The SEC has denied a request by The Travelers Companies for the go-ahead to exclude a shareholder proposal on its climate reporting.
SEC decisions under the 14a-8 process are garnering particular attention this proxy season since the division of corporation finance released revised guidance, Staff Legal Bulletin (SLB) No 14M, on February 12.
The new guidance rescinds SLB No 14L, which the division released in November 2021. Both bulletins focus on two possible bases for a company to argue that it may omit a proposal from its proxy statement:
- Rule 14a-8(i)(7), the ordinary business exception
- Rule 14a-8(i)(5), the economic relevance exception.
The ordinary business exclusion is based on the proposal’s subject matter and the degree to which it seeks to ‘micromanage’ the company. Travelers’ unsuccessful request to omit the climate change proposal was based on that micromanagement assertion.
The decision comes as many governance experts at companies and groups that file proposals believe SLB No 14M will lead to companies more frequently securing no-action relief on one of these or other grounds, particularly when they relate to environmental and social issues.
They acknowledge, however, that there is room for interpretation of the guidance by SEC staffers. Proposals also vary in terms of their framing even when they address similar topics. Many participants in the process are therefore taking a wait-and-see stance this proxy season.
A preliminary analysis by Governance Intelligence found that any changes in the division’s approach to no-action requests based on ‘ordinary business operations’ arguments may not be as clear-cut along policy lines as some governance experts had expected.
As You Sow proposal
The resolution filed at Travelers by As You Sow asks the company to ‘provide, in its existing climate reporting, the expected impact of climate-related pricing and coverage decisions on the sustainability of its homeowners’ insurance customer base under a range of climate scenarios in the near, medium and long-term.’
The group suggests that Travelers address, ‘for each timeframe,’ the:
- ‘Projected percentage of policies not insurable due to climate risk
- ‘Projected climate-related policy non-renewals and rate increases
- ‘Related profitability impact
- ‘Risks to Travelers and its investments from associated climate-related municipal bond and housing market bubbles.’
In a supporting statement, As You Sow writes: ‘As Travelers’ cancellations grow and climate-related rate increases outprice its customer base, it is unclear how [the company] will successfully maintain its homeowner business line, which makes up 50 percent of its personal insurance business.
‘In [Travelers’] TCFD climate-risk discussion, [the company] notes it can reduce growing climate risk by annually adjusting its pricing and policy conditions – that is, by raising rates and reducing coverage. However, Travelers fails to explain if or how it can retain sufficient homeowners’ policies to remain profitable as it makes these adjustments.’
Opposition to proposal
In its no-action request, Travelers writes that the proposal may be excluded from its proxy materials per Rule 14a-8(i)(7) because it relates to ordinary business operations and ‘impermissibly seeks to micromanage the company.’
The company states that, since 2018, it has published a report discussing its approach to managing changing climate conditions, consistent with the recommendations of the TCFD.
‘Despite the company’s existing detailed climate-risk reporting, the proposal seeks to prescribe highly granular and specific disclosures that have no basis in the TCFD or any other well-established climate-risk disclosure framework, including the TCFD’s supplemental guidance for insurance companies,’ Travelers writes.
‘The company further notes that it is not aware of any other insurance companies that provide disclosure[s] similar to what the proposal requests. By usurping the important role of management judgment and analysis – including that recognized by the TCFD itself – with respect to assessing and reporting on climate-related risks, the novel, detailed and prescriptive reporting requested by the proposal inappropriately seeks to interfere with [Travelers’] ordinary business operations and micromanages the company.’
The SEC’s staff disagreed, writing: ‘We are unable to concur in your view that the company may exclude the proposal under Rule 14a-8(i)(7). In our view the proposal does not seek to micromanage the company.’
A Travelers spokesperson did not respond to a request for comment.
As You Sow says in a statement: ‘The SEC’s decision to reject Travelers’ no-action request, which argued ‘micromanagement,’ underscores the significance of addressing climate risk to the long-term business model of insurers. In its no-action challenge, As You Sow highlighted that increasing premiums and cancellations could impact the size of [the] company’s customer base – making Travelers’ response to climate-related losses material to the value of the company.’
Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
