Could corporate lobbying pose a significant threat to responsible investment?

Over the past few years, momentum has been building behind responsible investment and the drive for a more sustainable global financial system. Increasingly, investors are incorporating environmental, social and governance (ESG) factors and climate impacts into their decision making.

In Europe, the EU are advancing policies to make the financial system more sustainable via the EU action plan on sustainable finance, while in the UK, the new Stewardship Code places systemic risks and collaboration with other investors and stakeholders at the heart of good stewardship. In the world’s 50 largest economies, the PRI finds that there have now been over 730 hard and soft law policy revisions, across some 500 policy instruments, which support, encourage or require investors to consider long-term value drivers, including ESG factors.

However, as responsible investment makes its way further into the mainstream there are powerful countervailing forces also coming to the fore. These come in the guise of corporate lobby groups. In the US, they seek to win the day on climate action with well-funded tactics of delay, obfuscation and denial.

The new battleground is pressuring corporate regulators to undermine long-standing shareholder rights and weaken investor voices. Nowhere is this more apparent than in the recent Securities and Exchange Commission’s (SEC) proposals which represent a substantial setback for responsible investment, something I have tackled in a previous blog. In an attack on basic good governance, the proposed rules create new roadblocks for investors seeking to use shareholder proposals and voting processes to signpost critical ESG issues with corporate leaders.

It is no coincidence that some of the business groups identified by UK NGO Influence Map as the most active in negative climate lobbying have also been amongst the strongest voices urging the SEC to clamp down on shareholder rights.

In summary the SEC proposals would:

• Increase the dollar value of the stock an investor must hold in order to be eligible to submit a proposal.
• Dramatically increase the portion of the vote a proposal must receive to be resubmitted in subsequent years. This would have the effect of cutting off discussion of emerging issues before investors have the chance to analyse them and integrate the latest thinking into voting behaviour.
• Undermine investors’ access to independent advice on matters brought to a vote at companies’ AGMs by requiring proxy advisory firms to allow companies to review and comment on voting recommendations before investors see them.

In a statement following the announcement, SEC Commissioner Rob Jackson commented: “Holding executives accountable for the way they run America’s corporations is difficult and expensive, and investors lack the time and money to do it. That’s why investors use proxy advisors, who make recommendations about how shareholders should vote. Today’s proposal imposes a tax on firms who recommend that shareholders vote in a way that executives don’t like.”

The United States is the largest financial market in the world, with investors around the globe holding direct and indirect stakes in myriad US companies. The SEC proposals, if adopted, will have significant international impacts.

The proposed rules stand in direct contradiction of the SEC’s stated purpose, to protect investors. Ultimately, they would put more power into the hands of CEOs and corporate boards, weaken shareholder protection, especially for smaller investors and diminish basic transparency and corporate accountability. They are in effect a form of corporate voter suppression to disenfranchise investors who seek to actively engage with companies on ESG matters, climate risks, sustainability and long-term value creation.

The proposed rules would put more power into the hands of CEOs and corporate boards, weaken shareholder protection, especially for smaller investors and diminish basic transparency and corporate accountability

So, what happens next? The Commission will solicit public comments for 60 days before voting to officially increase the re-submission thresholds and eligibility requirements. Commissioners will then have to hold a second vote for the rules to take effect.

This means that now is the time for investors to make their voices heard. Negative corporate lobbying has long been identified as an obstacle to good governance. The SEC vote presents a challenge for global investors in protecting shareholder and beneficiary interests.

Responsible investment has made great strides everywhere. Shareholder engagement and voting has been critical in improving corporate governance and elevating ESG issues up the agenda in US companies. I encourage investors in the coming weeks to stand together, weigh in with the Commission and demand that it puts aside these irresponsible and retrograde proposals.

This article was originally published in FT Adviser.