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SEC Climate Proposal Is New Factor for Activist Shareholder Bids

Elizabeth “Leza” Bieber, Freshfields counsel and head of shareholder engagement and activism defense, spoke with Bloomberg Law corporate governance reporter Lydia Beyoud about the SEC’s newly-proposed ESG disclosure rules. Following is the resulting article, published March 21, 2022. Reproduced here with permission. Copyright 2022 by The Bureau of National Affairs, Inc. (800-372-1033)

The SEC’s new climate disclosure proposal is likely to influence negotiating tactics between activist shareholders and companies over a raft of emissions and environmental sustainability proposals.

The Securities and Exchange Commission’s proposal is meant to help investors scrutinize public companies’ claims about greenhouse gas reduction targets, climate risks to their operations, and other climate metrics.

If shareholder proposals closely align with the information the SEC wants companies to disclose, it could influence how willing they are to withdraw proposals, if they get company commitments to work toward eventual compliance with the SEC’s rules, Elizabeth Bieber, head of shareholder engagement and activism defense at Freshfields Bruckhaus Deringer LLP said.

“Proponents will have to weigh whether immediate adoption, or much sooner adoption, of their proposal is worth negotiating longer-term compliance with the rule,” Bieber said.

The SEC’s proposal will also impact how companies approach their investors and how deeply they might oppose shareholder pushes substantively similar to the SEC’s proposed disclosure requirements, Bieber said.

The proposal would ask companies to disclose to the SEC not just direct greenhouse gas emissions and those from purchased energy, but also emissions generated elsewhere in their value chain, such as by suppliers or consumers, if it’s deemed “material” to operations or investors. The latter metric is often seen as more difficult—but not impossible—to quantify.

About half of S&P 500 companies already make climate risk disclosures, according to the Conference Board, a corporate governance think tank.

But shareholders are increasingly asking for more quantitative data and are “no longer accepting just qualitative assurances that a company is doing something,” said Michael Passoff, CEO of Proxy Impact, a socially responsible investor advisory firm.

Passoff is among the group of activist investors pushing companies for far more details on their climate commitments, such as specific measures to keep global temperatures from rising no more than 1.5 degrees Celsius.

“A lot of that will be unneeded if the SEC moves forward with these rules,” Passoff said.

Making Promises

The rules will likely face lawsuits. But if finalized, they still could take years to go into effect because of the SEC’s proposed phase-in of compliance deadlines.

“Regardless of a potential lawsuit, the proposed climate rules will likely help improve disclosure as companies can see that it will eventually be needed,” Passoff said.

But climate resolutions will still raise questions about whether corporate greenhouse gas reduction goals are aligned with the Paris Accord goal of keeping global temperature rise to 1.5 degrees Celsius, Passoff said. “Right now, most are not,” he said.

The proposal may make some companies more hesitant to agree to existing shareholder proposals for adopting “net zero” targets or quantitative greenhouse gas reduction goals, said Margaret Peloso, a partner at Vinson & Elkins LLP focused on climate change risk management and environmental litigation. That’s because such commitments could trigger new disclosures under the proposal, she said.

Others might decide to try to negotiate the shareholder proposals if certain metrics, such as indirect emissions, may eventually be required anyway, she said.

Some investors may view the SEC’s proposed disclosure requirements as the minimum that companies should have to meet.

“Shareholders are going to continue to engage and push companies on issues that are material for a given company and its given industries,” said Aeisha Mastagni, portfolio manager at CalSTRS, the California state teachers’ pension fund.

Busy Season

The effects of the SEC’s move on shareholder proposals will play out as the proxy season kicks into high gear over the next several months.

Recent shareholder votes at Costco Wholesale Corp. and Jack in the Box Inc. may be harbingers of other climate proposals.

Jack in the Box shareholders approved a proposal requiring a sustainable packaging report by more than 95%, despite management opposition to the measure. Costco shareholders approved a proposal by nearly 70% to make firm greenhouse gas reduction commitments.

The uptick in climate proposals is driven in part by a SEC policy change last year making it harder for companies to exclude shareholder proposals from their proxies.

That’s resulted in an increase in climate-related proposals for the 2022 season—110 proposals were made, up from 79 last year, according to a new report from Proxy Preview, a proxy analysis group supported by As You Sow, an activist investor organization, and Proxy Impact.

The proposal may also give activist investors more insight into the inner workings of companies and their boards when it comes to climate issues, said Christina Thomas, a partner in Mayer Brown’s capital markets practice.

There are a lot of proposed disclosure requirements about company oversight and board oversight, Thomas said.

“This rule is as much about governance as it is about the environment,” Thomas said.


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