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US SEC nixes bids by oil companies to omit climate resolutions

22 March 2021 Amena Saiyid

Small shareholders may now have a say on how oil companies announce their net-zero goals to limit GHG emissions not just from their refinery operations but also from the transportation and delivery of their end products, such as gasoline, plastics, and other petrochemicals.

The US Securities and Exchange Commission (SEC) on 19 March denied separate requests by ConocoPhillips and Occidental Petroleum to omit votes on proposed shareholder resolutions to set specific interim GHG reduction targets in their quest for net-zero carbon emissions.

The SEC said it was "unable to concur" with the companies' requests to deem these resolutions as "ordinary business operations."

The agency's actions mean the two companies must send a statement to all shareholders, which recommends either to vote for the resolution or against it, at least 30 days prior to the vote.

Protecting shareholder rights

The regulator's denials are in line with Acting SEC Chair Allison Herren Lee's decision to improve climate risk disclosure and protect the rights of shareholders to drive corporate decision-making toward sustainable solutions, especially in the environment, social, and governance (ESG) space, which now includes climate change.

In a 15 March speech, Lee announced the SEC would revisit and clarify Rule 14a-8, which lists criteria for submitting and including votes on shareholder resolutions. This rule until now has allowed major companies to exclude votes on shareholder resolutions that sought greater transparency on carbon reduction plans on the grounds that they were already included in "ordinary business plans."

Amherst, Massachusetts-based Shareholder Rights Group sees the SEC actions as a "very positive development for shareholder rights" because it gives a voice to those investors whose efforts to seek a vote on climate and ESG resolutions were denied by the Trump administration.

"It is an important breakthrough for shareholders to be able to ask companies to set climate targets that are aligned with global climate goals," Sanford Lewis, the group's director, told IHS Markit in a 22 March interview. Shareholder Rights Group includes Boston Trust Walden, Northstar Asset Management, and Arjuna Capital among its members.

'Ordinary business plans'

Houston-based ConocoPhillips had asked the SEC on 6 January to agree with its decision to exclude a vote on a resolution seeking specific targets for Scope 1 (direct GHG) emissions from combustion; Scope 2 (indirect) emissions from energy use; and Scope 3 emissions from distribution, transportation, and use of its refined products.

Likewise, Occidental, which also is based in Houston, requested the SEC on 29 January agree with its decision to exclude a vote on a resolution that sought medium-term GHG targets for the "company's energy products (Scope 3) on their pathway to their long-term target, which is net-zero emissions before 2050."

Both companies said they did not need a vote as they had already included GHG targets in their "ordinary business plans."

For instance, ConocoPhillips announced 19 October a net-zero goal for its Scope 1 and 2 emissions by 2050, but not for Scope 3 emissions from product use. It also strengthened its prior GHG intensity reduction goal from 5-15% to 35-45% by 2030.

Likewise, Occidental, which now refers to itself as a "carbon management" company, declared in November 2020 a net-zero goal for Scope 1 and 2 emissions before 2040 and net-zero emissions for its total inventory of GHG releases, including Scope 3, before 2050.

"Our goal is to provide the world with net-zero carbon oil," Occidental CEO Vicki Hollub told participants at a 2 March CERAWeek by IHS Markit panel.

When asked to comment on the SEC's action, Occidental spokesman Eric Moses said: "We have nothing to offer regarding your inquiry."

ConocoPhillips was unable to respond by deadline.

ESG resolutions on the rise

Shareholder proposals revolving around ESG resolutions are increasingly being offered as climate impacts make themselves felt.

In April 2020, the Harvard Law School Forum on Corporate Governance reported that the number of environment and sustainability proposals and support for them "hit an all-time high in 2019, a trend that has continued for three consecutive years."

The same report said such proposals accounted for more than half of all proposal filings in 2019 (55%) and garnered 26.8% support, adding: "We expect the 2020 proxy season to see a similar uptick in support for these proposals."

Recent statements by several SEC commissioners including Lee, as well as voting policies adopted by some of the largest investors, such as BlackRock and Vanguard, indicate rising demand for information on corporate climate and environmental impacts, according to Virginia Harper Ho, a University of Kansas School of Law professor who has written extensively on financial disclosure, shareholder activism, and corporate governance.

"Given these trends, climate-related and other ESG proposals will continue to make up a significant percentage of shareholder proposals going forward," said Harper Ho, who also serves as the law school's associate dean for international and comparative law.

In a 17 March speech, Lee reaffirmed the SEC's commitment to not only improve how publicly traded companies report climate and ESG risks, but also to allow greater shareholder proposals seeking greater accountability.

"We know investors are demanding ESG investment strategies and opportunities, but funds may not always reflect those investor preferences in their voting. Addressing this agency cost is at the heart of corporate governance today, and that is why it is critical that we at the SEC -- along with all of you in this virtual room -- focus more attention on fund and adviser voting duties and disclosure," Lee said at the 2021 ICI Mutual Funds and Investment Management Conference.

Posted 22 March 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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