This is not the first time that freedom of speech has been raised to sidestep legal responsibilities related to climate change. In 2019, ExxonMobil used free speech as a defence to dismiss a “deceptive advertising” suit related to climate change. Since then, fossil fuel companies have repeatedly returned to that same argument to rebuff similar lawsuits.

Canada is approaching its own critical milestones on the road to more effective climate disclosure rules. Federal and provincial regulators are seeking to put an end to greenwashing and investor confusion by fostering common reporting practices across firms. These rules will provide specific guidance on how companies and financial institutions must communicate their exposure to risks arising from climate change, such as more frequent extreme weather events, and may require them to tally and reveal their greenhouse gas emissions.

In 2021, provincial securities regulators across Canada issued, in draft form, one of the world’s first climate disclosure rules for publicly traded companies. Last month, the regulators indicated that they would produce a revised draft following the publication of a climate disclosure standard by the Canadian Sustainability Standards Board. That standard – a domestic equivalent to the International Sustainability Standards Board’s global sustainability standards – is currently in the consultation phase.

Ottawa is also engaged. The federal government, in its 2023 fall economic statement, announced that it would develop climate disclosure rules for private companies. This measure would complement the climate disclosure rules recently imposed on banks, insurers and other federally regulated financial institutions by the Superintendent of Financial Institutions, an independent federal agency.

As this flurry of Canadian disclosure rules gets finalized, should we expect Canadian businesses to launch free speech lawsuits, mimicking their U.S. counterparts? So far, Canada has been relatively immune to the wave of anti-ESG litigation and policies that have emerged in the United States. However, Canada has a history of controversial public-policy lawsuits fighting transparency by raising the freedom-of-expression flag.

In the late 1980s, the tobacco industry successfully challenged the constitutionality of the federal government’s tobacco advertising regulations. In a 1995 ruling, the Supreme Court of Canada agreed with tobacco companies that Ottawa’s ad bans were overly broad and violated the companies’ freedom of expression. A second, more targeted version of the regulations was given the green light by the Supreme Court in 2007.

While environmental policies have thus far escaped freedom-of-expression lawsuits in Canada, stakeholders are already using other legal arguments in court to prevent and delay climate initiatives. For example, in the past few months, the Quebec cities of Boucherville and Prévost have been sued after respectively proposing a tax on large parking lots and a ban of natural gas in new buildings. Similarly, last fall, the Supreme Court ruled that the federal government’s environmental-impact-assessment regime is “largely unconstitutional,” after a request for review by the Alberta government.

So far, Canada has been relatively immune to the wave of anti-ESG litigation and policies that have emerged in the United States.

That being said, Canadian corporations espouse distinctive values and operate in a political culture that is different from that of their U.S. counterparts, and business groups challenging the legality of upcoming climate disclosure rules could face pushback from their members. In Canada, despite some disagreements regarding the final scope of the rules, there has been broad industry support for clear standards that would put an end to what has been referred to as an “alphabet soup” of ESG (for “environmental, social and governance”) disclosure and target-setting guidelines and organizations, like TCFD (the Task Force on Climate-Related Financial Disclosures), SBTi (the Science Based Targets initiative), IASB (the International Accounting Standards Board) and others.

The rules are also supported by the broader public. In a 2022 survey of Canadian retail investors, 75% expressed concerns regarding greenwashing, and 78% supported increased and stricter regulatory measures within the financial sector to combat it.

Most importantly, while companies in Canada have a constitutionally protected right to freedom of expression, this right is not absolute. The Supreme Court has allowed disclosure mandates where the government’s objectives are deemed to be legitimate and restrictions on freedom of expression are limited to what is necessary to achieve those objectives.

Canadian federal and provincial policy-makers should therefore resist any temptations to water down their climate disclosure proposals in anticipation of future legal challenges. Climate transparency is simply too important to threaten such crucial instruments in closing Canada’s $115-billion annual climate-financing gap.

Julien O. Beaulieu is a lecturer in law at the University of Sherbrooke and a researcher with the Quebec Environmental Law Centre. Iris Fairley-Beam is an independent legal researcher.

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“This rule is a floor, not a ceiling, for companies to report how their business is adapting to a global economy that is transitioning away from fossil fuels,” said Maria Lettini, CEO of the U.S. Sustainable Investment Forum, in a statement. 

The rule, approved last week by the Securities and Exchange Commission (SEC), will provide “an achievable floor of disclosure” on company climate emissions and physical and transition risks, said the chief executive of the association whose members manage US$5 trillion in assets. 

When fully in place in 2026, the rule will require large, publicly listed companies to disclose their Scope 1 and Scope 2 greenhouse gas emissions from their direct operations and energy use if the emissions are sizeable enough to represent a material financial risk to the company. Smaller companies will start reporting in 2028. 

Under heavy lobbying from business organizations and threats of legal action, the SEC pulled back from a proposal two years ago to also require disclosure of Scope 3 greenhouse gases, the end-use releases that make up about 75% of all emissions. The earlier proposal also would have required companies to report on their Scope 1 and 2 emissions regardless of whether they are financially material. Even with the concessions, 10 Republican-led states launched a legal challenge against the rule, meaning its survival will ultimately be decided in the courts.  

The sustainable investment industry was among the strongest supporters of the SEC’s initial proposal. 

“The SEC’s new climate rule will help make it clearer which companies are living up to their climate pledges and which are doing nothing more than greenwashing,” said Al Gore, former U.S. vice-president and co-founder of sustainable asset firm Generation Investment Management. “But it’s not the full accounting of corporate climate pollution that we need,” he wrote on X, formerly Twitter. 

“It’s a step forward, but we feel it’s too little too late,” said Leslie Samuelrich, president of sustainable investment manager Green Century Funds, blaming “vigorous opposition by trade groups” for the pullback. 

“The SEC’s new rule can be seen as a step in the right direction, even if it backtracked from some provisions in earlier proposals,” said a post from the global corporate rating agency Sustainalytics. 

Largest consultation in SEC history  

Last week’s decision caps off two years of consultations in which the SEC heard from 24,000 investors, companies, lawmakers, think tanks and citizens. It was an unprecedented level of public debate for an initiative spearheaded by the regulator.    

The lobbying was particularly heavy by Republican lawmakers and large corporate interests, led by the U.S. Chamber of Commerce.  

While the future of the SEC rule is in doubt, large global corporations are facing a rising tide of mandatory climate reporting requirements around the world. Most notably, the European Union Corporate Sustainability Reporting Directive will require European-listed companies to disclose all three scopes of emissions, as well as detailed climate risk disclosures and “double materiality” impacts (real-world effects on people and the environment). 

The SEC estimates that 3,700 U.S. companies with business in Europe will be subject to the European rules when they go into effect between 2025 and 2029. 

The state of California has also approved new climate reporting requirements that apply to 5,300 large companies – including some large oil and gas conglomerates like Chevron – for all three scopes of greenhouse gas emissions and climate risks. 

In February, China announced new sustainability reporting requirements for companies listed on its three major stock exchanges. The sweeping rules include mandatory disclosure on all three scopes of carbon emissions, as well as reporting on environmental, social and governance impact and risk factors. Similar to the EU rules, the regulations include a “double materiality” standard. 

Eyes on Canada  

As home to one of the world’s largest fossil fuel industries, Canada also has a large role to play in the evolving world of climate reporting.  

The new SEC rule will apply to more than 200 large Canadian companies that trade on U.S. stock exchanges, including some of the country’s biggest oil, gas and pipeline companies. 

On March 13, the Canadian Sustainability Standards Board (CSSB), the Canadian branch of the International Sustainability Standards Board (ISSB), released its own climate reporting framework, based on the ISSB standard, which includes Scope 3 reporting. 

Once finalized later this year Canada’s securities commissions could then make the ISSB reporting standard mandatory for Canadian publicly listed companies. 

The Canadian Securities Administrators (CSA) – the umbrella group for Canadian securities commissions – has already proposed reporting requirements similar to the final SEC rule. But the securities commissions suspended that proposal while awaiting the CSSB framework. Once the CSSB standard is finalized, CSA will issue a new climate reporting proposal for adoption by provincial securities commissions. The CSA said its proposal will consider the CSSB standard “and may include modifications appropriate for the Canadian capital markets.”

The big question is whether Canada will go further and adopt full-scope climate reporting like the Europe-California-China standard or simply default to the weaker SEC rule, aligning Canada and the U.S. 

Eugene Ellmen is a former executive director of the Canadian Social Investment Organization (now Responsible Investment Association). He writes on sustainable business and finance. 

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In January, ExxonMobil launched a lawsuit against U.S.-based Arjuna Capital and Netherlands-based Follow This. The shareholder advocacy groups had filed a proposal calling on ExxonMobil to set targets and to reduce its Scope 3, or end-use, carbon dioxide emissions. The two organizations represent small shareholders in the company.

In response to the suit, the shareholder groups withdrew the proposal, but ExxonMobil continued its action.

“Exxon is sending a clear message – dissidents will not only be fought, they will be punished,” legal blogger Zachary Barlow writes.

The lawsuit is unusual because companies ordinarily appeal to the U.S. Securities and Exchange Commission (SEC) for rulings on the permissibility of shareholder resolutions. In this case, which is a first for ExxonMobil, the company asked the U.S. District Court rather than the SEC to rule that the Arjuna and Follow This proposal falls outside of normal shareholder proposals, which can be disallowed if they deal with day-to-day company business.

In recent years, the Biden administration has loosened Trump-era regulations that made it easier for companies to ask the SEC for permission to exclude shareholder proposals. There has been an increase in proposals on climate change and other environmental, social and governance issues as a result of the Biden reforms.

In a media statement, ExxonMobil characterized this increase as a “breakdown of the shareholder proposal process, one that allows proponents to advance their agendas through a flood of proposals.” In its lawsuit, the company also asked the court to direct the shareholder groups to cover legal costs for both sides, a burden that could amount to hundreds of thousands of dollars.

The request for fees and costs “exacerbates the perception that Exxon’s intention is to utterly silence dissenting investors,” said Christina Herman, program director for the Interfaith Center on Corporate Responsibility (ICCR), a U.S. coalition of faith-based investors that file shareholder proposals and engage with corporations on social and environmental issues.

Growing numbers of multinational corporations are taking advocacy groups to court in so-called strategic lawsuits against public participation, or SLAPP suits. The London-based Business and Human Rights Resource Centre identified 437 SLAPP suits brought or initiated by 144 companies or business organizations between 2015 and 2023.

Exxon is sending a clear message – dissidents will not only be fought, they will be punished.

 

– Zachary Barlow, legal blogger

“This aggressive action is nothing less than a SLAPP suit intended to intimidate perceived opponents,” said Josh Zinner, CEO of ICCR, in regard to the ExxonMobil lawsuit.

Nicolai Tangen, CEO of Norway’s US$1.5 trillion national oil fund, the world’s largest sovereign wealth fund and one of the world’s largest stock market investors, said ExxonMobil’s action is a worrisome development. “We think it’s very aggressive and we are concerned about the implications for shareholders rights,” he told the Financial Times.

ExxonMobil filed the lawsuit in a U.S. District Court in the Northern District of Texas, which has a reputation for conservative legal rulings. Judge Mark Pittman was assigned to hear the case. Pittman, appointed to the court by former president Donald Trump, has made notable rulings against student debt relief and restrictions on the rights of 18- to 20-year-olds to carry handguns.

ExxonMobil has faced a number of investor actions in recent years, including a Follow This proposal voted down by investors at last year’s annual meeting to adopt a medium-term greenhouse-gas-reduction plan. Three years ago, ExxonMobil suffered a historic defeat on a proposal from hedge fund Engine No. 1, which was successful in ousting three of its directors on a demand for more stringent climate change action.

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In November, the independent federal government agency whose stated mission is to “protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation” announced that it would be toughening the rules surrounding shareholder resolutions – a critical legal tool available to activist shareholders looking to propose corporate changes.  The following is a letter signed by a number of pension and sustainable finance experts challenging the silence from large institutional investors surrounding the rule change.

As the SEC changes “the rules of the game” for material risks like ESG, big institutional investors must act before it is too late

Investors rely on the proxy process in the United States as the main mechanism to bring both strategic and material environmental, social and governance (ESG) risks and opportunities to the attention of corporate boards. But the SEC (Securities and Exchange Commission) is now proposing to degrade this key tool such that it will seriously undermine corporate accountability. U.S. institutional investors’ silence on this issue will hurt them and, more importantly, their clients in the long run. They must speak up now before their fiduciary duty is further degraded.

The SEC wants to curtail the proxy process by increasing ownership requirements and thresholds of support to allow resolutions to be submitted to general meetings in subsequent years. These measures sound technical and dull, but their impact could be significant.

The rules would, in effect, exclude many proposals on topics ranging from executive stock sales to political spending and from board diversity to climate change. Data shared with Standard & Poor’s by the Sustainable Investments Institute suggests that one-third of proposals voted on from 2010 to 2019 would have been excluded from resubmission by the new rules.

The proposed rules would make it significantly harder for shareholders to resubmit proposals, but many observe that resubmitting proposals is essential to building support for and understanding of the issues, as was the case for an issue once considered fringe, like climate change, which has now become “a defining factor in companies’ long-term prospects,” as BlackRock CEO Larry Fink said last week.

Disappointingly, the SEC’s actions also contradict the Business Roundtable, which in August 2019 broadened its definition of corporate purpose to give more attention to the interests of stakeholders beyond shareholders. They stand in contrast to the rising number of CEOs speaking out about the need to address the loss in public confidence in capitalism and the actions of companies like Microsoft, which recently detailed its concrete plans to become carbon negative.

The SEC comment period ends February 3. Preventable Surprises reviewed comments submitted to date in the current comment period and in the policy development process. The vast majority of U.S. fund managers appear to be either actively or passively supporting this specific change, whether through silence or by letting business associations speak for them.

Wellington Management Company and MFS Investment Management are commendable exceptions, having signed on to a letter coordinated by the United Nations’ Principles for Responsible Investment (PRI) that states:

“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.”

They are joined on this letter by an impressive group of (non-American) asset owners and managers.

In private discussions, managers often come up with a variety of reasons for not publicly challenging the SEC proposal. Some protest that they have already made their views clear by taking part in the SEC roundtable or through direct conversations with SEC officials. Others claim that they don’t comment publicly on policy matters, relying on trade groups to speak for them. Still others say they do not sign on to group letters and would rather submit their own letters. But the vast majority have neither written their own letter nor signed on to others.

The unspoken reality could be that senior executives of these mega-managers might be happy if ESG resolutions went away, as their voting record consistently suggests (many of the largest U.S. index funds have, for instance, consistently opposed shareholder proposals related to climate change).

Regardless, letting trade associations speak for them does not do them or anyone else any favours. However, if ESG resolutions are restricted, it will negatively affect investors’ ability to fulfill their fiduciary duties by investing in and positively influencing the companies they own.

It’s worth remembering that shareholder resolutions and the proxy voting process are the only existing communication channel between a board and its company’s broad shareholder base that is not controlled by management. In a fast-changing world, companies will be worse off if their boards are insulated by barriers to regular and unbiased feedback from the shareholder base, especially on evolving sustainability issues that will influence future capital flows.

Thinking ahead, fund managers should realize that their silence will hurt their bottom line:

• 1) Asset owners – their clients – will continue to demand to see positive ESG changes in the companies they invest in and will expect these big managers to submit resolutions on their behalf or will do so themselves (and the managers may still have to bear the costs). Otherwise, they might resort to other, more radical means: voting against corporate directors more often or finding new managers.
• 2) Asset owners will see the U.S. as too weak on corporate governance because of corporate influence over regulators while viewing large U.S. fund managers as being too conflicted to protect the interests of asset owners.
• 3) Silence around these proposed SEC changes positions U.S. fund managers as behind the curve, further hurting their ability to attract talent.

A proactive stance in favour of transparency and stakeholder engagement will instead help their bottom line. Capital is liquid and prefers to invest in countries where investors can influence the companies they invest in. By depriving themselves of this ability, U.S. institutional investors are doing a disservice to their long-term business model, no matter the relative depth of U.S. capital markets.

With less than a week left to submit responses, we urge institutional managers, including BlackRock, State Street, JPMorgan, T. Rowe Price, Nuveen and Morgan Stanley – all of which have made strong commitments to climate or ESG ­­­– to be transparent about their positions on this matter.

They could join the International Corporate Governance Network in noting:

“The number of shareholder proposals in the U.S. has remained consistent over years while the level of support for shareholder proposals has increased, demonstrating growing recognition of the importance of the matters raised by such proposals among a broader spectrum of investors. We are not aware of any “abuses” of the existing rules by shareholders.”

Or they could join Theresa Whitmarsh of the Washington State Investment Board in observing:

“Systems for proxy voting and shareholder proposals are not broken. Granted, the plumbing system could benefit from careful updates, but the SEC’s proposed overhaul is overkill and does not address the system’s plumbing.”

Or they could join the Wellington Management Company and MFS Investment Management in signing the PRI-coordinated letter.

Or they could write their own.

To quote SEC commissioner Robert Jackson, “Whatever problems plague corporate America today, too much accountability is not one of them.”

We simply wish that institutional managers make their views equally explicit.

Signed,

Keith P. Ambachtsheer, Director Emeritus, International Centre for Pension Management, Rotman School of Management, University of Toronto

Bill Baue, Senior Director, r3.0 (Redesign for Resilience & Regeneration)

Lauren Compere, Managing Director, Boston Common Asset Management

Toby Heaps, CEO, Corporate Knights

Margaret Heffernan

Keith L. Johnson, Chair, Reinhart Institutional Investor Services

Jon Lukomnik

Nell Minow, Vice Chair, ValueEdge Advisors

Tom O. Murtha, Lecturer, Columbia University

Mike Musuraca, Chair, Preventable Surprises

Brynn O’Brien, Executive Director, Australasian Centre for Corporate Responsibility

Jérôme Tagger, CEO, Preventable Surprises

Raj Thamotheram, Founder and Senior Advisor, Preventable Surprises

Gabriel Thoumi, CFA, FRM

Michele Wucker, CEO, Gray Rhino & Company

The post As SEC curtails shareholder activism, big institutional investors must act appeared first on Corporate Knights.

The General Electric Company (GE:NYSE) was founded in 1892 by American icons including Thomas Edison and J. P. Morgan in upstate New York. It was initially famous for producing light bulbs and rapidly expanded into home appliances, aviation and power generation. The company’s market value peaked just shy of $600 billion in 2000 but has steadily declined to less than $100 billion today.

GE’s story is the cautionary tale of a company that started a move towards sustainability in 2005 (remember former CEO Jeffrey Immelt’s Ecomagination exhortation that “green is green?”) but nearly collapsed thanks to legacy businesses in the financial and power sectors. A lot has been written about how GE Capital dragged down the once dominant behemoth after the 2008 financial crisis. But the main reason GE’s financial performance reeks is that the company bet that gas power would be a golden egg, and it turned out to be a rotten one.

As recently as 2016, GE’s power division (which is separate from its renewable energy division) accounted for half of the company’s pre-tax profits. It had doubled down on gas power with its late 2015 acquisition of Alston, a major French industrials company, for $13.7 billion – GE’s largest industrial acquisition ever. Soon after, orders for gas turbines cratered, forcing the company to slash order projections by 75% (from 160 turbines to “somewhere around 40”) in early 2017. By 2018, the power division had slipped into the red, losing $800 million, as detailed in a recent report by the Institute for Energy Economics and Financial Analysis.

Number of all large gas turbines (>100MW) sold worldwide

As the IEEFA writes, “Investors lost billions when the (once) most valuable company in the world, General Electric Company (GE) and its largest shareholders – BlackRock, Vanguard, State Street and Fidelity – misjudged the pace of the global energy transition and subsequent collapse of the gas turbine and thermal power construction market.”

Yes, GE is still, astonishingly, betting big on coal. Not only has it been a “leading supplier of coal-fired power plants worldwide,” in early May it announced it was building Kosovo’s new $1.3 billion 500-megawatt power plant. I agree with the IEEFA that the move is “deeply puzzling.”

Back when GE first announced its Ecomagination campaign (with a pledge to put US$1.5 billion into green R&D), ethical investors such as myself were excited to see such a large company make such a bold green commitment. After all, in the ’90s GE was better known among socially responsible investors for its nuclear weapons parts production which made it the subject of a successful boycott. (It’s still the world’s 22nd largest weapons maker, according to 2017 data, with US$3.8 billion in arms sales representing 3% of its revenue, it’s just not the nuclear kind).

By 2015, Ecomagination had generated over $200 billion in cumulative revenues, and Fast Company wrote that Ecomagination had “become the lynch pin of a remarkably successful reinvention of GE, the foundation of the company’s future, and the vanguard of the global movement towards corporate environmentalism.”

A 2008 print ad campaign for GE’s Ecomagination.

Unfortunately, management saw things differently, and, as the IEEFA put it, “GE assumed wrongly that demand for natural gas and coal would continue to track global economic growth” – an assumption that  cost GE and its investors as much as $193 billion over the past three years.

Its financial woes could get even worse since GE is currently facing a Securities and Exchange Commission investigation into the conglomerate’s “aggressive” accounting practices at both its capital and power divisions.

GE was a great investment throughout the 20^th century, but lacking a clear forward-looking strategy to transition into a low-carbon future, it’s no wonder that sustainable investors are turning out the lights on GE shares.

As an alternative, I present to you Schneider Electric (SGBSY:OTC). Schneider Electric is a French energy management company making hardware and software that helps companies improve their energy efficiency. It’s set ambitious targets, such as 80% renewable energy and 200 zero-waste-to-landfill sites by 2020 as well as full carbon neutrality across its extended supply chain by 2030. The company reports on its progress towards these goals every quarter with a non-financial disclosure document that I wish other companies would emulate. I’m not surprised at all to see Schneider Electric at #60 on the 2019 Corporate Knights Global 100 Most Sustainable Corporations in the World list, and #13 on the 2019 Corporate Knights and As You Sow Clean200 list.

Schneider Electric has been reliably profitable over the last five years, and has outperformed GE while paying a higher dividend. I expect demand for its energy-efficient products and services to increase as companies and governments around the world get more serious about climate change.

If you want to keep the lights on sustainably in the 2000s, forget GE. Schneider Electric is a better investment.

Beta is a measure of a stock’s volatility in relation to the market. By definition, the market has a beta of 1.0, and individual stocks are ranked according to how much they deviate from the market. A stock that swings more than the market over time has a beta above 1.0. Lower beta means less risk.

Have a company in your portfolio that you want to replace with a more sustainable option? Write us an email or send us a tweet!

Tim Nash blogs as The Sustainable Economist and is the founder of Good Investing.

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