BlackRock Cuts Support for Shareholder ESG Proposals
BY: Michael Gersho
In the past decade businesses have increasingly focused on incorporating socially and environmentally conscious factors into their decision-making processes, often under the label of ESG (environmental, social, and governance). However, the backlash against ESG has been swift, and large asset managers like Blackrock are taking note. Blackrock, along with Vanguard and State Street, the so-called “Big Three” of index fund managers, collectively vote around 25% of shares in all S&P 500 companies.
Funds have a general fiduciary duty to vote consistent with the best interest of the fund and its shareholders but have few regulations on voting beyond limited disclosure requirements. Blackrock claims to support shareholder proposals that are aligned with maximizing value to its clients, rather than achieving a specific decarbonization outcome, or other social aims. Yet as ESG principles have come under increased scrutiny in recent years, BlackRock has reduced its support for ESG related shareholder proposals (in 2023 the firm supported a mere 7% of proposals concerning climate and natural capital, down from 22% in 2022 and 47% in 2021). This raises the question of whether ESG voting decisions were influenced more by activism or desire for favorable publicity, rather than a fiduciary duty to clients. However, BlackRock insists that the decline in support for ESG proposals is not due to a change in the firm’s investing principles, but rather a decline in the quality of the proposals themselves.
BlackRock’s explanation could be supported by a 2022 SEC regulation, which made it easier for shareholders to elect board members at annual meetings. Shareholders can now vote for individual board members rather than an entire slate of directors, regardless of whether the shareholder is present at the meeting. The change effectively grants shareholders more leverage over the board, making managers more likely to consider activist shareholder proposals. Shareholder ESG proposals increased significantly after the regulation was enacted, which could lend credence to BlackRock’s proposal quality explanation.
However, ESG has been troubled in recent years, with many large companies reporting ESG backlash, largely from state and federal politicians and policymakers. Politicians have filed anti-ESG legislation, increased scrutiny of companies and investors, and even issued civil investigative demands and subpoenas to financial sector entities regarding how ESG metrics are calculated. Moreover, a flurry of litigation from state officials and private parties have challenged fiduciaries employing ESG considerations in financial decision making. These political actions and increased litigation risk may be changing BlackRock’s risk calculus in its support of ESG proposals.
Regardless of rationale, BlackRock may have a way of avoiding ESG controversy by delegating voting decisions to its investors. The firm is increasingly giving investors the opportunity to vote their own shares, an option currently available for close to half of its total index equity but quickly expanding to more funds and classes of clients. Vanguard and State Street are implementing similar voting choice programs for investors, indicating large asset managers are responding to concerns about their control and influence.
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