Changes in SEC guidance on stewardship present a new challenge to shareholders

Sustainable investors consider their next steps as new barriers to engagement with companies on ESG issues emerge.

The SEC issued new guidance that will have a profound and immediate impact on shareholder engagement with US companies. Two major changes were published last week.

• The SEC began to require extended disclosures from shareholders with a large equity stake in a company who choose to engage with management on environmental, social, or governance matters.
• The SEC also reduced the scope of permissible shareholder resolutions at company meetings, reversing previous guidance issued in 2021.

It’s clear from some SEC commissioners’ recent remarks that they aim to leave behind the era of the shareholder meeting as a battleground for social and political issues.

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However, taken as a whole, the new guidance from the SEC staff contains elements that are potentially of concern to sustainable investors. For example, it appears to hand power to corporate leaders in areas where they already have considerable discretion. It also appears to reduce opportunities for investors to challenge practices at companies where shareholder rights are perceived to be disadvantaged or to request additional information on financially material sustainability matters.

Disclosure Burden Increases for Shareholders Who Engage With Companies

The SEC is now requiring increased disclosures from shareholders with a large equity stake in a company (5% of any voting class of shares) who are also engaging with the company to improve business practices or reporting. This affects ongoing conversations not only about environmental issues but also conventional corporate governance topics like executive compensation or the process of appointing directors to the board.

This will likely reduce the frequency with which institutional shareholders like asset managers and pension funds engage with companies. The biggest index fund managers are particularly affected by this, given their large shareholdings. The Financial Times reported that BlackRock and Vanguard have already canceled meetings with investee companies out of caution, seeking to avoid triggering additional new requirements.

Return of Restrictions on Permissible Shareholder Resolutions

Previous SEC guidance from 2021 that expanded the scope of permissible shareholder resolutions and led to significant growth in the number of ESG resolutions in recent years has been reversed.

Volume of ESG Shareholder Resolutions

Voted resolutions in the US market.

Now, it is much more likely that the SEC will permit companies to exclude nonbinding shareholder resolutions from the proxy ballot either because they make highly specific “micromanaging” requests of boards or because they deal with ordinary business matters.

The changes also pose something of a logistical challenge for shareholders This year’s proxy-voting cycle began in the second half of 2024, so the SEC is introducing new rules for evaluating shareholder proposals and ongoing engagements that kicked off under different requirements.

Average Support for ESG Shareholder Resolutions

Voted resolutions in the US market.

This applies not only to the social and environmental issues that have frequently divided shareholder opinion but also to more conventional governance issues where the trend in shareholder support is actually rising, as shown in the chart above. That includes issues like petitioning to remove dual-class share structures and staggered board elections that present barriers to exercising shareholder rights.

Overall, the changes signal a new era in the relationship between US companies and those who invest in them. The new guidance appears to hand considerable power back to company boards, which already enjoy wide discretion over how their companies are run. It also erects new barriers to investors who wish to engage on financially material sustainability and governance issues.

It all leaves a lot to think about regarding the next steps for sustainability-focused shareholders who rely on open dialogue with companies to drive change.