by Steven A. Rosenblum, Adam O. Emmerich, David A. Katz, Andrew J. Nussbaum, Karessa L. Cain, John L. Robinson, Elina Tetelbaum and Allison Rabkin Golden
Top left to right: Steven A. Rosenblum, Adam O. Emmerich, David A. Katz and Andrew J. Nussbaum. Bottom left to right: Karessa L. Cain, John L. Robinson, Elina Tetelbaum and Allison Rabkin Golden (Photos courtesy of Wachtell, Lipton, Rosen & Katz).
Recently, there’s been a series of developments where regulators, major index funds, and proxy advisors took steps to diminish the role of environmental, social and governance (ESG) initiatives at public companies.
New SEC Guidance on Rule 14a-8
On Wednesday, the SEC’s Division of Corporation Finance released Staff Legal Bulletin No. 14M, updating SEC guidance with respect to shareholder proposals under Rule 14a-8 and replacing its prior Bulletin No. 14L issued in 2021. The prior version of the bulletin laid the foundation for shareholders to bring a wider range of proposals, especially on ESG issues, by making it more difficult for companies to exclude such proposals from their proxy statements. This galvanized a wave of smaller, often impact-oriented shareholder activists filing targeted shareholder proposals under Rule 14a-8. The 2024 proxy season, for example, saw nearly 750 shareholder proposals submitted on ESG matters, including more than 440 shareholder proposals on environmental and social issues, compared to fewer than 500 ESG proposals in 2020.
Under the revised SEC guidelines, proponents can continue to “raise social or ethical issues in [their] arguments” in shareholder proposals, but must “tie those matters to a significant effect on the company’s business.” The Division’s analysis of such proposals will be informed by a quantitative framework, focusing on whether they impact operations that account for at least 5% of total assets, net earnings and gross sales. The SEC also largely reinstated guidelines issued in 2018 and 2019 under President Trump’s first term regarding what constitutes micromanagement, including that prescribing specific timelines or methods for addressing an issue or implementing a complex policy may be viewed as unduly micromanaging the company.
New SEC Guidance on Schedule 13G
This week the SEC Staff also issued a new Compliance and Disclosure Interpretation (C&DI) and revised an existing C&DI, providing guidance on the types of shareholder engagement that can lead to loss of Schedule 13G eligibility. The new C&DI is not focused expressly on ESG issues, but makes clear that Schedule 13G may be unavailable to a shareholder who recommends that an issuer remove its staggered board, eliminate its poison pill, or undertake a particular ESG-related action, if the shareholder explicitly or implicitly conditions its support of the issuer’s director nominees on the issuer’s adoption of that recommendation. As governance teams at institutional investors evaluate their voting policies and engagement practices for compliance with this new guidance, companies should expect to see changes to their proxy season and off-season engagement sessions, including potentially less transparency from shareholders.
Elimination of ESG from Proxy Voting Guidelines
Institutional shareholders and proxy advisory services are taking note of the changing legal and regulatory landscape and altering their voting recommendations accordingly. For example, on Tuesday, citing President Trump’s Executive Orders on diversity, equity, and inclusion, ISS announced it would “indefinitely halt” consideration of gender, racial, and ethnic diversity of US company boards when making its voting recommendations. BlackRock and Vanguard have each made changes to proxy voting guidelines removing recommendations tied to boards’ diversity in terms of gender, race, and ethnicity. These actions follow the December invalidation of Nasdaq’s board diversity-related rules that had been approved by the SEC in 2021.
Cross-Border ESG Considerations
This scrutiny and reassessment of ESG in corporate decision-making and disclosures has not been limited to the US regime. On Wednesday, President Trump’s Commerce Secretary nominee Howard Lutnick asserted that the EU’s Corporate Sustainability Due Diligence Directive is overly burdensome for American businesses. The EU Directive will mandate specific disclosures by American companies with European operations. Mr. Lutnick noted that the US government would consider “all available trade tools” to prevent EU ESG regulations from harming the American economy, raising the possibility of tariffs targeting the EU’s ESG rules.
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These developments are likely to continue the de-emphasis on ESG at public companies and by investors, and narrow the ways in which investors are able or willing to exercise their influence on ESG matters—whether through voting or engagement. Companies are advised to maintain robust avenues of engagement with shareholders, but should expect that shareholders may be more limited in the ways they are willing to express feedback going forward.
Steven A. Rosenblum, Adam O. Emmerich, David A. Katz, Andrew J. Nussbaum, Karessa L. Cain, John L. Robinson and Elina Tetelbaum are Partners, and Allison Rabkin Golden is an Associate at Wachtell, Lipton, Rosen & Katz. This post first appeared as a client memo for the firm.
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