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SEC rules create ESG roadblocks for investors, says PRI

The US Securities and Exchange Commission (SEC) has proposed rule changes that create barriers for investors seeking to raise environmental, social and governance (ESG) issues with companies, Fiona Reynolds argued.

The chief executive of the PRI wrote in a blog: “US investors are increasingly stepping up to push the business community to prepare for the economic impacts of climate change and escalate inequality – they are stepping in where government policy has failed.

“But the US government is now responding by working to silence the voices of responsible investors,” she wrote.

The PRI believes that the shareholder proposal process has been one of the most important factors in putting ESG at the top of the agenda at US companies.

SEC’s proposals

The changes raise requirements of stock ownership as well as voting thresholds, and increase the hurdles of shareholders to lobby for change.

Current resubmission thresholds of 3%, 6% and 10% for matters voted on once, twice or three or more times in the last five years, respectively, would be replaced with thresholds of 5%, 15% and 25%, respectively.

The new rules would also require shareholder advisory firms to provide companies with advance copies of their advice before it goes to investors.

This, the PRI says, undermines investors’ access to independent advice on matters brought to a vote at companies’ annual general meetings, as companies can review and comment on voting recommendations before investors see them.

Jay Clayton, who was appointed as chair of the SEC by President Donald Trump, argued that the amendment of the proxy voting rule would ensure accuracy and transparency of the proxy system, while the shareholder proposal would help to modernise and enhance the system’s efficiency.

“Accordingly, our proxy process, in its components and as a whole, necessarily reflects the need for a rich exchange of information and the need to balance the interests of proponents of shareholder proposals with the interests of their fellow shareholders.

“More specifically, the proposal would facilitate and enhance the quality of disclosure about material conflicts of interest,” he stated.

Legal view

Keith Higgins, chair of the securities and governance practice at global law firm Ropes & Gray and former head of the SEC’s division of corporation finance, commented that he does not believe that either proposal diminishes investor protections.

He told Expert Investor: “For the group of small shareholders, which currently account for a significant percentage of proposals each year, it is unlikely that they will meet the $15,000 (€13,645) or $25,000 thresholds in a significant number of their holdings.

“But the $2,000 threshold remains, albeit with a three-year holding period rather than the current one-year. To the extent this group recycles its holdings to enable it to offer proposals at more companies, it would limit to some extent the number of companies at which it can submit proposals.

“The impact of the proposed rules on proxy voting advice businesses would be more substantial, particularly the issuer review requirements. Viewed in its most favorable light, in this proposal the SEC is trying to enhance the integrity of the proxy voting process, to make sure that shareholder votes are cast only after hearing both, or all, sides of the issue.”

Background

On 5 November, the SEC voted to move forward with its proposals and determined a 60-day public comment period.

The rule proposals are part of an ongoing reform by the SEC to reform the proxy process.

In August, it put forward guidance clarifying that proxy advisers are subject to anti-fraud rules concerning materially false or misleading statements.

The Institutional Shareholder Services (ISS), a major US shareholder advisory firm, filed a lawsuit against the SEC in response.

ISS president and chief executive Gary Retelny commented: “After careful review of the August guidance, we are deeply concerned that it will be used or interpreted in a way that could impede our ability to deliver our data, research, and analyses in an independent and timely manner”.

 

 

Elena Johansson

Senior Reporter

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