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Research Casts Doubt on ‘Big Three’ Passive Managers’ ESG Stewardship

Academic study condemns managers as “stewards of the status quo”. 

Serious doubts about the environmental stewardship credentials of three of the world’s largest asset management firms have been raised by academics at City Political Economy Research Centre (CITYPERC), part of City, University of London.

A research report found BlackRock, Vanguard and State Street – which together manage more than US$20 trillion in assets – “more often than not” oppose shareholder resolutions aimed at improving environmental governance at publicly-owned ‘carbon majors’.

CITYPERC researchers studied the three managers’ relationships with 55 publicly-owned companies within the carbon majors – a group of 90 fossil fuel, mining and cement companies responsible for more than 70% of industry’s cumulative GHG emissions since 1988.

The research tracks activity from the late 1990s, measuring the prominence of the managers in the ownership of carbon majors as it has unfolded over this period and their proxy voting record on environmental resolutions.

Responding to pressure

The report notes that in response to pressure from regulators, environmental NGOs, think tanks and other advocacy groups, the managers – referred to as ‘the Big Three’ – have committed to become stewards of a more environmentally-sustainable form of capitalism. As part of this, they had pledged to launch new ESG funds for investors, integrate more robust ESG criteria to their monitoring of and engagement with companies in their portfolio and to become active in proxy voting to support shareholder resolutions on environmental sustainability.

The research suggests that the firms’ embrace of ESG has been less than wholehearted, even with the big three’s ESG funds. “A more fine-grained analysis shows that the combined voting decisions of the Big Three are more likely to lead to the failure than to the success of environmental resolutions and that, whether they succeed or fail, these resolutions tend to be narrow in scope and piecemeal in nature,” said the report.

Of the 141 shareholder resolutions on environmental governance put forward at carbon major AGMs between 2014 and 2021, CITYPERC’s study identified 42 marginal cases where the votes of one or more of the Big Three were pivotal to the resolution outcome. “Taken together, we see that the voting decisions of the Big Three are more likely to result in the failure than in the success of environmental resolutions. Over this period, the votes cast by one or more of the Big Three were decisive in the success of just 11 resolutions and swung the vote of 31 other resolutions toward failure in securing an absolute majority.”

Stakeholder capitalism

In his 2022 letter to CEOs of portfolio companies, Chairman and Chief Executive of BlackRock Larry Fink declared that the manager focuses on sustainability “not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients”. BlackRock is asking companies to set short-, medium-, and long-term targets for greenhouse gas emissions reductions. “These targets, and the quality of plans to meet them, are critical to the long-term economic interests of your shareholders,” he wrote.

State Street Global Advisors’ CEO, Cyrus Taraporevala, said in his letter to CEOs that the manager would support the acceleration of the systemic transformations under way in climate change and the diversity of boards and workforces. But former BlackRock CIO of Sustainable Investing Tariq Fancy has denounced what he calls “cynical” rebranding exercises by corporates and financial institutions, and recently challenged Fink to demonstrate his commitment to stakeholder capitalism by leading a campaign “to remove the corrupting influence of corporate money in politics”.

The CITYPERC study also notes an ongoing debate about the role of the Big Three, with one side arguing that as passive investors they are unlikely to wield much influence in corporate governance and the other that their status as permanent capital gives “clear incentives” to engage corporate managers on ESG. This argument, said the report, suggests “… the Big Three, as universal owners with a stake in nearly every corporation listed on the stock market, will also have an interest in the performance of the entire economy, and will therefore internalise the costs of externalities, including environmental damage”.

Equity exposure to carbon majors 

The equity exposure of the Big Three to high-emitting firms has climbed steadily during the past twenty years, with the global financial crisis a “turning point” as total AUM and equity stakes of the Big Tree in the carbon majors soared from 2009 onwards. “Even the Big Three’s ESG funds are heavily invested in the carbon majors. Our research thus reveals the unparalleled structural prominence of the Big Three in the carbon majors’ financial networks,” said the report.

The report examines the proxy voting record of the Big Three on shareholder and management resolutions at carbon major AGMs across four areas: environmental governance, buybacks and dividends, director elections and executive remuneration. “Contrary to the expectations of some researchers, our analysis shows that the Big Three seldom defy management in supporting shareholder resolutions aimed at improving environmental governance,” said the report. “Astonishingly, we find that the voting behaviour of their ESG funds on environmental resolutions tabled at carbon major AGMs is almost identical to that of their non-ESG funds.”

Rather than promoting environmental stewardship, CITYPERC said the Big Three are “better characterised as stewards of the status quo” of shareholder value maximisation. There is “little evidence” that the Big Three champion environmental stewardship – directly or indirectly – nor do they seem willing to “consistently use their voice against management”. This is also the case when it comes to the Big Three’s ESG funds, which invest in many of the same carbon majors as their non-ESG funds and tend to vote the same way.

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