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October 6, 2023

Right-wing think tank challenges SEC authority over shareholder proposals

As the ESG wars continue in the US, a steady drip feed of anti-ESG legislation and legal actions continues.

By Paul Hodgson

As the ESG wars continue in the US, a steady drip feed of anti-ESG legislation and legal actions continues.
War! What is it good for? (Image by Liu Zishan via Shutterstock)
  • In April this year, the National Center for Public Policy Research filed a lawsuit against the SEC because it allowed retailer Kroger to exclude one of the centre’s shareholder resolutions.
  • In May, the National Association of Manufacturers (NAM) joined the lawsuit on the side of the centre.
  • In July, ICCR and Ceres wrote to NAM members to alert them of their trade association’s actions.

The latest campaign in the anti-ESG wars in the US comes from right-wing think tank the National Center for Public Policy Research (NCPPR), which filed a lawsuit against the US Securities and Exchange Commission (SEC) over its handling of a shareholder proposal the group had filed at retailer Kroger.

The resolution called on Kroger to end its “kowtowing” to liberals which led it to, for example, “pull ‘Freedom Series’ items from its shelves, removing items that read, ‘Give me liberty or give me death’ and ‘America, love it or leave it.’”

The company sought to exclude the resolution from its proxy statement, which already included four other shareholder resolutions. The SEC gave it permission to do so, agreeing with the company that the resolution would interfere with the company’s ability to conduct its “ordinary business”. The NCPPR lawsuit accuses the SEC of liberal bias and challenges it to be non-partisan or to get out of the business of policing shareholder resolutions altogether.

The NCPPR is wellknown for filing resolutions challenging companies over their alleged anti-conservative biases. These resolutions receive very low levels of support, and even this low level is decreasing. In this case, the lawsuit may have become moot as the company included the resolution in its proxy statement. It received support from 1.8% of shareholders.

That the lawsuit is ongoing, however, is largely due to the National Association of Manufacturers (NAM) – a trade association – which filed an intervention motion in May, supporting the “get out of business” end of the lawsuit. The motion alleges that the SEC’s role in forcing companies to include shareholder proposals on their proxy statements is “a violation of the First Amendment’s prohibition on government-compelled speech”.

Shareholder resolutions

Again, NAM has been vocal in its opposition to shareholder resolutions altogether and was instrumental in lobbying the SEC under the previous administration to roll back shareholders’ rights to file – rollbacks that were reversed by the current SEC.

“NAM has long been extremely antagonistic to the right of shareholders to file resolutions,” says Tim Smith, senior policy adviser at shareholder group Interfaith Center on Corporate Responsibility (ICCR). More recently, NAM testified in front of Congress in July at one of the infamous “ESG Hearings”. More than half of Fortune 500 manufacturers are members of NAM, though 90% of its members are small and medium-sized manufacturers who are rarely, if ever, the target of shareholder resolutions.

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Says Smith: “NAM saw an opportunity to piggyback on a separate case by the NCPPR in which NAM argued the SEC has no authority to exclude shareholder resolutions. And even though the case may well be moot, NAM is continuing to use it as a tool to severely restrict the SEC's authority.”

The pushback from shareholders came in July, when two shareholder organisations, ICCR and Ceres, sent letters to 50 of NAM’s largest members alerting them of their trade association’s actions.

“We have received between four and six responses,” says Steve Rothstein, managing director of Ceres Accelerator for Sustainable Capital Markets. “We are in discussion with a few companies and we appreciate their willingness to listen to these issues.” Rothstein wouldn’t comment on whether the companies were engaging with NAM.

Capital Monitor sent email enquiries to six of the companies in receipt of the letter to ask if they had responded to Ceres or ICCR or if they had engaged with NAM about its actions. None responded.

Rothstein adds that the whole anti-ESG movement is heating up. “The House Financial Services Committee consolidated 18 anti-ESG bills into four bills and sent them to the House, then the Education Committee had another set of bills. Rothstein also testified before the House Committee on Science, Space and Technology last week on the Federal Procurement Rule that says the largest federal suppliers should disclose information on climate risk. “There is a lot of activity,” he notes, “and most of it in the house is a fact-free discussion.”

Smith agrees. “The NAM case is part of ongoing attacks by conservative critics. These attacks include challenging company support for sustainability, all the way to attempting to radically curtail the power of federal agencies from the SEC to the EPA.”

Anti-ESG Conservative attacks

Three of the bills sent to the House are definitely anti-ESG. The Guiding Uniform and Responsible Disclosure Requirements and Information Limits (GUARDRAIL) Act seeks to prevent the SEC from mandating climate risk disclosures; the Protecting Americans’ Retirement Savings from Politics Act would allow companies to exclude environmental, social and political resolutions; and the Businesses Over Activists Act would do what NAM is seeking to do in its lawsuit, remove the SEC from the shareholder resolution process.

Speaking of the bills, South Carolina Congressman Ralph Norman said: “ESG is an evil pollutant that must be eradicated from corporations and businesses.” An indication of the level of rhetoric that is in use.

Smith says the ICCR letter aimed to alert companies to the fact that their trade association was acting inappropriately and going far beyond the views of its members. Going forward, this specific problem – indirect lobbying out of line with companies’ public statements on issues like sustainability – would be part of the engagement agenda this proxy season.

“Specifically, we will note that one of their major trade associations is using their money to pursue a radical agenda they may not be in tune with,” says Smith. “Trade associations tend to respond to the lowest common denominator,” adds Rothstein.

In early September, the SEC filed its opposition to the case which stated that not only are NAM’s claims meritless but that the court is not the appropriate place to discuss the merits of its arguments, which should be brought before the SEC itself. Even if the case were not moot – since Kroger included the proposal – the SEC’s argument is that its offering permission to exclude the letter is not government-compelled speech because: “The Kroger letter—an informal, non-binding staff letter with no legal consequences—is neither ‘final’ nor a Commission ‘order’.”

Then, at the end of September and in a rebuff to the anti-ESG movement, ICCR filed an Amicus brief in the case, supporting the SEC’s authority to oversee the resolution process and reiterating many of the arguments in its letter. On the same day, shareholder representative As You Sow, filed its own Amicus brief, again in support of the SEC. More “friends of the court” filings are due from Amici ClientEarth and Shareholder Commons.

Rothstein says: “Economic democracy is about having a voice in the company.” He adds that, for decades, shareholders have known that if they buy a share, they have a vote, “but you have to get a large number of shareholders to agree with you and that has helped companies improve governance, and health and safety; a whole range of topics that are now embedded in corporate America.”

[Read more: The ESG culture war tantrums]

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