SEC moves to keep ESG shareholder resolutions off proxy ballots

The SEC today reversed Biden-era guidance on shareholder resolutions, in a move that could make it more difficult for investors to bring environmental and social issues to proxy votes.

The agency’s Division of Corporation Finance published a bulletin, 14M, superseding the Biden-era bulletin, 14L. The new version appears to revert to the SEC’s stance during President Donald Trump’s first term, generally allowing public companies to exclude shareholder proposals from their proxy ballots if they say the issues focus on ordinary business operations or amount to micromanagement.

The change, which observers said was all but expected with a second Trump term, comes a day after SEC acting Chairman Mark Uyeda moved to pause the agency’s defense of a lawsuit challenging its climate-disclosure rule for public companies.

Commissioner Caroline Crenshaw, the sole Democrat remaining at the head of the SEC, said that the timing will complicate things for investors.

The new bulletin “moves the goalposts smack dab in the middle of this year’s shareholder proposal process. Doing so at this hour creates undue costs and uncertainty for investors and corporations alike,” Crenshaw said in a statement. “As anyone familiar with the shareholder proposal process knows, excluding a proposal from the proxy statement all but guarantees it will never make it to a shareholder vote.”

It will affect shareholder proposals that address a range of topics, including poison pills, executive compensation, artificial intelligence, lobbying, or social and environmental issues that investors may deem financially material, Crenshaw said.

“The rescission comes as no surprise given that the shareholder proposal process has become the target of politicized messaging and a preferred punching bag of those who wish to diminish corporate democracy,” she said. “This is the case even though there are already numerous other mechanisms in place to limit the availability of the proxy ballot to shareholders.”

During former President Joe Biden’s term, public companies strongly objected to a wide range of shareholder proposals that, for a year or two, they had difficulty keeping from votes. That was in part due to the SEC’s prior bulletin that was seen to give social and environmental issues more consideration for shareholders, when companies asked the SEC for permission to exclude resolutions from their proxy ballots.

But it’s important to note that even with the prior Biden guidance, the SEC over the past two years has increasingly allowed companies to exclude shareholder resolutions, said Luke Morgan, staff attorney at As You Sow. There was a dramatic rise in the number of shareholder proposals between 2021 and 2023, particularly on environmental, social, and governance topics,

Even so, the agency’s reversal is troubling, he said.

The new bulletin’s “micromanagement section in particular looks like a troubling exacerbation of recent trends to over-enforce that exclusion, and seems particularly targeted at climate proposals,” Morgan said in an email. “For example, the suggestion that investors micromanage when they seek to promote ‘timeframes’ is especially problematic. ‘Net Zero by 2050’ is technically a ‘timeframe’ to which much of the global economy is committed, and it is hardly ‘micromanagement’ within the ordinary meaning of that word or in the context of investor-company relations to ask a company to align its actions with that target.”

The shareholder votes companies face are nonbinding, meaning that their boards and leaders may be pressured to make changes but ultimately do not have to. Still, companies often want to avoid such votes altogether.

In 2021, ExxonMobil became a success story for activist investors, when a small fund manager led a successful campaign to replace several of its board members amid a wider push to get the company to diversify its business beyond fossil fuels.

Last year, in a move seen as having a substantial chilling effect on activist investors, Exxon sued two shareholders who filed climate-related resolutions at the company.

The SEC’s change today does not necessarily mean that social or environmental shareholder resolutions can’t survive and make it to votes. The agency will assess proposals for their relevance to a company’s business is the issue involves less than 5 percent of total assets, today’s bulletin stated. The fact that the SEC isn’t barring such proposals outright shows the disconnect between the political rhetoric against ESG issues and what is happening in the market, Morgan said in a phone interview.

“It’s going to be a real threat to environmental and social proposals,” but “it’s not necessarily what the anti-environmental and social people have been clamoring for, politically,” he said.

Regardless, much of the engagement that asset managers have with companies in their portfolios happens behind the scenes, said Julie Gorte, senior vice president for sustainable investing at Impax Asset Management, in a statement provided by a spokesperson.

“Some of the big asset managers engage with many companies in their portfolios every year, or even more often, and almost never file shareholder proposals. Impax engages with scores of companies every year, and we file very few proposals,” Gorte said. “Bringing material items like climate risks and building resiliency to the attention of boards – who are there to represent the interests of shareholders – is something that investors do all the time, and not having the ability to file a proposal to wield as a mechanism to compel engagement may affect some companies’ willingness to engage, but by no means all.”