As pension plans are engaging more often as active shareholders, some companies are beginning to chafe.

One instance of pushback came after the the New York State Common Retirement Fund co-sponsored a proposal with the Church of England’s endowment fund requesting that Exxon Mobil Corp. include short-, medium- and long-term greenhouse gas reduction targets aligned with the Paris Climate Agreement in its annual reporting, covering efforts regarding both operations and products.

The oil and gas company had other ideas, asking the U.S. Securities and Exchange Commission if it could block the vote. In March, the SEC ruled ExxonMobil doesn’t have to allow shareholders to vote on the proposal, specifically saying it wouldn’t recommend any enforcement action should Exxon choose to keep the item off the agenda at its next annual shareholder meeting.

In the previous months, members of the international group Climate100+ — including Canadian institutional investors such as the British Columbia Investment Management Corp., the Caisse de dépôt et placement du Québec and the OPSEU Pension Trust — wrote to the SEC to encourage it to support the shareholder vote. As well, Andrew Logan, senior director of oil and gas at the sustainability non-profit organization Ceres, commented in a statement the SEC’s decision was flawed, inconsistent and will serve to worsen friction between ExxonMobile and investors “who remain undaunted in their efforts to engage the company on climate.”

The SEC declined to comment on the decision and ExxonMobil didn’t respond to Benefits Canada‘s request for comment.

The move by the SEC came at the same time the Senate Committee on Banking, Housing and Urban Affairs hosted a hearing to “examine the application of environmental, social and governance principles in investing and the role of asset managers, proxy advisors and other intermediaries.”

The broad argument from many of those testifying was that institutional investors are going too far in their engagement efforts where ESG issues are concerned.

Speaking at the hearing, James Copland, senior fellow and director of legal policy at the Manhattan Institute for Policy Research, raised the alarm regarding outside interest groups influencing institutional investors and related market intermediaries.

In describing special interests, he provided the example of the People for the Ethical Treatment of Animals buying the $2,000 minimum amount of stock required to make a shareholder resolution for Levi Strauss & Co. The organization did so with the aim of engaging on the company’s use of leather, he said.

In the case of shareholder engagement in index funds, these actions fundamentally conflict with an index fund’s core advantage — eliminating the need to actively engage, noted former Republican senator Philip Gramm. But he also argued American corporations have nothing to do with the issues activist shareholders are grappling with, suggesting they have no role to play in solving them.

“Past reforms by Congress, the SEC and the courts designed to enhance shareholder rights have unintentionally empowered special interest groups to subvert corporate governance, forcing corporations to deal with political and social problems they were never designed or empowered to deal with,” he said during the hearing.

“The explosion of index funds whose managers vote [on] shares they don’t own has dramatically increased the danger posed by political activists, not just to American corporate governance, but to our prosperity and freedom,” he added.

So what should happen if a shareholder is unhappy with the actions of a company they’re invested in? Divesting isn’t the obvious answer, especially for pension funds investing along indexes, said Michael Garland, assistant comptroller for corporate governance and responsible investment at Office of the Comptroller of New York City, at the hearing.

Garland defended the motivation of active shareholder engagement and argued its purpose is to bolster companies in the long-run, not impede their profitability in favour of some political agenda. “In those instances, the best way we can protect and create long-term shareholder value is to be an active owner by exercising our legal rights as share owners. Therefore, we actively vote our proxies and actively engage our portfolio companies, mainly through share-owner proposals and dialogue ensuing from those efforts.”

Proxy advisors are an important provider of expertise and further enable pension funds to fulfill their fiduciary promises, added Garland. The implication that sophisticated institutional investors are blindly following proxy advisors’ advice like “lemmings,” he argued, is incorrect and unfounded.

“I want to disabuse committee members that the argument of undue proxy advisor influence has merit,” he said, noting proxy advisory firms and institutional investors often come to different conclusions on which way to vote on key issues. Regulations hampering proxy firms would merely delay their ability to submit timely and relevant research, leading pensions to make less informed choices, he said.