SEC's new guidance on stewardship: A game-changer for US investor engagement?

The US Securities and Exchange Commission (SEC) has recently shaken up the landscape of shareholder engagement with its new interpretive guidance, announced on February 11, 2025. This update is set to have far-reaching implications for institutional investors, particularly those involved in environmental, social, and governance (ESG) activities.

Key points of the new guidance

1. Schedule 13G Eligibility: The SEC staff has redefined what it means to be a "passive investor," potentially limiting the ability of large shareholders to file the simpler Schedule 13G instead of the more detailed Schedule 13D.

2. Influencing Control: The guidance expands on activities that could be seen as "influencing control of the issuer," which may deter passive investors owning more than 5% of a company's voting securities from certain forms of engagement.

3. ESG Activism: The new interpretation could require groups of smaller social activist shareholders to become subject to 13D reporting, potentially impacting ESG-focused engagement strategies.

Implications for institutional investors

This guidance is likely to significantly impact how investors, especially large asset managers, engage with public companies. It underscores the SEC's increasing scrutiny of institutional investors' corporate governance stewardship activities, particularly in the context of ESG matters.

The new rules may have a chilling effect on stewardship activities by mega-managers. Investors may need to reconsider their engagement strategies to avoid triggering the need for more onerous reporting requirements.

Industry reaction

The investment community is still digesting the implications of this guidance. Some experts suggest that it could lead to a reduction in certain types of shareholder engagement, particularly around ESG issues. Others argue that it may simply require more careful consideration of how engagement is conducted.

Looking ahead

As the investment world adapts to these new interpretations, we can expect to see changes in how institutional investors approach stewardship and engagement. Companies and shareholders alike will need to navigate this new landscape carefully to ensure compliance while still maintaining effective communication.

The full impact of this guidance will likely unfold over the coming months and years, potentially reshaping the dynamics between public companies and their largest shareholders.