In the midst of the bear market resulting from the COVID-19 pandemic, efforts to politicize financial markets have continued apace, with two-thirds of 400-plus shareholder resolutions filed in 2020 dealing with issues such as climate change, political spending and gender diversity on boards of directors. Now, activists appear to have persuaded many asset managers to support these proposals and push their agenda at public companies on their behalf.
Most notably are new commitments from BlackRock, which can leverage its tremendous assets to pressure companies to hew to its agenda. In fact, if BlackRock’s growth continues at a similar rate, independent research predicts BlackRock could control as much as 40% of the votes in the S&P 500 by the end of the next decade, which means even minor policy changes could have huge implications for public companies.
In January, Larry Fink, the CEO of BlackRock, noted that he was committed to pushing companies especially hard on climate change, but also lists board diversity as a key engagement priority.
While BlackRock defends these guidelines as not only being salutary for society but also in the long-term benefit of shareholders (although little evidence supports such claims), there are a number of reasons to question the claims and examine the multitude of pernicious incentives for the firm to be viewed as a leader pushing for environmental and social objectives.
First off, greater incorporation of environmental, social, and governance objectives is widely seen as a door for asset managers to charge higher fees or excuse poor financial performance. This is especially salient in an atmosphere where low-cost passive investment vehicles like index funds and ETFs have often successfully generated returns greater than actively managed portfolios.
BlackRock’s pursuit of certain government contracts around the world has also bolstered the firm’s need to appear more “aligned” with vocal activist groups. For instance in Europe, BlackRock has secured a key role in helping the EU integrate “sustainability” into banking regulations. The firm’s new pronouncements and actions on climate will further cement its contract with the European Union and allow the firm to burnish its green credentials amid criticism from activists who believe the firm was ill-suited to perform this work given its interest in fossil fuel companies.
The same business unit has also been given responsibility for managing the Federal Reserve’s bond-buying process, which also generated criticism by a number of activist groups including ESG Transparency Initiative, Greenpeace USA and Public Citizen, which voiced concern BlackRock has not been active enough on the climate. Ultimately, BlackRock’s involvement with the Fed will likely trigger congressional oversight from the House Committee on Financial Services, which passed legislation to mandate ESG disclosure. BlackRock’s recent commitments and voting record on climate could help Larry Fink answer any pointed questions posed by Committee Democrats about one of their pet policy priorities.
To make matters worse, Larry Fink is a leading candidate for Secretary of the Treasury under Joe Biden. Fink, who makes $25.5 million per year, would certainly rile progressives, who are concerned about rising income inequality. Perhaps, Fink will also use the firm’s new focus on sustainability as an example of his own progressive bona-fides and increase his odds of Senate confirmation by winning over votes of left-wing senators such as Elizabeth Warren and Bernie Sanders.
At the same time BlackRock is imposing an agenda on the companies in which it invests, the asset manager has endeavored to escape its own political strictures, calling into question the sincerity of their commitments. It recently petitioned the SEC to exclude a proposal from As You Sow asking for it to review the Business Roundtable’s Statement of the Purpose of a Corporation and detail how its governance and management systems should be altered as a result. Moreover, last year Saba Capital Management sued BlackRock for failing to allow its nominees to stand as directors, contradicting Fink’s demand that businesses engage more closely with their investors.
All and all, Blackrock’s efforts to simultaneously use its heft to force the companies it invests in to conform to its environmental, social and governance agenda while wiggling out of attempts by activists and the government to force it to be a better corporate citizen amount to a cognitive dissonance that is hard to comprehend. It also calls into question whether BlackRock’s decisions are being driven by a desire to drive returns for its clients, or is instead focused on maintaining and increasing its own profits and political capital.
Jared Whitley is a longtime D.C. politico, having worked in the U.S. Senate, the Bush White House, and the defense industry. He has an MBA from Hult International Business School in Dubai.