ESG Shareholder Proposals: Practical Guidance From Proxy, Legal, IR And Consulting Perspectives – Shareholders

Nelita Collins

On January 6, Katten Capital Markets partner Farzad Damania,
along with Zally Ahmadi of D.F. King, George Lu of ADEC ESG
Solutions and Ari Frankel of Solebury Trout, presented a program
sharing their insights into the trends in ESG shareholder proposals
and the steps companies should take to meet investor expectations.
They noted that shareholder proposals received a record level of
support, reaching 36.3 percent across all ESG categories. The panel
measured the ESG trends using data for companies within the Russell
3000 Index during the 2021 proxy season. A number of trends and
developments in ESG are highlighted below.

Support for Environmental Proposals Booms

There were 105 shareholder proposals on environmental reform in
2021, and nearly half of all environmental proposals that made it
to the ballot passed (compared to zero in 2019). The top
environmental proposal submitted was a request for climate change
reporting, and support increased from 35 percent in 2020 to 52
percent in 2021. Additionally, 80 percent of greenhouse gas (GHG)
emissions-related proposals that made it onto ballots received
majority support in 2021.

Say on Climate: In 2021, a “say on
climate” initiative emerged. Such proposals request an
annual advisory vote on a company’s climate-related plans.
Proponents have indicated that they plan to file several similar
proposals for the 2022 proxy season. However, such “say on
climate” proposals had significantly less success than
other environmental proposals in 2021. Four “say on
climate” proposals were voted on but did not pass, with
three receiving 30 percent support and one receiving only 7 percent

Social Proposals Have Strong Presence in Top 10 ESG

In 2021, the number of social proposal submissions nearly
tripled. Of the 258 that were proposed, 133 made it to the ballot.
These social proposals included EEO-1/diversity reporting, board
and management diversity proposals, and racial equity proposals.
Within these three categories, EEO-1/diversity reporting had the
highest number of submissions and received an average level of
support of 55.66 percent in 2021. Notably, pension funds and social
impact investors, including the NYC Comptroller’s Office and
Calvert Research, are continuing with their campaigns in 2022,
demanding various forms of workforce disclosure, including the
publication of EEO-1 reports.

Board and Management Diversity: Board
and management diversity proposals received the highest average
level of support at 61.98 percent in 2021, compared to just 13.3
percent in 2019. Proxy advisory firms and institutional investors
continue to take action and have stated that they expect companies
to provide board diversity disclosures. Some institutional
investors have gone further and now expect companies to disclose
the role diversity plays in their long-term strategy, their
diversity goals and progress toward those goals.

Governance Proposals Continue to Have a Strong Presence

Nearly 80 percent of governance proposals went to a vote in the
2021 proxy season. The most common governance proposal continues to
be the written consent proposals and support for such proposals
increased from 35 percent in 2020 to 41 percent in 2021. Eight
written consent proposals passed in 2021 compared to just two in
each of 2020 and 2019. Average support for proposals requesting the
elimination of supermajority provisions also increased to almost 90
percent. During the 2021 proxy season, 18 proposals to eliminate
the supermajority voting provision made it onto ballots and
ultimately received over a majority of shareholder support.
Notably, in 2021, there was a decrease in the number of proposals
to lower the ownership threshold to call a special meeting but an
increase in the number of proposals to require a majority vote for
the election of directors. The average support for these proposals
was 35.05 percent and 51.63 percent, respectively.

SEC Developments on Shareholder Proposals

Background: Rule 14a-8 of the Securities
Exchange Act provides the procedure whereby a shareholder can
propose a matter to be voted on at a company’s shareholder
meeting. Under Rule 14a-8, a public company must include a
shareholder’s proposal in its proxy statement if the
shareholder proposed the matter using proper procedure and the
company lacks a substantive basis to exclude such proposal.

SLB 14L: On November 3, 2021, the staff of the
Division of Corporation Finance of the SEC (Staff) published Staff Legal Bulletin No. 14L (SLB 14L), which
limits the ability of public companies to exclude shareholder
proposals relating to social issues from proxy statements and
provides clarification regarding the procedural requirements
applicable to shareholder proposals. SLB 14L rescinds the
interpretive positions taken in Staff Legal Bulletin Nos.14I
(2017), 14J (2018) and 14K (2019). By rescinding the SEC’s
prior positions, SLB 14L creates a tougher threshold for no-action
relief, and will likely result in more E&S-styled shareholder
proposals. The Staff stated in SLB 14L that it will decide whether
to allow a proposal based on the social policy significance of the
issue in the shareholder proposal, rather than the significance of
the policy issue to the subject company. Accordingly, companies no
longer need to include a board analysis under the economic
relevance or ordinary business exclusions.

Human Capital Management: SLB 14L provides new
guidance stating that proposals raising human capital management
issues with a broad societal impact, such as employment
discrimination, may no longer be excludable on economic relevance
and ordinary business grounds. With the Staff reducing avenues to
exclude shareholder proposals, more companies are likely to
consider other grounds for excluding shareholder proposals,
including substantial implementation and negotiation with
shareholder proponents in their efforts to convince the proponents
to withdraw their proposals.

Climate Change Initiatives: SLB 14L also
specifically provides that when a shareholder proposal requests
that a company adopt targets or timelines for climate change
initiatives, the Staff may not grant no-action relief on the basis
of ordinary business, so long as the proposals afford discretion to
management as to how to achieve such goals. As SLB 14L clearly
states the Staff’s position on climate-related proposals, it is
expected to result in more proposals, including, for example,
adoption of science-based targets and net zero commitments.

Mechanics of Climate Proposals

Task Force on Climate-Related Financial Disclosures
(TCFD) and Risk Assessment:
The TCFD was created in 2015
by the Financial Stability Board to develop consistent
climate-related financial risk disclosures. The number of companies
that support TCFD has rapidly increased since 2017. In 2017, fewer
than 500 companies supported TCFD but that number has nearly
doubled each year since. As of April 27, there are 3,300 companies
supporting TCFD in 93 jurisdictions. The TCFD provides
recommendations for companies aiming to improve their
climate-related financial risk disclosures. First, the TCFD
recommends that a company establish board oversight and management
of climate-related risks such as physical and transitional risks.
Physical risks arise from exposure of company-owned facilities,
supply chains and capital assets to sea-level rise, flooding, heat
wave, and the like. Transitional risks, on the other hand, are the
risks inherent in changing strategies and policies in an effort to
reduce reliance on carbon. Second, a company should identify
climate-related risks and opportunities by conducting scenario
analyses to evaluate mechanisms available to address
climate-related risks and opportunities, the magnitude and
likelihood of climate-related risks impacting the company, and the
resilience of the company against climate-related risks. Third, a
company should manage climate-related risk by establishing an
enterprise risk management program. A company should use metrics to
assess climate-related risks and opportunities and demonstrate
performance with an emphasis on GHG data management. A company
should integrate such metrics into the company’s enterprise
risk management program. Finally, a company should establish
internal education and engagement related to climate change and ESG

Science Based Targets (SBT): When establishing
a low-carbon transition plan, companies should consider guidance
and frameworks from the Science-Based Targets initiative (SBTi) and
from GHG Protocol. SBTi is an organization committed to reducing
emissions and offers resources and guidance for companies
establishing a science-based low-carbon transition plan. GHG
Protocol partners with the World Resources Institute and the World
Business Council for Sustainable Development to establish global
standardized frameworks to measure and manage greenhouse gas. One
consideration for companies establishing a low-carbon transition
plan is the plan’s boundary, under which targets must cover
company-wide Scope 1 and Scope 2 emissions and all relevant GHGs as
required in GHG Protocol’s international standards. Companies
also must consider the timeframe, which must cover a minimum of
five years and a maximum of 15 years from the date of announcement
of the target. Moving too far beyond 15 years can make planning for
future events impractical. For many companies, the minimum target
will be consistent with the level of decarbonization required to
keep global temperature increase to 1.5°C compared to
pre-industrial temperatures. Companies should set ambitious Scope 3
targets, which is required by SBTi when Scope 3 emissions
constitute over 40 percent of a given company’s overall
emissions. Scope 3 emissions fall into 15 distinct categories, but
not all of these categories are inherently relevant to any one
company. Therefore, companies should screen Scope 3 categories for
relevancy. Once companies target the most relevant Scope 3
emissions, companies should inform their investors on how they will
act to reduce Scope 3 emissions. Companies should make mitigation
and reducing Scope 3 emissions a priority, but Scope 3 emissions
are not in a company’s direct control, so setting appropriate
investor expectations is important. Finally, companies should
disclose company-wide GHG emissions inventory on an annual basis as
part of the plan.

Combination of TCFD and Science-Based Targets:
Companies should consider risk and opportunities throughout
operations (GHG inventory, TCFD/ERM analysis). Prioritization of
projects and capital investments (technologies, energy efficiency,
and renewables) is vital for reducing emissions and meeting
targets. Companies should combine TCFD and SBT results to identify
key risk and opportunity areas. Additionally, companies should
convene or create an ESG steering committee for a multidisciplinary
approach and develop an internal understanding and public-facing
narrative of the business case for a low-carbon transition plan.
The effect of combining TCFD and SBT results is complementary, as
companies that follow TCFD procedures will be in a better position
to meet their SBTs. Conversely, companies that set SBTs in
compliance with SBTi and GHG Protocol standards will be in a strong
position to disclose the information required by the TCFD.

Proactive Engagement of Shareholders

Create a Narrative: There is an opportunity to
create comradery within an ESG-focused company, including with
employees and suppliers, and to satisfy investor expectations. Part
of creating a narrative is determining what is important to a
company and creating internal engagement to bring a company
together around that focus point. Once a company determines what is
material to its ESG plan, it should establish a narrative and
communicate that narrative to shareholders. Generally, if a
shareholder proposes an ESG initiative focusing on a particular
issue, that issue is probably material to the company.

Be Proactive: Many shareholders are willing to
side with companies once they see those companies making genuine
efforts to address their concerns. Shareholders are more
sophisticated than ever before and are aware of the various nuances
for proposals and for meeting goals. While there is an uptick in
environmental proposals right now, shareholders are not currently
expecting full programs to be in place. If a shareholder proposal
is submitted before a company has an ESG program in place, the
company should focus on communicating its sustainability journey,
which typically includes several steps: collecting data, analyzing
the data, creating a plan, implementing the plan, tracking and
automating the company’s progress and reporting back to
shareholders. A company should consider the steps it wants to take
and when, but it should try not to overcommit. Companies that have
engaged with shareholders and clearly communicated their plans have
had some success in convincing proponents to withdraw their
proposals. However, even companies with strong ESG programs can
encounter unexpected shareholder proposals. These situations
usually arise when there is not enough proactive engagement with
the shareholder base. Some companies have been successful in
getting these proposals withdrawn by providing key information to
the proponent. Companies that have proactively engaged with
shareholders have had more success in avoiding proposals, having
proposals withdrawn and defeating proposals that have gone to a

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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