SEC's Division of Corporate Finance revises guidelines for shareholder proposals covering climate risks
On October 27, 2009, the SEC’s Division of Corporate Finance revised its guidelines regarding the grounds on which a public company can exclude from its proxy materials shareholder proposals relating to environmental, financial or health risks, including those seeking disclosure of climate-related risks. Issued as part of Staff Legal Bulletin No. 14E (CF) (“SLB 14E”), the revised guidance seeks to address the Division’s concern that the existing analytical framework may have led to the “unwarranted exclusion” of proposals related to an evaluation of risk – formerly seen as an aspect of ordinary business operations and therefore excludable under Rule 14a-8(i)(7) – but which focus on “significant policy issues.”
Going forward, the Division will examine the “nexus” between the nature of the proposal and the company and whether the proposal’s underlying subject matter “transcends the day-to-day business matters of the company and raises policy issues so significant that it would be appropriate for a shareholder vote.” Where the nexus is sufficient and the proposal raises such policy issues, the proposal generally will not be excludable under Rule 14a-8(i)(7). The Division also highlighted the board of directors’ oversight of corporate risk management, noting that a proposal focusing on the board’s role in overseeing a company’s management of risk may also “transcend the day-to-day business matters” and raise significant policy issues meriting a shareholder vote.
Rule 14a-8 under the Securities Exchange Act of 1934 permits shareholders to submit proposals for inclusion in a public company’s proxy statement, and also describes categories of proposals that a company may exclude from its proxy statement. Rule 14a-8(i)(7), for example, permits a company to exclude a proposal that “deals with a matter relating to the company’s ordinary business operations.” Under the prior guidelines, established in Staff Legal Bulletin No. 14C (CF) (June 28, 2005), where a proposal focused on a company undertaking an internal assessment of risks and liabilities arising from its operations, the Division permitted the company to exclude the proposal under Rule 14a-8(i)(7) as relating to an evaluation of risk, which the Division viewed as relating to the company’s ordinary business operations. Companies were not permitted to exclude proposals, on the other hand, focused on minimizing or eliminating operations that could adversely affect the environment or the public’s health.
Shareholder and environmental activists have hailed the new guidelines as a victory. Mindy Lubber, president of Ceres, a coalition of institutional investors and environmentalists, praised the guidelines for “strik[ing] the right balance of ensuring that resolutions about critical matters reach company shareowners, without opening the floodgates to proposals of more questionable significance.” Ceres and the Ceres-coordinated Investor Network on Climate Risk (“INCR”) have actively campaigned for the guideline change announced in SLB 14E; in a June 14, 2006 letter to then-SEC Chairman Christopher Cox, for example, INCR renewed earlier requests by INCR investors that SEC staff revise its interpretation of Rule 14a-8’s “ordinary business” exclusion to require inclusion of proposals seeking disclosure of financial risks due to climate change.
Ceres reports that insurers want to be part of the climate change solution
In April 2009, Ceres published a report entitled “From Risk to Opportunity, Insurer Responses to Climate Change.” The report contains responses and significant information from over 12 insurance companies, as well as several brokers, insurance consultants, insurance associations regarding the climate initiatives being undertaken by the industry, including coverage for green buildings, renewable energy, carbon risk management, and officers’ liability insurance to tackle climate change and rising weather-related losses in the US. The report speaks to the many insurer activities identified in our previous blog post regarding insurance industry climate change strategy and its implications for corporate policy holders, as well as the more recent March 17, 2009 National Association of Insurance Commissioners (NAIC) climate risk disclosure requirement for insurance companies. The insurance industry’s response aims to address more than $200 billion in estimated losses to the global economy attributed to climate change, but critics say the industry’s response is too little, too late.
The Ceres report identifies 643 specific insurance industry climate activities in the areas of:
- Developing “innovative” insurance products;
- Disclosing carbon risk;
- Aligning terms and conditions with risk reducing behavior and promoting loss prevention;
- Promoting understanding and participation in Climate change and public policy;
- Offering carbon risk management and offsets; and
- Investing in and financing climate change solutions and customer improvements.
What does the Ceres Report say about Insurers and Policy Holder Litigation?
Interestingly enough the report states that “liability insurers might willingly assume the responsibility for climate-related litigation costs borne by their policyholders (p.1).” The report goes on to state that losses arising from the causes/impacts of climate change, as well as the emerging responses, will pierce liability lines. Potential triggers for insurer responsibility include:
- Abrupt impacts of extreme events linked to climate change;
- Gradual impacts such as increased mold losses from warmer and wetter climates and flooding (Lavoie 2006);
- Secondary consequences of climate-linked events (e.g. waste spills);
- Failure to adapt quickly or adequately to climate change impacts;
- Demands for compensation for prudent adaption costs;
- Political risks;
- Poor corporate governance and failure to fulfill fiduciary duties in light of climate change risks and opportunities;
- Professional liability associated with implementation of new technologies;
- Contract performance in carbon-offset or energy production/saving projects, and carbon credit nondelivery;
- False advertising (greenwashing);
- Disinformation/fraud;
- Inadequate fiduciary responsibility (investment choices)
- Worsening roadway risks affecting vehicle liability losses.
The report acknowledges that insurers in the past have “assumed certain risks for which they did not collect adequate underwriting information or, premiums, or have adequate surplus.” The report recommends that insurers involving climate-related risks will “need to be attentive to changing standards of care, as new data, methodologies, and technologies emerge.
AIG withdraws from climate change lobby group
After receiving growing criticism from Congress for engaging in lobbying activities while essentially being owned by US taxpayers as a result of a federal rescue package last year, AIG formally withdrew its membership in the US Climate Action Partnership last Friday. As noted in prior blog entries, the insurance industry continues to be actively involved in seeking to influence climate change policy and AIG’s public efforts date back to at least 2006. While AIG’s unique financial situation makes its awkward for AIG to be directly lobbying lawmakers on these issues, AIG is still pursuing a fairly public strategy on climate change.
Insurance industry efforts include looking for opportunities to create potentially lucrative new markets for climate change-related risks ranging from traditional weather-related exposures to liability relating to new technologies. At the same time that the insurance industry is looking for sources of new revenue, policyholders can expect the insurance industry to also seek to influence climate change policy in a way that limits the industry’s exposure under historical and current policies potentially implicated by climate change issues.
Insurance industry climate change strategy has serious potential implications for corporate policyholders
Historically, when a significant liability risk begins to emerge, the insurance industry employs a three-pronged strategy in response. Signs of this three-pronged strategy by the insurance industry are already manifesting themselves in the climate change arena. First, as noted in a prior blog entry, insurers are beginning to litigate aggressively against policyholders seeking coverage for climate change claims. Second, the insurance industry is carefully monitoring legislation and public policy initiatives in order to shape the debate (and limit their financial exposure). Finally, the insurance industry is beginning to market “new” policies to address climate change risks.
Corporate policyholders should monitor the insurance industry efforts closely including: (1) being alert to new exclusions being added to policies; (2) watching legislative efforts that might result in valuable coverage being undermined; and (3) evaluating whether new insurance products being marketed are necessary to address potential gaps in a company’s existing coverage.
The goals of the three-pronged strategy in the insurance industry are: (1) to limit its financial exposure under policies it has already sold by mounting an aggressive litigation campaign against coverage; (2) to influence public policy and legislation in a manner that limits its potential financial and legal exposure to such claims; and (3) to begin developing new insurance products to maximize profit opportunities from the emerging risk.
A classic example of this three-pronged strategy was the insurance industry’s response to the enactment of Superfund legislation. Beginning immediately after the passage of Superfund legislation in 1980, the insurance industry has spent the last three decades aggressively litigating against policyholders over environmental coverage claims. Those environmental coverage wars have spawned thousands of court decisions with billions of dollars in judgments and settlements. At the same time that the insurance industry began preparing for this nationwide coverage litigation battle, it was also lobbying Congress for amendments to the Superfund legislation that would have eliminated the availability of historical insurance coverage to respond to environmental claims. While the insurance industry’s efforts in that regard were ultimately unsuccessful, the inclusion of such an amendment would have cost policyholders billions of dollars in coverage under historical policies for which policyholders had paid premiums for decades. Finally, insurers began adding exclusions in new policies while developing “specialty” insurance policies such as environmental impairment liability (EIL) policies. The insurance industry took away coverage that had traditionally been afforded under comprehensive general liability (CGL) policies (even renaming them “commercial” rather than “comprehensive” general liability policies to make them seem to provide narrower coverage). Simultaneously, the insurance industry began marketing different insurance products for environmental liabilities for a dual purpose – to generate a new source of premium revenue and to create an implication that CGL policies did not already cover many of the emerging liabilities.
Corporate policyholders should monitor insurance developments in the climate change arena closely, as history appears to be repeating itself with recent insurance industry efforts to simultaneously limit their financial exposure to emerging risks and capitalize on new profit opportunities.
