By:  Maria Kotsiras, DJCL Staff Member at Widener University Delaware Law School.

A new year initiates a period of annual meetings throughout the corporate world. In recent years, investors have pressed companies to disclose their efforts to address and further prevent climate change.[1] Climate change is one of the most important policy issues facing the world today. Scientific consensus confirms this issue affects everyone globally because human activities have the largest influence on climate change. This occurs through the release of carbon dioxide and greenhouse gases which leads to droughts, floods, rising sea levels, and heat waves.[2] As climate change progresses, the frequency of extreme weather events will increase. Therefore, climate-change related incidents could threaten the economic well-being of corporations and their investment value.[3]

Companies should expect an increase in shareholder activism on climate change in 2020.[4] The nature of the potential business risks that affect climate change and their environmental impact may naturally be connected to a board of directors’ fiduciary responsibilities.[5] The failure to provide protection for the corporation in the face of potential climate change-dangers could subject the corporation to massive financial losses in the long run.[6] The fiduciary duty of a board of directors may include obtaining insurance against the risks related to climate-related incidents.[7] Because the protection from effects of environmental changes caused by corporations could fall within the fiduciary duties of a board of directors, a board member’s decision that effects the environment may result in a shareholder cause of action.[8]Shareholder resolutions have already been filed asking companies to disclose data on their climate change-related lobbying, to set greenhouse gas emission reduction goals, to publish sustainability reports, and to pursue energy efficiency, arguing that climate change will affect a company’s market value.[9]

Although shareholder proposals are non-binding, the Securities and Exchange Commission (“SEC”) is working towards hardening rules governing their submissions.[10]  In November 2019, the SEC proposed amendments constricting the resolution process.[11] The SEC chairman explained that the proposed changes would benefit small investors concerned with proxy firms that were promoting resolutions based on their political agendas, rather than on investor profits.[12] Proposed changes by the SEC include raising the amount of stock required to file resolutions to amount to around $25,000 and investors would no longer be allowed to combine their holdings in order to meet the threshold.[13]  The threshold percentage of support allowing resolutions to be resubmitted in subsequent years could also rise.[14]  Additionally, proposed changes may also require proxy advisory firms to share their recommendations with corporate management prior to sharing them with the shareholders.[15] The SEC is accepting public comment on the proposed rule changes through early February and will then take a final vote to finalize the new rules.[16]

Resolutions are an important part of shareholder engagement and are most often related to environmental, social, and governance issues. The resolutions serve an important purpose, even if they are later found unsuccessful. Shareholders may begin to sue corporations regarding their proposals. In December of 2019, a NorthWestern Energy shareholder sued the company in a Missouri district court for omitting his proposal from its 2020 proxy materials.[17]Exxon, Chevron, and Devon Energy have all succeeded with the argument that some shareholder proposals infringe on the companies oversight of everyday business operations.[18]  The SEC has previously concluded that forcing the companies to comply with the demands would be micromanaging.[19]  Regardless of the outcome of proposals, shareholder proposals focus on increasing corporate accountability and call attention to issues management and boards should address.[20]

About the Author:  Maria is a second-year Regular Division student and expected to graduate in May, 2021. Maria worked as a law clerk at Marshall Dennehey Warner Coleman & Goggin, P.C. the summer of 2019 in the Professional Liability department. She is continuing to work there this fall. Maria is a recipient of the First State Merit Scholarship. She is an active member of the Delaware Journal of Corpoate Law and the Transactional Law Honors Society.

Footnotes:

[1] Marlene Martin, Can Shareholders Bring the Sun to Climate Change Disclosure – Reflections on Shareholders’ Power to Fix Environmental Problems through Proposals on Climate Change, 14 Wyo. L. Rev. 289, 290 (2014).

[2] Environmental Protection Agency, Climate Change: Basic Information, http://www.epa. gov/climatechangelbasics/.

[3] See id. at 293.

[4] James Fernyhough, Big Investors Won’t Shut Up About Climate Change, Financial Review (Jan. 6, 2020), https://www.afr.com/companies/financial-services/big-investors-won-t-shut-up-about-climate-change-20191213-p53jo5.

[5] Eric K. Risley Jr., Signifying Nothing: Why Shareholder Suits Are Ineffective to Promote Corporate Response to Climate Change,  44 B.C. Envtl. Aff. L. Rev. 391,393 (2017).

[6]  Id.

[7] Id.

[8] Id. at 392.

[9] See Karen Savage, Shareholders Demand More Climate Disclosures As SEC moves to Restrict Them, Climate Liability News(Jan. 10, 2019), https://www.climateliabilitynews.org/2020/01/10/shareholder-resolutions-sec-climate/.

[10] See Id.

[11] Id.

[12] Jay Claton, Statement of Chairman Jay Clayton on Proposals to Enahnce the Accuracy, Trnsaparency and Effectiveness of Or Proxy Voting System, U.S. Securities and Exchange Commission (Nov. 5, 2019). https://www.sec.gov/news/public-statement/statement-clayton-2019-11-05-open-meeting.

[13] Supra note 9.

[14] Supra note 9.

[15] Supra note 9.

[16] Supra note 12.

[17] Martin Kidston, NW Energy Shareholder Sues After Utility Excludes Climate Plan From 2020 Proxy, The Harve Herald (Dec. 30, 2019), https://www.havreherald.com/2019/12/30/nw-energy-shareholder-sues-after-utility-excludes-climate-plan-from-2020-proxy/.

[18] David Hasemyer, Investors Worried About Climate Change Run Into New SEC Roadblocks, Inside Climate News (May 3, 2019), https://insideclimatenews.org/news/01052019/shareholder-resolution-climate-change-sec-challenge-micromanage-trump.

[19] Id.

[20] See supra note 6.