Since 2010 more than 600 environmental, social and governance-related resolutions likely would have never advanced under a newly proposed rule by the U.S. Securities and Exchange Commission, according to data the Sustainable Investments Institute shared with S&P Global Market Intelligence.
The SEC in November 2019 proposed to increase the amount of support a shareholder resolution required to be reconsidered in the years following an initial vote. Rather than resolutions needing at least 3% support the first year, 6% the second year, and 10% the third and subsequent years after an initial vote to be reconsidered, the SEC would raise those thresholds to 5%, 15% and 25%, respectively. The agency estimated the changes would cut the number of shareholder proposals by 7%.
While the rule has yet to be finalized, the Sustainable Investments Institute, or Si2, compiled a database of ESG resolutions voted on from the beginning of 2010 through Nov. 18, 2019. Si2 found that 614 ESG-related resolutions, or about 30%, of the 2,019 proposals voted on at company annual meetings over that period would not have been eligible for resubmission. That total is almost three times the number of resolutions — 206 resolutions — that could have failed existing threshold requirements over that time, according to Market Intelligence's analysis of the data.
Of the 614 potentially impacted resolutions, political activity, climate change and human rights issues would have taken the biggest hit.
Companies are coming under increased pressure from investors to disclose how ESG risks could impact their bottom line, and they are addressing those risks and opportunities. But groups such as the U.S. Chamber of Commerce and Business Roundtable have pushed for reforms to the shareholder resolution process.
An official with the chamber said the SEC's proposed changes are needed to stop resolutions that fail to gain support from wasting the time and resources of both shareholders and companies.
"The shareholder proposal process, in our viewpoint, has been subverted over the last several years from being one of a communications device between shareholders and companies as to the strategy and bottom line of a company and is instead being used by certain special interest activists to push agendas or issues that they can't make progress on in Washington," U.S. Chamber Center for Capital Markets Competitiveness Executive Vice President Tom Quaadman said in an interview.
But shareholder advocates say the proposed rule will limit investors' ability to raise ESG issues with companies at a time when the rise in passive index-based investing is making engagement with companies the primary tool.
The SEC is tipping the scales in favor of corporate management and is "really throwing a wrench in the works for passive investors because they can't manage risks except by engagement," Ceres Shareholder Engagement Director Rob Berridge said in an interview.
Keeping an issue on the annual agenda of a company is key to building support, said a spokesperson for New York Comptroller Thomas DiNapoli, who oversees the New York State Common Retirement Fund that proposed more than 270 ESG-related resolutions at companies over the past decade, according to Si2 data. Corporations and institutional investors often require more time to absorb and respond to new information and ideas, the spokesperson said.
The true impact of the rule could be even greater when combined with related SEC proceedings that could make proxy advisory firms liable for any false or misleading statements when advising clients on how to vote on proposed resolutions, Berridge said. Under the proxy firm rule changes, proxy advisers may be less willing to recommend that investors vote against management on resolutions, which would then also reduce the total amount of shareholder support resolutions receive even as the SEC is increasing the threshold requirements, he said.
What about the 2020 proxy season?
As for all resolutions voted on in 2019, the SEC's proposed threshold and momentum requirements would have prevented 34 resolutions that would have cleared the current threshold requirements from being eligible to be resubmitted for a vote in 2020.
They include resolutions that asked AbbVie Inc., BlackRock Inc., Boeing Co., Comcast Corp., Ford Motor Co., Tyson Foods Inc. and United Parcel Service Inc. to disclose their lobbying activities. As You Sow's resolution that asked Exxon Mobil Corp. to report on the climate-related impacts of extreme weather events to its petrochemical operations and investments garnered 24.99% of shareholder support at the company's 2019 annual meeting, which potentially would not clear a 25% threshold.
At the same time, a resolution proposed for the first time in 2019 at Duke Energy Corp. by Steven Milloy that questioned whether the utility had good financial reasons for shuttering coal-fired plants and building more wind and solar projects garnered 4.39% support and would have cleared the current 3% resubmission threshold but not the proposed 5% threshold.
Momentum requirement would impact 13 resolutions
The SEC's proposed rule also includes a measure aimed at preventing a resolution that clears the 25% threshold from lingering when it fails to gather additional steam. The proposed momentum requirement would block any measure that had between 25% and 50% support but that lost 10% support compared to the immediately preceding vote.
The momentum requirement would block 13 resolutions of the 614 impacted by the rule, an analysis of the data found. For example, a resolution co-filed by Trillium Asset Management LLC's to have Home Depot Inc. disclose equal employment opportunity federal report-related information received 33% support in 2019, but the same resolution in 2018 garnered 48.3% support, which means it would not be eligible to be resubmitted in 2020 if the proposed momentum requirement were in place.
Comments on the proposed rule are due Feb. 3.
About the data
The data covers 4,365 ESG-focused resolutions that shareholders of publicly traded companies in the U.S. submitted to be voted on at meetings that took place from the beginning of 2010 through Nov. 18, 2019. The curator of the data, Si2 Executive Director Heidi Welsh, indicated the list of environmental and social resolutions is comprehensive but covers only those governance topics that Si2 tracks, such as board diversity, board oversight of specific topics and ESG-linked executive pay metrics. The data also does not account for how any repeat resolutions performed before 2010.
The data was filtered to include only resolutions that received a vote — a number of resolutions each year are withdrawn by the proponent or blocked by the SEC for other reasons. Next, the percentage of shares cast in favor of the resolutions of all shares voted, excluding abstentions and broker nonvotes, was compared to both the current threshold requirements and the proposed rule to determine the extent of the impact of the proposed rule.
As for interpreting whether a resolution is a repeat of a prior proposal and deals with substantially the same subject matter, Welsh said she tended to take a conservative approach and assumed resolutions that fall under a broad topic are the same. But she noted that the SEC and companies could ultimately make different judgment calls.