Today, an investor coalition with more than $4 trillion in assets filed a complaint in the U.S. District Court for the District of Columbia challenging the Securities and Exchange Commission recent amendments to its rule governing the filing of shareholder proposals.

The revised rule creates impediments to shareholders’ ability to raise issues of material concern through resolutions filed with public corporations, the plaintiffs which include the Interfaith Center on Corporate Responsibility (ICCR), a coalition of over 300 faith-based institutional investors representing more than $4 trillion in assets, assert in the complaint. The group has been “engaging corporations and filing shareholder proposals to mitigate harmful environmental, social, and governance (ESG) impacts for half a century,” according to its website.

This is the first lawsuit of this magnitude and is critical to force the SEC to give shareholders back their ability to address governance and ESG issues with companies through shareholder proposals, Danielle Fugere, President of As You Sow, a shareholder advocacy nonprofit and a plaintiff in the case told Financial Advisor Magazine.

"Rather than restricting these tools, the SEC should be focused on expanding them,” Fugere said. “It’s unusual to have to do this but we felt we had to because the rule change was so draconian that it will impact shareholders’ abilities to raise important governance and ESG issues with companies.”

For decades, the 14a-8 rule has allowed shareholders to submit proposals for inclusion in a company’s proxy statement asking the company to consider additional material disclosures, policies, or governance changes.

But in September 2020, the SEC imposed a new rule that sharply restricts shareholders’ ability to submit proposals through dramatically increased requirements for the amount of stock held, the duration of stock ownership, and the votes required for resubmitting proposals.

While the SEC positioned the new rule as a cost-savings measure, the complaint demonstrates that it significantly undermines shareholder rights, particularly the rights of mainstream investors.

“The new rule guts the existing shareholder proposal process, which has long served as a cost-effective way for shareholders to communicate their concerns to management,” said Josh Zinner, CEO of plaintiff Interfaith Center on Corporate Responsibility (ICCR).

“The rule provides little serious economic analysis supporting the need for these substantial changes. It is instead based on the wholly unsupported assumption that shareholder proposals are simply a burden to companies with no benefits for companies or non-proponent investors when there is 50 years of evidence to the contrary.”

The SEC under President Trump increased both the dollar amount of shares investors need to have and the time they need to hold shares in order to bring a shareholder proposal. For instance shareholders now need to have $25,000 in a company’s shares to bring a proposal the first year of their investment, up from $2,000 in shares previously.

The agency also made it more difficult for shareholders to re-propose shareholder proposals and eliminates their ability to use experts. “It often takes two to three times for to educate shareholders about complex issues,” Fugere said.

“This suit is essential to keeping the process fair and reasonable,” said Amy D. Augustine, Director of ESG Investing at plaintiff Boston Trust Walden. “Engagement with companies has led to an impressive track record of improved corporate oversight and management of material risks. Evidence abounds in this proxy season alone, in which dozens of proposals were withdrawn as a result of negotiated agreements between company management and shareholders,” she added.

The SEC did not respond immediately respond to a request for comment, but both SEC Chairman Gary Gensler and the Biden Administration have indicated repeatedly that ESG issues and especially climate chain are the most important threats facing the country.