Investors buying index funds with ESG mandates from managers like BlackRock have their shares voted for them, and usually without their input. This has raised a red flag among shareholders who don’t appreciate the political agendas being pushed by BlackRock and other firms via their corporate voting. In what amounts to a false solution to the problem, BlackRock has enlisted proxy advisors Glass Lewis and ISS as surrogates for index fund owner voting. The problem is, as The Wall Street Journal’s editorial board explains, Glass Lewis and ISS are voting exactly like BlackRock, so what seems like a choice between apples and oranges is really between Galas or Fujis. The editors write:
BlackRock has won media plaudits for purportedly democratizing proxy voting for retail investors. If only. Instead, the asset manager is trying to blunt criticism of its environmental, social and governance (ESG) approach, while empowering the proxy advisory duopoly that promotes the same progressive agenda.
BlackRock, like other asset managers, has traditionally voted proxy ballots for retail investors in its index funds. Yet it has lately come under criticism from conservatives for using the $9.4 trillion in assets that it manages to drive public companies to adopt ESG causes, including on CO2 emissions and other “sustainability” disclosures.
Nineteen Republican state Attorneys General last autumn sent a letter to BlackRock CEO Larry Fink, warning about antitrust concerns from its coordination with other financial institutions as part of the Net Zero Asset Managers initiative. The AGs also noted that BlackRock’s policy of punishing directors of corporate boards that don’t follow its climate orders may violate its fiduciary duty to investors.
BlackRock got the message—sort of. Last week it announced that starting next year more than three million retail investors in its most popular exchange-traded fund will be able to choose from a range of proxy voting policy options. Message to the Republican AGs: There can be no antitrust or fiduciary violation if BlackRock offers retail investors a voting choice.
Not so fast. Nearly all of BlackRock’s pre-selected voting policies are crafted by the proxy advisory duopoly of Glass Lewis and Institutional Shareholder Services, or ISS, both of which support ESG investing. These include Glass Lewis’s Climate Policy and ISS’s Socially Responsible Investment Policy. Even options that aren’t ESG-focused on their face, such as ISS’s Catholic Faith-Based Policy, support things such as emissions reductions, board diversity quotas and racial equity audits.
“BlackRock is committed to a future where every investor can have the choice to participate in the shareholder voting process,” the company’s global head of investment stewardship said. OK, but they still can’t truly choose how to vote. BlackRock’s “voting choice” initiative recalls Henry Ford’s famous line that a customer can have a car painted any color as long as it’s black.
One BlackRock option from ISS does broadly support the recommendations of corporate boards, which tend to be less friendly to ESG resolutions. But most investors don’t support corporate boards on every issue. Under this policy, investors can’t separately disapprove of a CEO’s compensation when a company is under-performing.
BlackRock seems to be more concerned with obtaining political and legal protection than providing true voting choices to its investors.
Action Line: Rather than pushing political agendas via the power of their customers’ shareholdings, managers should be working on a “prudent man” approach that puts clients’ interests first. Avoid false choices by owning a portfolio of individual stocks rather than index funds when it makes sense for you. When you need help, let’s talk.
E.J. Smith - Your Survival Guy
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