SEC Stuff: Inside the Climate Disclosure War

Breaking down the SEC’s big moves on climate transparency, universal proxy cards and shareholder proposals.

When’s the last time you read a terms and conditions agreement? No judgment. Keeping up with rules is hard — especially in finance. People get paid to know that stuff. But retail investors don’t have legal teams, so it’s easy to miss when the SEC (the federal agency that oversees financial markets) creates regulations that impact our wallets and shareholder rights.

SEC Chairman Gary Gensler is putting in work. In the Biden appointee’s first 15 months on the job, the SEC proposed 23 new sets of rules, nearly as many as the previous three SEC regimes combined. Gensler is tackling environmental concerns, corporate transparency and investor protections way more aggressively than his predecessors, ruffling Wall Street’s feathers along the way. Lots of it impacts retailers.

To keep up with the action, and translate it in (hopefully) non-boring terms, we bring you SEC Stuff, a semi-regular column tracking the hottest watchdog moves that actually serve regular joes and janes.

🌱 The Battle Over Climate Disclosure

The biggest proposal of the Gensler era is a set of rules requiring public companies to report on info relating to climate change, finally. Firms would disclose, among other things, how they oversee climate risk; how they assess and measure this risk; the impact of climate risk on their short-, medium- and long-term business and strategy; and most significantly, hard data on Scope 1 and 2 emissions (from direct company activity and energy purchases) as well as Scope 3 emissions (from customers and suppliers in a company’s value chain).

Public comment on the proposal ended in June and got unsurprisingly heated; it’s the agency’s most demanding new disclosure requirement for public companies in decades, after all. Compliance will cost money, around $530,000 annually for big companies, according to the SEC. Critics have objected that increased disclosure might increase their liability, while energy companies in particular have complained about Scope 3 requirements. Also relevant, a recent Supreme Court decision striking down the EPA’s right to limit greenhouse gas emissions may factor into how legal challenges to the SEC’s rule play out, although Congress’ recent climate law strengthens the SEC’s argument.

But a legal battle was always expected. The proposal is a massive move, to mandate and standardize transparency about how corporations are addressing a generational crisis. Retail investors want this and shareholder proposals are demanding it. Similar requirements are happening in Europe. At least one organization of transition-minded funds and shareholder rights groups argues the SEC’s rule still isn’t strong enough. Whatever the regulation’s final form, increased disclosure can catalyze more sustainable business in practice, and that’s a solid goal. The new rule is expected to be adopted in December, so stay tuned.

📩 Welcome, Universal Proxy Cards

When the time comes for a company in your portfolio to host its annual shareholder meeting, chances are you’re not booking a flight to attend in person. Companies allow people to vote remotely on things that investors have input on at these meetings, like executive compensation, so staying home isn’t a huge deal. But until this month, voting remotely was different in one key way: director elections.

How it used to work is that companies sent shareholders a “proxy card” featuring their board nominations, and if anyone else, like an activist hedge fund trying to hasten ExxonMobil’s green transition, wanted to nominate opposing candidates with different goals, they would send shareholders a separate proxy card with their own recommended slate. In-person attendees could cast votes on individual nominees, but remote shareholders could only vote on one of the slates in its entirety.

Under a new SEC rule, companies must send shareholders “universal proxy cards” that include all candidates, and remote voters can select whomever they want. Any shareholder can nominate a candidate, too. It will be easier for retailers to learn about activist nominees and for individual challengers to gain voter support. Expect increased pressure on controversial incumbents (like, say, Activision Blizzard’s creepy CEO Bobby Kotick) and more contested board elections overall.

🙅 Stop Prop Blocking

Readers may know that we at Troop nerd out over shareholder resolutions. (It’s kind of our thing.) These are proposals that shareholders can submit to be voted on at a company’s annual shareholder meeting. They’re the most accessible way for regular investors to try to exert influence over a company’s operations — and by extension the ways in which a company impacts the world — and movement around them is booming. The first half of the year saw a record number of proposals compared to last year’s previous record number.

This increase in activism comes at a time when boardrooms are likewise working overtime to prevent shareholder proposals from reaching a vote. Companies can ask the SEC permission to exclude proposals for several reasons; last proxy season they submitted 266 such requests. A new proposed SEC rule would make it harder for companies to block these proposals, by narrowing three of the bases on which exclusion requests can be approved. It’s all a bit technical, so let’s break it down.

Companies can block a proposal by claiming, among other things, “substantial implementation,” “duplication,” or “resubmission.” In other words, they can argue:

• They’ve already addressed a proposal’s objectives
• A proposal is too similar to another proposal on the same ballot
• A proposal is too similar to another proposal from a previous year

But often their arguments are permissibly flimsy. The new rule would make it harder for companies to claim a proposal is overly similar or already implemented, which will result in more opportunities to vote on demands. Public comment on the proposal ended on September 12.

✌️ We’ll SEC you next time.