In this paper, BlackRock Investment Stewardship provides a preview of its perspective on climate-related shareholder proposals up for votes during the current proxy season. In 2021, BIS “supported 47% of environmental and social shareholder proposals,” but, BIS observes, the results in 2022 are expected to fall well short of that level. Why is that? Because, in the view of BIS, “many of the climate-related shareholder proposals coming to a vote in 2022 are more prescriptive or constraining on companies and may not promote long-term shareholder value.” In addition, BIS advises that its vote determinations will also be affected by the current geo-political context—particularly the impact on climate-related proposals of the Russian invasion of Ukraine —as well as “energy market pressures and the implications of both for inflation.” BlackRock is reportedly the largest asset manager worldwide, overseeing about $10 trillion in assets. But other asset managers are not all that far behind. Will they follow the same path?
As framed by BIS, climate-related shareholder proposals submitted in 2021 focused on “material business risks” or requested reports providing information that would be useful to investors to help them assess a company’s “ability to generate durable long-term value.” Because BIS considered these proposals “to be consistent with long-term value creation” and not undue constraints on management’s strategic efforts to create shareholder value, BIS supported 47% of environmental and social shareholder proposals (81 of 172) in 2021.
However, BIS views many of the proposals submitted in 2022 to be “more prescriptive and constraining on management than those on which [BIS] voted in the past year,” and less likely to promote long-term shareholder value. Why more prescriptive this year? BIS apparently attributes the change to Staff Legal Bulletin 14L, new SEC staff guidance on shareholder proposals, which BIS maintains “broadened the scope of permissible proposals that address ‘significant social policy issues,’ [resulting] in a marked increase in environmental and social shareholder proposals of varying quality coming to a vote.”
Staff Legal Bulletin 14L, issued in November 2021, outlined Corp Fin’s most recent interpretations of Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception to the shareholder proposal rule. At the same time, the SLB also rescinded SLBs 14I, 14J and 14K, following a “review of staff experience applying the guidance in them.” The effect of the new SLB was to reverse some of the interpretations of “significant social policy,” “micromanagement” and “economic relevance” imposed under the rescinded SLBs, making exclusion of shareholder proposals—particularly proposals related to environmental and social issues—more of a challenge for companies. Needless to say, climate activists were pleased that their proposals were likely to find a more receptive audience at the SEC.
Generally, as described in a 1998 release, proposals may be excluded under Rule 14a-8(i)(7) if the proposals raise matters that are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight”—unless, that is, the “significant policy exception” applies. That exception precludes exclusion of the proposal if the proposal “would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.” Under new SLB 14L, Corp Fin advises that the staff will “realign its approach” with the standard originally expressed in 1976, and reaffirmed in 1998, which looked at whether the proposal raised significant social policy issues. According to the new SLB, the
“exception is essential for preserving shareholders’ right to bring important issues before other shareholders by means of the company’s proxy statement, while also recognizing the board’s authority over most day-to-day business matters. For these reasons, staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.” [Emphasis added.]
The second consideration that forms the basis of the “ordinary business” exclusion is, as described in the 1998 release, whether the proposal seeks to “micromanage” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” Under this aspect of the exclusion, the staff does not look at the subject matter, but rather only at the manner in which a proposal seeks to address the subject matter, i.e., how prescriptive is the proposal? In new SLB 14L, the staff indicates that, after further consideration, it has now determined that the staff’s recent application of the micromanagement concept in SLB 14J and SLB 14K “expanded the concept of micromanagement beyond the Commission’s policy directives. Specifically, we believe that the rescinded guidance may have been taken to mean that any limit on company or board discretion constitutes micromanagement.” Under new SLB 14L, the staff
“will take a measured approach to evaluating companies’ micromanagement arguments—recognizing that proposals seeking detail or seeking to promote timeframes or methods do not per se constitute micromanagement. Instead, we will focus on the level of granularity sought in the proposal and whether and to what extent it inappropriately limits discretion of the board or management. We would expect the level of detail included in a shareholder proposal to be consistent with that needed to enable investors to assess an issuer’s impacts, progress towards goals, risks or other strategic matters appropriate for shareholder input.”
(See this PubCo post.)
BIS advises that it is more likely to support shareholder proposals that ask companies to provide information that helps BIS “understand the material risks and opportunities they face, especially where this information is additive given the company’s existing disclosures,” such as climate action plans that describe the impact of the energy transition on long-term business models and performance, including scope 1 and 2 GHG emissions and related reduction targets. BIS may also favor climate-related proposals asking companies to provide comprehensive information on how corporate political activities support long-term strategy. BIS finds instructive discussions of the potential impact of climate risks and opportunities on the business and how the business is addressing these risks and opportunities, such as how the business model aligns with various climate scenarios (e.g., keeping temperature rises to well below 2°C or moving toward net zero emissions by 2050). BIS also want to understand how climate risks and opportunities are integrated into governance, strategy and risk management—notably, all components of the TCFD framework. In addition to scopes 1 and 2 GHG emissions disclosures, BIS appreciates disclosure about “how companies are considering scope 3 GHG emissions,” recognizing that this disclosure will become less burdensome and more informative once there is a “widely accepted approach to consistently measure and disclose scope 3.”
However, BIS tends to disfavor proposals that micromanage, are unduly prescriptive and constrain board or management decision-making, seek to change strategy or business model or focus on matters that are immaterial to delivering long-term shareholder value. Some of the types of more prescriptive proposals that “warrant special attention” include:
- “Ceasing providing finance to traditional energy companies
- Decommissioning the assets of traditional energy companies
- Requiring alignment of bank and energy company business models solely to a specific 1.5⁰C scenario
- Changing articles of association or corporate charters to mandate climate risk reporting or voting
- Setting absolute scope 3 GHG emissions reduction targets
- Directing climate lobbying activities, policy positions or political spending”
BIS also observes that it is not alone in this view of more prescriptive climate-related proposals; “proxy advisors ISS and Glass Lewis have been recommending that shareholders not support overly prescriptive or constraining proposals,” and these proposals “seem to be attracting lower levels of investor support” generally. The volume of these prescriptive shareholder proposals submitted for votes this proxy season means that BIS is “likely to support proportionately fewer this proxy season than in 2021, as we do not consider them to be consistent with our clients’ long-term financial interests.”
Notably, BIS also indicates that it is “unlikely to support the re-election of directors considered responsible for climate risk oversight when corporate disclosures do not sufficiently enable investors to assess risk through the TCFD framework—including in relation to governance, strategy, and risk management—or when companies have not provided scope 1 and 2 GHG emissions disclosures and meaningful short-medium-, and long-term targets.”
In addition, BIS observes that, in making vote determinations about climate-related shareholder proposals, it is “crucial” to “take into consideration the context in which companies are operating their businesses.” That includes the geo-political context:
“Importantly, in the context of voting on shareholder proposals regarding climate-related risk, companies face particular challenges in the near term, given under-investment in both traditional and renewable energy, exacerbated by current geo-political tensions. In recent research, BlackRock noted that reducing reliance on Russian energy in the wake of the invasion of Ukraine will impact the net zero transition that is already underway. Net exporters of energy are likely to be required to increase production, while net importers are expected to accelerate efforts to increase the proportion of renewables in their energy mix. This set of dynamics will—at least in the short- and medium-term—drive a need for companies that invest in both traditional and renewable sources of energy and we believe the companies that do that effectively will produce attractive returns for our clients.”
In addition, European and other companies are submitting for shareholder votes management proposals to approve their companies’ climate action plans. Where similar shareholder proposals are on the ballot at the same time, BlackRock is “increasingly inclined to support the management proposal, as the company is demonstrating commitment to act by setting out their business plan for how they intend to deliver long-term financial performance through the energy transition.” Hat tip to thecorporatecounsel.net