Uncertainty as US lawmakers continue to pump brakes on ESG

Court suspends California climate rule as SEC makes it easier to reject shareholder proposals. But legal experts say moves muddy the waters.

At first glance, developments in the US this week have gone in favour of large US firms.   

On Tuesday, the Ninth Circuit Court of Appeals granted a suspension of one of California’s incoming climate disclosure rules, to give it time to consider a legal challenge from the US Chamber of Commerce.

Known as SB 261, the rule would require big firms with operations in California to report on their climate-related financial risks and mitigation measures every two years.   

It was scheduled to enter into force in January. 

The Securities and Exchange Commission also doubled down on its commitment to protect companies from the influence of their investors.  

The regulator said “resource and timing considerations” meant it would not, during the coming proxy season, intervene if issuers blocked shareholder requests. 

Through a process called ‘no action’, companies can ask the SEC for permission to exclude proposals they deem inappropriate from being voted on at their annual meetings.  

The process has become highly politicised over recent years. 

Under the Democrats, keen to encourage shareholder interventions on sustainability topics, the SEC sided more with investors in the ‘no action’ process. Republicans, on the other hand, have moved to support more companies seeking to exclude such requests. 

Democrat commissioner at the SEC, Caroline Crenshaw, described this week’s move as a “Trojan horse” that “hands companies a hall pass to do whatever they want”. 

Both the court of appeals and the SEC have made their decisions on the back of intense corporate lobbying against burdensome disclosure rules and shareholder meddling.  

But, while they may please many firms, they will also introduce what US securities lawyer Con Hitchcock describes as “a lot of uncertainty” over the short term. 

“If you’re a company and you omit a proposal [without the mediation of the SEC], there’s an increased threat the proponent will sue for an injunction to require that the proposal be put on the proxy,” he explained.  

With case law suggesting that, if defeated, issuers should cover the filer’s costs, that could be an expensive process.  

All this means companies are going to have to make careful judgments this proxy season.   

“A lot of individual calculations are going to have to happen,” said Hitchcock.

“Are you going to spend $100,000 on a law firm to litigate? Or is it better just to say we’re going to put it to the vote?” 

Factors like the topic and proponent will influence thinking, he believes.   

“If it’s a major pension fund, one might think they’re more likely to sue than an individual proponent. But you don’t know.”  

Making it harder for shareholders to table proposals may also drive frustrated investors to vote against board directors in lieu of specific secondary proposals, or to use a workaround known as a ‘proxy solicitation’ to submit their own items of business at annual meetings. 

On the disclosures front, companies must now wait and see whether they will still have to comply with SB 261. 

It’s a situation lawyers were quick to liken to the EU’s recent last-minute changes to its sustainability reporting laws.   

But Michael Littenberg, ESG head at law firm Ropes & Gray, told Real Economy Progress that most of the companies covered by SB 261 are already a long way into their preparations. 

A “preliminary injunction will not have much of an impact on that process,” he said. 

However, they now face a dilemma about “whether to go ahead and publish their SB 261 report or take a wait-and-see approach”. 

“I suspect most will opt to do the latter,” Littenberg predicted. 

Whatever they decide, the big question is what the legal case will mean for SB261 beyond 2026. 

The ruling will be watched closely by other US states considering introducing their own climate disclosure requirements, Littenberg said.