Environmental and Climate Risk Shareholder Proposals at a Crossroads

In the face of increased pressure from shareholders, corporations subject to shareholder proposals dealing with climate change and other environmental issues have been mostly unsuccessful in their attempts to seek refuge by excluding shareholder resolutions from their proxy materials under the SEC's No-Action authority. According to Bloomberg, 14 of the 19 (74 percent) requests to exclude proposals related to environmental issues under SEC No-Action relief that were not withdrawn have been denied during the 2017 proxy season, and the relevant proposals must be included in the petitioning corporation's proxy materials. While it is unclear if this is part of a burgeoning trend at the SEC, there are indications that the incoming chairman of the SEC, Jay Clayton, may support shareholder proposals aimed specifically at climate risk disclosure. On March 23, 2017, in response to a question at a hearing on his nomination before the Senate Committee on Banking, Housing, and Urban Affairs, Clayton stated that "public companies should be very mindful" of SEC guidance regarding climate risk disclosure, and he acknowledged that shareholders can seek additional disclosure on items of interest through shareholder proposals.

Shareholder interest and activism in regard to climate issues may be buoyed by increased engagement on the topic from some of the world's largest institutional investors. According to a survey by the Asset Owner Disclosure Project, 60 percent of the world's 500 largest asset managers, with more than $27 trillion in assets under management, are taking action to protect their portfolios from climate risk. This represents an 18 percent increase in the number of climate-concerned investors among large asset managers over the past year. In addition, some of the world's largest pension funds and asset managers have publicly stated their intent to engage management at their portfolio companies on climate-related issues either through the proxy process or in meetings with management.

If there is any relief in sight from shareholder pressure on environmental and climate issues for corporate boards and management, it might come in the form of House Financial Services Committee Chairman Jeb Hensarling's proposed legislation, the Financial CHOICE Act. Hensarling's planned Financial CHOICE Act would alter the thresholds for eligibility of shareholders to submit proxy proposals for inclusion in a company's proxy statement. Currently, Exchange Act Rule 14a-8 requires shareholders to hold either at least $2,000 in market value or at least 1 percent of the company's securities entitled to be voted on a proposal for a period of at least one year by the date the proposal is submitted. In contrast, under the Financial CHOICE Act, the $2,000 market value threshold would be eliminated and the holding period would be lengthened to three years. Therefore, shareholders would be permitted to submit proxy proposals only if they own at least 1 percent of the company's outstanding voting securities for at least three years—a change that would limit the universe of proposal-eligible investors in most large public companies to only the largest institutional shareholders. The Financial CHOICE Act would also eliminate the ability of individual investors to authorize other shareholders to submit proposals on their behalf, a change that would further adversely affect the ability of activist shareholders to seek inclusion of their proposals.

China Moving Toward Greater Disclosure of Climate and Environmental Impacts for Listed Companies

On March 25, 2017, Fang Xinghai, vice chairman of the China Securities Regulatory Commission ("CSRC"), said at the Boao Forum that the CSRC is exploring the possibility of requiring all companies listed on the main Chinese financial exchanges to disclose information about their carbon emission and pollution levels. Such disclosure requirements, if made compulsory, are expected to contribute to the development of green finance in China.

Disclosure of Emission Data by Key Pollution Discharge Entities Already Required Although this potentially mandatory requirement has yet to be crystallized, certain listed companies already have been required to disclose their annual emission data. The Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No. 2—Contents and Formats of Annual Reports (2016 Revision) ("Disclosure Standard") published on December 9, 2016, included a new provision relating to emission data. The new paragraph under article 42 of the Disclosure Standard requires that companies named as key pollution discharge entities by the Ministry of Environmental Protection disclose certain environmental data, including the name of main pollutants, discharge methods, distribution of discharge ports, concentration of pollutants, and volume of emissions. The new language also encourages companies that are not listed as a key pollution discharge entity to disclose the environmental data required of key pollution discharge entities. The disclosure of such information, according to Fang at the Boao Forum on March 25, 2017, is particularly helpful for investors to determine whether a certain listed company has improved its environmental protection strategies over the years.

Disclosure of Environmental Data in the Context of Green Finance To promote green finance in China, the CSRC also published the Guiding Opinions of the China Securities Regulatory Commission on Supporting the Development of Green Bonds ("Guiding Opinion") in March 2017. The Guiding Opinion details specific requirements applicable to an issuer of green bonds and highlights the disclosure obligations that arise when applying for an issuance of green bonds. For instance, the Guiding Opinion requires the green bond prospectus to disclose the category of the green industry project to be invested in and intended use and management of capital raised, as well as a commitment letter regarding the use of capital. Additionally, the Guiding Opinion requires that during the existence of a green bond, the issuer must disclose the use of capital, progress of the green industry project, and environmental benefits.

The disclosure obligations outlined in the Guiding Opinion follow other recent disclosure developments in the green financing space in China. In August 2016, the People's Bank of China, along with six other government agencies and commissions, including the CSRC, released a set of Guidelines for Establishing the Green Financial System. Similar to the disclosure obligations outlined in the Guiding Opinion, the guidelines suggested a gradual establishment and improvement of a mandatory environmental information disclosure system for listed enterprises and bond issuers. For listed companies that are on the black list of major polluters compiled by the Ministry of Environmental Protection, the guidelines noted that there should be strict implementation of the disclosure requirements for information on emission of major pollutants, construction and operation of environmental protection facilities, and major environmental incidents. Some of the recommendations of the August 2016 interagency release have been reflected in the 2016 additions to the Disclosure Standard and will likely influence the expected carbon emission and pollution disclosures for all listed companies.