A new ruling
by the Securities and Exchange Commission (SEC)
holds far-reaching implications for investor efforts to promote
proactive corporate responses to climate change. Every spring in annual meetings, shareholders
vote on hundreds of proposals asking
corporations to take more proactive action to consider and reduce impacts on climate change – to shift toward renewable energy sources, to
reduce greenhouse gas emissions, and to consider risks to their financial
future associated with an overemphasis on fossil fuels.
The proposals
are filed by public pension funds, religious institutions and socially
responsible investors holding stock in the companies. However, a massive portion of the vote for or against
the proposals is controlled by large mutual funds which often vote reflexively against shareholder
proposals, with limited accountability
to explain their rationale.
In a letter issued November 24, 2015, SEC
Staff held that a proposal seeking to hold a mutual fund accountable for its
poor voting record on climate proposals is not excludable from the proxy
statement. The proposal at Franklin Resources Inc.( doing business as Franklin
Templeton Investments) was submitted by Zevin Asset Management LLC on behalf of its
clients.[1] In the proposal which will now appear on the proxy in the spring:
Shareowners request that the Board
of Directors issue a climate change report to shareholders by September 2016,
…[to] assess any incongruities between the proxy voting practices of the
company and its subsidiaries within the last year, and any of the company's
policy positions regarding climate change.
This assessment
should list all instances of votes cast that appeared to be inconsistent with
the company's climate change positions, and explanations of the incongruency.
The report should also discuss policy measures that the company can adopt to
help enhance congruency between its climate policies and proxy voting.
Perhaps most notably, the Company
argued to the SEC in a request for a no action letter (that would allow the
company to exclude the proposal) that its existing legally required [2]disclosures
of its proxy voting records and
guidelines “substantially
implement” the request of the proposal.
Those disclosures reveal that the company’s voting record on climate change is
near the bottom of the pack among mutual funds (See chart, courtesy of CERES). The guidelines show
that its subsidiaries have a great deal of flexibility to decide whether to vote for or against
climate proposals.
The proponent argued that since the company says it takes a “long-term”
view of investments and has endorsed the
UN Principles for Responsible Investment, this posture of environmental
leadership seemed inconsistent with its climate voting record. Shareholders are entitled to ask the company for a better explanation of this seeming
inconsistency, and also to encourage the company to do better.
The Company argued that the
subject matter of the proposal was proxy voting (excludable based on prior
decisions as relating to ordinary business), while the proponents successfully
asserted that the proposal focused on a
transcendent policy issue of climate change, which is not excludable. The
decision was a first opportunity for the
SEC to apply its
newly minted Staff Legal Bulletin 14H (CH) which held that if the focus is a significant
policy issue, it’s not excludable even
if the proposal touches on “nitty gritty” business practices.[3]
The Company also argued that as a parent company, Franklin Resources
Inc., lacked the power to evaluate or influence proxy voting of its
subsidiaries. Subsidiaries have a fiduciary duty to evaluate proxy proposals on
behalf of their clients without “undue influence” by a parent company. However,
proponents asserted that the proposal left leeway for the parent company to
provide legitimate assistance to the subsidiaries, for instance risk assessment
resources, without crossing a line into improper
influence.
Download
the full text of the SEC decision and correspondence from the company and the
proponent.
*Disclosure: The author represented the
proponents in defending the proposal before the SEC.
[1]
The Proposal was also co-filed by First Affirmative
Financial Network, LLC ("FAFN"), on behalf of its client, Waterglass,
LLC, and Friends Fiduciary Corporation ("FFC”).
[3] http://www.sec.gov/interps/legal/cfslb14h.htm “[T]he Commission has stated that proposals
focusing on a significant policy issue are not excludable under the ordinary
business exception “because the proposals would transcend the day-to-day
business matters and raise policy issues so significant that it would be
appropriate for a shareholder vote.” Thus, a proposal may transcend a company’s
ordinary business operations even if the significant policy issue relates to
the “nitty-gritty of its core business.” Therefore, proposals that focus on a
significant policy issue transcend a company’s ordinary business operations and
are not excludable under Rule 14a-8(i)(7).”
