Republicans ramp up criticisms of the agency.

The agency voted 3-2 to propose amending a provision known as Rule 14a-8, to require companies to jump through additional hoops when seeking to prevent shareholders from voting on corporate proposals.

If finalized, the changes would likely make it much harder for companies to avoid votes on ESG matters in the future.

The rule as currently written allows shareholder proposals to be excluded if companies say they have been “already substantially implemented,” that they “substantially duplicate” another current proposal, or that they substantially duplicate a proposal that was previously submitted at the company’s prior shareholder meetings, according to the agency.

The SEC proposed amending each of these options so that companies would have to meet a higher bar.

For something to be excluded on the basis of being substantially implemented, the “essential elements” of the proposal would have to be already in place.

For claims of a duplicative proposal, the company would have to show it addresses the same issue and “seeks the same objective by the same means” as another resolution.

Finally, a proposal would only be an excludable resubmission if it “substantially duplicates” a prior resolution.

The comment period will be open for 60 days, according to the agency.

During an open meeting Wednesday, SEC Chairman Gary Gensler said the amendments would provide much-needed clarity. The SEC received more than 700 requests to block shareholder resolutions in the last three proxy seasons, according to the agency. Nearly half of those requests used at least one of the three arguments.

“I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought,” Gensler said. “They also would help shareholders exercise their rights to submit proposals for consideration by their fellow shareholders.”

Republican commissioners Hester Peirce and Mark Uyeda, who was sworn into the agency last month, voted against the change. Both said the move is another example of regulatory whiplash as the SEC unwinds or mitigates actions taken during the Trump administration.

Peirce said the proposal would force executives to rehash old issues year-after-year, “narrowing companies’ ability to exclude proposals.”

Upping ante

The proposal marks the latest in the SEC’s efforts as activist investors, galvanized by recent agency actions, up the ante on companies to meet investor demand on ESG matters.

Investors have voted on 282 resolutions at companies’ annual general meetings so far this year, up nearly 60 percent from the same period in 2021, according to findings released Wednesday by As You Sow, the Sustainable Investments Institute and Proxy Impact.

Investors have cast majority votes favoring 34 resolutions aimed at holding corporations more accountable on emission targets, racial justice and civil rights audits, corporate political spending and other issues.

The rise in resolutions is attributed to guidance released last year by the SEC. The agency 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 from 2017 through 2019.

“There was a precipitous drop in the number of proposals blocked by company challenges at the U.S. Securities and Exchange Commission, because of an interpretive shift last November,” said Heidi Welsh, executive director of the Sustainable Investments Institute and co-author of the report.

Republicans continue to lambaste the agency for hastily finalizing rules on major securities issues. Sens. Bill Hagerty of Tennessee and Thom Tillis of North Carolina sent a letter Tuesday to Gensler slamming the SEC over the length of comment periods given for several proposals. 

One of those is a rule that requires companies and shareholders to use universal proxy cards to vote for candidates in director election contests, giving investors more choice in supporting individual candidates rather than entire slates of directors pitched by management or activist shareholders. The comment period for that rule lasted for about a month toward the end of the year, the senators said.

“As a result of these shortened windows for critical feedback, market participants are not being provided adequate time to provide effective and meaningful input,” Hagerty, a member of the Senate Banking Committee, and Tillis said in the letter.

The duo said the shorter comment periods contradict previous statements from Gensler; in May 18 testimony before the House Appropriations Subcommittee on Financial Services and General Government, the chair said comment periods for SEC proposed rules are “always at least two months.” 

“If you choose not to reopen the comment periods for these three proposals, we request that you reply to this letter with an explanation of the basis for your decision and an explanation for why your testimony included inaccurate statements about the SEC’s track record during your tenure for providing the public with adequate notice and a reasonable opportunity to comment on the agency’s proposed rulemaking,” Hagerty and Tillis said.

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