When we think about how American energy production is being undermined, we usually think about policies emanating from Washington, D.C., and the inexorable march of the federal regulatory state. But a quieter and more sinister movement is afoot to bypass the messy process of lawmaking and regulation and force large corporations to stop financing American energy producers.
This movement has taken on the moniker of environmental, social, and governance (ESG) investing, and proxy voting is one of the main strategies environmental activists are utilizing to directly influence company operations and install extreme environmental policies.
Proxy voting occurs during the annual corporate shareholder meeting of publicly traded companies. Shareholders vote on various corporate issues including election of board members, merger or acquisition approvals, actions pertaining to stock compensation plans, and corporate policy proposals.
The use of proxy votes to influence corporate action is rooted in the basic premise of capitalism that the shareholders—the owners of the company—should have a direct say in the company’s operations when appropriate, most importantly in the selection of its board members. In this sense, proxy votes are an expression of shareholder property rights.
However, in recent years, activist groups like As You Sow, Follow This, and the Sierra Club have seized on this process as a way to insert their politics into corporate decision making. They do this by purchasing stock in public companies and forming coalitions with other shareholders to introduce shareholder resolutions and nominate new board members, copying the decades-old practices of activist hedge funds.
A recent example of the power of this strategy was a 2021 proxy fight to replace four board members on the board of ExxonMobil. With the support of the three largest asset managers in the world—Vanguard, BlackRock, and StateStreet—three of the four hand-picked board members were elected. Less than a year later, ExxonMobil announced that it would adopt a policy of achieving net-zero carbon emissions by 2050.
Never mind that an oil and gas company adopting a net-zero policy is fundamentally destructive or that the firm proposing the new board members, Engine No. 1, was heavily marketing their new ESG products at the time of the election. The activists achieved their goal in this fight, and the message is now loud and clear in board rooms across the country that if executives don’t get on board with net-zero, they will be targeted.
Unfortunately, Texas pensions are being pulled into this ESG wave. Both the Employees Retirement System of Texas (ERS) and the Teachers Retirement System of Texas (TRS) voted for the three new board members in the Exxon proxy fight, following the guidance of their proxy advisory firm Institutional Shareholder Services (ISS).
ISS and GlassLewis control more than 90% of the proxy advisory market, and with the proliferation of ESG shareholder proposals, their services are in ever greater demand as investors, such as state pensions, try to keep up with voting their shares in public companies. Therefore, the ESG movement represents a huge growth opportunity for ISS and GlassLewis, and they are active promoters of ESG philosophies.
When ISS and GlassLewis combine with the power of the big three asset managers, which control more than 20% of the votes in a vast majority of large public companies, they can sway almost any vote in a corporate election. This is what happened in the ExxonMobil election last year.
Fast forward to this year, and environmental activists are at it again, this time with proposals at most of the major U.S. banks—including Bank of America, Citigroup, and Wells Fargo, among others—to require them to end financing of new fossil fuel energy production activities by the end of this year.
Fortunately, in the case of those three companies, the activists overstepped and could not gain the support of ISS and GlassLewis for their proposals. Given that the proposals garnered less than 15% of the vote in most cases, it appears that the big three investment firms also voted against the proposals and will likely vote against them in other elections later this year.
As far as state pensions are concerned, the New York State Common Retirement Fund came out publicly saying they would support the proposals, but the major California pensions voted against the proposals, despite their lofty statements about pursuing net zero goals this year. Here in Texas, TRS followed the recommendation of ISS to vote against the proposals. But shockingly, ERS voted for the proposals, despite their strong anti-ESG proxy voting policy.
Whether by their own volition or through the influence of proxy advisors and outside managers, Texas pensions are frequently voting in favor of activist shareholder proposals, despite their investment policies discouraging such votes. These votes are also certainly against the desire of the Texas Legislature, which overwhelmingly passed Senate Bill 13 last year specifically to counter the influence of ESG activism.
In this era of growing political activism in corporate elections, these examples underscore the need for more oversight of the proxy voting practices of Texas pensions. The Texas Legislature should act to define clear proxy voting guidelines in statute and task the Pension Review Board or a new entity with ensuring that Texas pensions are following those guidelines. The financial security of Texas pensioners and Texas taxpayers depends on keeping political activism and ESG ideology from overtaking Texas pensions.