New Climate Ruling by SEC Strengthens Shareholder Advocacy

Sanford Lewis, Esq.* 

 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.

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[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”).

[2] Form N-PX

[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).”