POLITICS: Everyday investors may soon vote away ESG
This summer, the world’s largest asset manager, BlackRock, announced that it was considering a policy change for its biggest exchange-traded fund (IVV), which tracks stocks in the S&P 500 Index.
Beginning next year, ordinary retail investors — folks like you and me — would get more control over how the shares corresponding to their funds are voted in corporate annual meetings.
That’s a big deal, especially since these votes have become increasingly politicized —with encouragement from Biden administration regulators.
The new BlackRock voting policy is clearly designed to blunt criticism that the investing giant has been exploiting its shareholder voting power to push companies toward environmental and social policy positions preferred by the progressive left.
BlackRock’s principal competitors Vanguard and State Street already allow for customized voting for some institutional investors, but this is the first time such policies have been extended to everyday investors — and others are likely to follow suit.
It’s not hard to see why. The “Big Three” asset managers have been at the forefront of the ESG movement — that’s environmental, social, and governance — pushing corporations to pursue environmental goals, “racial justice,” and other left-oriented policy objectives.
And these asset managers’ proclivity to endorse left-wing ideas on corporate proxy ballots has now, unsurprisingly, prompted a conservative blowback.
Last fall, Florida announced that it was yanking $2 billion in assets from BlackRock funds, citing the investment manager’s environmental and social activism.
This spring, 21 state attorneys general sent letters to BlackRock, State Street, and several other asset managers warning that their pursuit of ESG goals at the expense of financial returns may violate their fiduciary duties to investors and other state and federal laws.
In July, the leadership of the House Financial Services Committee held multiday hearings looking into environmental and social investing. (I was among those called to testify.)
Last month, GOP presidential candidate Vivek Ramaswamy called the Big Three asset managers “arguably the most powerful cartel in human history.”
Ramaswamy’s “cartel” charge is probably somewhat overblown.
And the privately owned Vanguard has been far less likely to support environmental and social shareholder proposals than its two big publicly-owned competitors, which are under substantial pressure from politically oriented investors like the New York state and city pension funds.
Still, these three investing fund families wield extraordinary influence over corporate America.
Collectively, the “Big Three” asset managers control almost a quarter of the shares in the S&P 500, which represents some 85% of the total U.S. stock market.
And you don’t have to look far to see at least some collusion.
BlackRock and State Street are among the financial firms belonging to the “Climate Action 100+” initiative, which tries “to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.”
Vanguard was formerly a member, too, but withdrew from the initiative last December, which is perhaps why it was not targeted by those state attorneys generals.
In addition to legal and political risks, the increased attention on asset managers’ progressive activism obviously affects their brands, too, and may help explain why Vanguard has been closing ground on industry leader BlackRock.
So, what to make of the new move to give individual investors more “voting choice”?
Well, empowering individual investors to align their stock holdings with their own preferences is good.
But note that BlackRock isn’t actually proposing to allow ordinary investors to vote on all the shares in companies held by its IVV fund.
Such an idea would be administratively unwieldy if not impossible, and the whole reason why people like index funds is that they offer a low-cost way to capture stock-market returns without having to research individual companies or portfolio managers.
Instead, ordinary investors in the BlackRock fund can shift control of their shareholder voting from BlackRock itself to one of six “voting plans” developed by a “proxy advisory firm.”
Never heard of them? Proxy advisors assist institutional asset managers in voting their shares.
With just two dominant firms in the market — ISS and Glass Lewis — they also wield enormous control over corporate shareholder votes as well as possess clear agendas.
Indeed, proxy advisors have been more likely to recommend voting with progressive activists than even the Big Three asset managers.
Additionally, the top proxy advisors remain unregulated, and they’re both foreign-owned — ISS by Germans, and Glass Lewis by Canadians.