Examining BlackRock’s shift away from ESG

The Economy and Society letter is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the environmental, social, and governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG developments this week

On Wall Street and in the private sector

Examining BlackRock’s shift away from ESG

The financial and mainstream media were abuzz last week with news that BlackRock’s support for ESG shareholder propositions dropped during the last shareholder meeting season. Long considered the single most aggressive advocate of ESG investing, BlackRock has recently been retreating from the limelight on the issue, and story, after story, after story noted as much last week. Barron’s put it this way:

BlackRock ’s support for shareholder proposals focused on environmental and social issues plummeted for a second consecutive year, even as the number of proposals soared.

The world’s largest asset manager said it supported 26 out of 399, or 7%, of proposals focused on environmental and social considerations. That is down sharply from a year ago, when BlackRock supported 22% of 321 of such measures, and 47% of 172 the year before.

In a report released Wednesday, BlackRock’s investment stewardship team said too many proposals were “overreaching, lacking economic merit, or simply redundant.”  

Shareholders submitted a record number of proposals in the 2022-23 proxy year, the firm said. Joud Abdel Majeid, global head of stewardship at BlackRock, said in the forward to the report that while there was a 34% increase in shareholder proposals focused on environmental and social issues, more of them were “overly prescriptive” or “lacking economic merit.” …

Over the past year, the pushback against environmental, social, and governance investing has escalated, putting BlackRock, which had been seen as a supporter of ESG, into the hot seat. In June, Larry Fink, BlackRock’s CEO, said he had stopped using the term because it had become too politicized. …

BlackRock’s waning support for proposals on environmental and social issues comes amid this backlash and a general decline in support for ESG shareholder resolutions. But the drop-off can’t all be blamed on the culture war over so-called corporate wokeism.

Lindsey Stewart, director of investment stewardship research at Morningstar, said that while there are frequent suggestions that anti-ESG rhetoric in the U.S. is depressing the level of support for such resolutions, that isn’t the main reason for the decline.

“I think those suggestions give the anti-ESG crowd far too much credit,” Stewart added. “If institutional shareholders’ proxy votes were starting to tilt in an anti-ESG direction, then anti-ESG proposals would probably have been better supported this year compared with 2022. The opposite is true. Support for both pro- and anti-ESG proposals has decreased this year.

Some ESG advocates were upset about BlackRock’s changing approach, according to ZeroHedge.com:

Having already been hit by backlash from red-state officials over its embrace of the environmental, social and governance (ESG) agenda, BlackRock is now under criticism from Democratic officials alarmed that the giant asset manager has decreased its votes in favor of ESG shareholder proposals

Last week, the Financial Times reported that BlackRock voted for only 26 ESG proposals in the 12-month period ending in June — or 7% of the total opportunities. That marks the continuation of a steep decline that’s seen BlackRock’s percent of “yes” votes on such proposals plummet from 47% in 2021. 

That trend has angered leftists, including New York City Comptroller Brad Lander. In a textbook example of projection, Lander tells FT that BlackRock has caved to a “misinformed and shortsighted war against ESG at the behest of special interests.”   

“BlackRock has a responsibility to use its votes to send a clear and consistent message regarding the need to manage climate-related and human-capital related risks,” said Lander, who oversees $250 billion in pension assets. 

BlackRock’s declining percentage of “yes” votes comes as the quantity of ESG proposals has surged thanks to new SEC rules that make it easier for shareholders to get them on the proxy ballots. On Wednesday, BlackRock said it’s voting “no” more often “because so many shareholder proposals were overreaching, lacking economic merit, or simply redundant.” 

Illinois State Treasurer Michael Frerichs is watching with unease, telling FT, “We understand that there are years where there are lower-quality proposals, but if this becomes a trend over multiple years, then we’ll be concerned.” State Street’s frequency of backing ESG measures has also declined, but not as sharply as BlackRock’s.

Matt Cole, the CEO of Strive Asset Management (the investment firm co-founded by presidential candidate Vivek Ramaswamy), agreed with Lindsey Steward that what the financial and mainstream media perceived as BlackRock’s decline in ESG support may not be a real and earnest move away from ESG. Cole stated that the issue is not quite as cut-and-dried as it seems on the surface. The real issue, he argued, hinges on support for stakeholderism vs. traditional shareholder capitalism. As long as BlackRock supports a stakeholder model, Cole continued, then its votes on shareholder proposals and its CEO’s retreat from using the term ESG are not meaningful actions.

Investors call for clarity in corporate ESG metrics 

With a majority of publicly traded companies now using ESG metrics in determining executive and employee compensation, the Financial Times reported that some investors are worried that the companies may be gaming the system:

A growing number of blue-chip US companies are using environmental and social factors to decide bonuses for top executives, but investors are worried the metrics are being gamed to increase payouts.

Three-quarters of S&P 500 companies have disclosed that environmental, social and governance metrics contributed to executives’ pay, up from two-thirds of companies in 2021, according to data from The Conference Board and Esgauge, an ESG data analytics firm.

Among them are American Express, Dow and Southwest Airlines.

More than half of all S&P 500 companies have diversity and inclusion components in executives’ pay, according to Semler Brossy, a consultancy. Almost half of these businesses included environmental metrics as part of bonuses, up from a quarter of companies in 2020.

Since 2015, pay factors tied to profitability and business matters have declined at more than 13,000 global companies, while environmental and social pay factors have surged, according to ISS ESG, a division of Institutional Shareholder Services.

Now some of these determinants of executive pay are coming under fire from asset managers.

“We are sceptical of ESG metrics being used in compensation,” said Ben Colton, head of stewardship at State Street Global Advisors, which manages $3.79tn. “Oftentimes they are very subjective, fluffy and easily gamed.” …

Unlike financial metrics tied to earnings or share price performance, it is almost impossible for outsiders to tell if ESG pay metrics are worthwhile “or merely line CEOs’ pockets with performance-insensitive pay”, two Harvard researchers said in a January 2023 paper.

ESG in pay “enables executives to obtain extra compensation when equity pay is not rewarding”, Lucian Bebchuk, the director of the corporate governance programme at Harvard Law School and co-author of the research, said in an interview. “But they are happy to get extra compensation also when equity pay is rewarding.”

Credit card company American Express paid 15 per cent of executives’ annual bonuses for diversity, talent and culture achievements. But it is unclear how those achievements are met, the Harvard professors said in their research. “It is unclear whether there was a quantitative target or whether any increase (even of only one woman) would suffice.”

An op-ed in Reuters suggested that corporate boards should rein in what the authors described as a rise in greenwashing and related ESG practices. Boards should, the authors argue, be compensated in accordance with the achievement of ESG metrics (deemed problematic above):

As part of a concerted effort by international regulators, the UK Advertising Standards Authority (ASA) has recently taken enforcement action against corporate greenwashing. Airlines, banks, fashion retailers and energy giants are among more than 20 companies targeted by the ASA for making misleading statements and representations about their sustainability and environmental credentials.

One industry to attract regulators’ attention is fashion, where the negative global impact of fast fashion has been widely reported and criticised. While some companies have responded to consumer pressure by adopting more responsible business models, others have faced criticism for making statements or designing branding that make them appear more sustainable than they are – for example, by providing misleading or incomplete information about the extent to which their clothes are recycled, or recyclable. …

As institutions place greater importance on the ESG status of assets they purchase, market and sell across multiple jurisdictions, the commercial incentive to amplify or omit environmental aspects of company activity may also get stronger.

To increase boardroom responsibility for the accuracy of accounts and accountability for misconduct, the Financial Reporting Council is consulting on changes to its UK Corporate Governance Code. Proposed changes include increased integration of ESG matters and culture within a company’s strategy and reporting, emphasising the responsibilities of the board and audit committee for ESG reporting. …

The proposed revisions aim to link companies’ remuneration policies more closely with their results and, specifically, ESG objectives. This mirrors EU developments requiring large companies to publish regular reports on social and environmental risks, as well as how their activities impact the environment – together with information to support those findings. If implemented, the FRC’s proposed changes would take effect from January 2025.

In the Spotlight

Consumer group launches campaign opposing Duke Energy’s ESG policies

The consumer watchdog organization Consumers Research launched a new campaign opposing the ESG policies in use by North Carolina’s Duke Energy:

Consumers’ Research, a leading non-profit dedicated to consumer information, is launching a campaign targeting North Carolina-based Duke Energy for prioritizing a woke policy agenda over lowering electricity prices.

As part of the campaign, Consumers’ Research sent a letter Thursday to the North Carolina Utilities Commission highlighting Duke’s various woke programs and launched a website informing consumers about the company’s environmental, social and Governance (ESG) initiatives. The ESG movement broadly seeks to promote a green transition and left-wing social priorities through the private sector. 

Consumers’ Research will also send mobile billboards critical of Duke to the company’s Charlotte, North Carolina, headquarters Thursday and outside a California event where Duke board member W. Roy Dunbar will speak about the “impact of ESG on business success” on Friday.

“As the nation’s oldest consumer protection organization, Consumers’ Research’s purpose is to educate consumers on issues that impact them and amplify their voice in the marketplace,” Consumers’ Research Executive Director Will Hild wrote in the letter. “It is for this reason that we implore the commission to put an end to the abuse of North Carolina consumers by Duke Energy.”

“Duke’s operations have become a laundry list of expensive boondoggles and distractions,” Hild continued. “When they aren’t pushing double-digit rate increases onto customers, they are busy wasting their time and customers’ money pushing political initiatives (some targeting children) and massive pay increases for their executive suite.” …

“Perhaps the most abusive use of Duke’s resources has been their political advocacy of anti-consumer ‘net zero’ policies which they boast about supporting at both the national and state level,” Hild wrote in his letter Thursday.

“It is a clear conflict of interest for Duke Energy to expend company resources supporting the enactment of policies that increase costs for Duke at the same time they ask those costs to be passed on to their customers in the form of rate hikes,” Hild added.Duke Energy has announced a series of rate hikes to create more reliability and to support its investments in green energy sources like wind and solar power, the Wilmington Star-News reported in June. The company is reportedly slated to increase rates in North Carolina by about 20% over the next three years.