Economy and Society: SEC proposes rule increasing proxy disclosures

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

The SEC pushes on proxy disclosures 

On Wednesday, September 29, the Securities and Exchange Commission proposed a rule that would require large asset managers to provide greater disclosure and transparency on how they vote the proxies associated with the funds they manage. The Wall Street Journal had the details:

“The Securities and Exchange Commission proposed a rule that would require money managers to disclose more information on how they use their voting power.

When investors buy a mutual fund and exchange-traded fund from an asset manager, the money manager votes on shareholder proposals on behalf of the investors. Shareholder votes extend to issues from executive compensation to a company’s efforts to address climate change.

The SEC proposal on Wednesday targets funds that manage trillions of dollars for investors. It follows a years-long concern among some SEC officials that current disclosures make it difficult for individual investors to see how asset managers cast shareholder votes on their behalf….

The popularity of index funds fueled the rise of a small group of money managers in the last decade. This has given firms such as BlackRock Inc., BLK 0.24% Vanguard Group and State Street Global Advisors enormous sway over corporate affairs that appear on proxies, including pay for top executives, board appointments and acquisitions. A 2019 study found that the three firms collectively cast an average of about 25% of the votes at S&P 500 companies.”

Eight days later, BlackRock, the largest asset management firm in the world, with nearly $10 trillion in assets under management, made its own news regarding proxy votes, appearing to accept the SEC’s characterization of the need for transparency:

“Investment giant BlackRock Inc. BLK 0.24% is giving institutional investors such as pensions and endowments the option to cast shareholder votes tied to their investments.

When investors buy a fund from an asset manager, the money manager typically votes on shareholder proposals on behalf of the investors.

Starting in 2022, BlackRock says its large investors can vote themselves on everything from who sits on boards to executive pay to what companies should disclose on greenhouse gas emissions. The change allows those BlackRock clients to lay claim to voting power on some $2 trillion in investments tied to index-tracking assets BlackRock manages in institutional accounts. This is about 40% of roughly $4.8 trillion of indexed equities managed by BlackRock.

“We believe clients should, where possible, have more choices as to how they participate in voting their index holdings,” BlackRock said in a client note on Thursday announcing the changes….

BlackRock said that it is “committed to exploring all options to expand proxy voting choice to even more investors.” That includes individual investors in exchange-traded funds and index mutual funds.”

Rubio continues ESG pushback

A week after introducing legislation pushing back against ESG, Senator Marco Rubio (R-Fla.) sent a letter to the Securities and Exchange Commission (SEC) asking it to clarify several ESG matters. Specifically, Senator Rubio wanted the SEC to explain how ESG rules will affect American business in its dealings with China. He wrote:

“[P]revious positions taken by the Commission indicate that the consistent application of its policies to the PRC is not guaranteed,” Rubio wrote. “In recent years, the Commission has created arbitrary exceptions to its general rules for activities in the PRC.

For example, a standard purporting to provide information about issuers’ relevant ‘social’ businesses practices that required the disclosure of ‘diversity, equity, and inclusion’ practices with respect to their workforces in the United States, but not the complicity of those same issuers in supporting the Chinese Communist Party (CCP)’s many human rights abuses within the PRC or globally would be, at the very least, highly inconsistent and arbitrary….

[Consider] [w]hether China-based issuers or issuers with significant business in the PRC should require the representation or information about the representation of underrepresented ethnic or religious groups historically oppressed by the CCP, including Uyghurs, ethnic Kazakhs, Kyrgyz, and members of other Muslim groups, Tibetans, Christians, and practitioners of Falun Gong, among others.

If the level of ‘investor demand’ for an ESG disclosure for business activity in the U.S. is diminished for substantially similar, or even more substantial activities in the PRC, it may indicate that the disclosure is not primarily about providing beneficial and consistent information to investors about that activity, but instead is an arbitrary attempt to influence issuers on certain domestic political affairs….”

According to a press release, Senator Rubio also “argued that the SEC should consider how to consistently apply its standards to supply chain resiliency and investor protection” to China, especially in light of what it described as “the hoarding of medical supplies by [China] during the COVID-19 pandemic….”

On Wall Street and in the private sector

ESG opponent highlights ESG ratings confusion on Fox News

Independent Wall Street analyst, anti-ESG activist, and author Stephen Soukup appeared on both Fox News’sTucker Carlson Tonight,” and Fox Nation’sTucker Carlson Today” to discuss his book The Dictatorship of Woke Capital. Among other things, Soukup discussed ESG and what he considers one of its greatest perils, the confusion over ESG ratings, an assessment shared among some of ESG’s most outspoken proponents. He argued that the ratings are inconsistent, are often contradictory, and can be manipulated for purposes other than promoting shareholder-focused goals. In the end, he argued, “ESG can mean anything you want it to mean,” or, conversely, can be selectively applied for personal, political, or cultural reasons.

Soukup raised the issue of Elon Musk and Tesla, which, he said, would appear to most outsiders to be an ESG no-brainer investment, a company that is on the cutting edge of trying to eradicate the need for the internal combustion engine. He argued, however, that Tesla’s ESG’s ratings are inconsistent and are often negative, not because of its business practices but because of its reporting practices, which many ratings services consider insufficient. 

Meanwhile, over at Morningstar, Michael Jantzi, the founder of Sustainalytics, a division of Morningstar and one of the best known and most prominent ESG ratings services, insists that there is no reason for anyone to be worried that the perceived diversity in ESG ratings signals a chaotic and exploitable business environment. Indeed, he insists that this diversity is proof that the opposite is true, that the ESG movement is, in his view, maturing and robust:

“This [criticisms] is an indication of a maturing and increasingly robust industry. There’s a lot of nuance, particularly on the institutional side of the business, looking at the challenges of integration across asset classes.

Constructive criticism in anything makes you better….

[T]he diversity of ratings is a sign of a healthy market. It reflects that there are a variety of approaches–some, like Sustainalytics’ ESG Risk Ratings, measure risk, other focus on impact, while others look only at reputation or market sentiment, for example. Different starting points lead to different outcomes, so the market has choice. That’s a good thing from my perspective. I often wonder if the critics of ESG ratings are also the ones complaining loudly about the fact that credit ratings and sell side ratings are too aligned?

As for emojis–they instantly convey a direction or how someone is feeling about something, so in a sense there is some similarity to ESG ratings. But the criticism reflects a fundamental misunderstanding of what an ESG Risk Rating is. It’s not meant to be a single indicator or a single tool to make a decision. It’s meant to be used alongside other tools and inputs to inform the user about whether or not this is a company you might want to consider investing in or engaging with. It’s a starting point to what lies beneath.”

In the spotlight

“We don’t have patience much longer for these disclosures to be forthcoming. We are increasingly seeing the impacts of climate change not only across our portfolios but also across the global economy….[T]his was the year that we really started to take more concerted action based on what companies were providing us…. Where we felt that companies were falling short for a variety of ESG issues, we were more inclined to support those [shareholder] proposals this year.”