In 2019, investor support for shareholder proposals related to environmental, social and governance matters reached a record average high of 29%, according to Morningstar. And that doesn't take into account the number of climate-related proposals that were withdrawn after successful negotiation—a number that exceeded the number of climate proposals that actually went to a vote. In this report, Morningstar analyzes the level of proxy voting support by 52 of the largest fund families for ESG-related shareholder proposals in 2019 and over the five years from 2015 to 2019. Although Morningstar finds substantial increases in average support over the last five years, five of the largest fund families, including BlackRock, voted against over 88% of ESG-related proposals, enough to prevent many of these proposals from achieving majority support. But, in 2020, with BlackRock having joined Climate Action 100+— reportedly "the world's largest group of investors by assets pressuring companies to act on climate change"—and having announced that it was putting "sustainability at the center of [BlackRock's] investment approach," the question is whether that voting strategy is about to change?


As BlackRock CEO Laurence Fink put it in his 2020 letter to CEOs, "[c]limate change has become a defining factor in companies' long-term prospects." Although he has seen many financial crises over the course of his long career, in the broad scheme of things, they have all ultimately been relatively short-term in nature. Not so with climate change: "Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis." As a result, "we are on the edge of a fundamental reshaping of finance":

"Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage—a key building block of finance—if lenders can't estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?"

The result, according to Fink, is "a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future—and sooner than most anticipate—there will be a significant reallocation of capital."

Investors are now "recognizing that climate risk is investment risk," making climate change the topic that clients raise most often with BlackRock: what are the physical risks arising out of climate change? How will climate policy affect prices, costs and demand? How should investors modify their portfolios? (See this PubCo post.)

As framed by Morningstar (and others), the transition to passive investment through index funds means that, without the possibility of selling out of a stock position, the only way for these fund managers "to influence shareholder value at the company or system level is through exercising active ownership rights. A failure to actively monitor investee companies and shape governance practices to address sustainability risks could lead to vulnerabilities across markets." As a result, these funds are likely to weigh in on ESG issues though engagement and voting.

Morningstar used its fund voting data to examine votes by more than 2,000 funds offered within 52 of the largest fund families on ESG shareholder proposals in 2019 and over the past five proxy seasons (1,033 proposals). (Funds with ESG mandates were excluded.) Morningstar found that average support for ESG proposals by asset managers has increased every year since 2015 and over the five-year period from 27% in 2015 to 46% in 2019. The report includes tables showing the 10 fund families that were the most supportive and the 10 that were the least supportive over the five years, including, as noted above, funds from Vanguard (4% support) and BlackRock (3% support). Morningstar reports that 15 of the 52 fund groups increased their support for ESG proposals in 2019 by more than 20 points over their previous four-year averages. For example, Fidelity index funds abstained entirely in 2015 and 2016, voted in favor on 7% of ESG proposals in 2017 and then voted in favor of 30% of ESG proposals in 2018 and 53% in 2019. In addition, only 12 fund families supported more than half of the proposals in 2015, compared to 25 fund families in 2019.

Notwithstanding these increases in support, across the board, Morningstar observes that "funds offered by the largest asset managers continue to lag those of their smaller peers by a wide margin. As a group, the largest of the asset managers are the least likely to support ESG shareholder-sponsored ballot initiatives." Morningstar attributes the lower levels of support among the largest asset managers to their historic "reluctan[ce] to vote against management both on shareholder- and management-sponsored ballot items. The upward trend in asset-manager support for shareholder-initiated ESG resolutions reflects rapidly changing investor attitudes toward the materiality of the sustainability issues that these resolutions address. It shows that asset managers, as a group, are becoming increasingly willing to use their proxy votes to support transparency and better governance of sustainability concerns."

Taking a deeper dive into the data for 2019, Morningstar identified 12 ESG issues—climate change, cybersecurity, diversity, environmental stewardship (generally, environmental impact of corporate and supply chain operations), sustainable governance (e.g., requests for board committees with oversight over climate, human rights, etc.), gender pay equity, human rights, lobbying, political spending, reputational risks of products, governance of workplace sexual harassment claims and other—and examined how fund groups voted in each category.

For example, proposals related to reputational risks of products (guns, opioids) garnered substantial support. Of the 48 fund families voting on one or more of these proposals, 34 supported all proposals. Gender and pay equity proposals also received strong support, with fund families supporting these proposals on average 71% of the time. Looked at separately, however, proposals regarding gender pay gaps received an average of 48% support from asset managers. Political spending and lobbying proposals "were supported, on average, 53% of the time by the fund groups surveyed. Eleven fund groups, however, failed to support a single political-spending resolution." Morningstar reports that "votes on climate risk, environmental stewardship, and human rights were strongly correlated, averaging 51%, 42%, and 41% average support, respectively, across the 52 fund groups." Five of the 52 fund families supported all of the climate proposals on which they voted, 16 supported at least 75% and 25 supported at least half. In contrast, BlackRock and Vanguard each supported four of the 16 climate proposals.

Although the data demonstrate growing support of ESG proposals among these large fund families in general, Morningstar observes that "the overall impact on actual vote outcomes of this growing asset-manager support is tempered somewhat by the less-supportive voting of the largest asset managers. The largest asset managers are generally far less inclined to vote for sustainability resolutions and yet they have many times the impact on the vote than their smaller peers—and their impact is growing." In its survey, Morningstar found that, of "the 10 largest U.S. fund families, five supported ESG resolutions less than 12% of the time. The largest and second largest fund providers in the U.S., Vanguard and BlackRock, respectively, each only supported 7% of ESG proposals..." What's more, this low level of vote support has kept vote totals low in many cases and, in some cases, it has led to failure to achieve a majority vote: "In a significant number of cases a vote by just one large asset manager would have tipped the vote outcome on a resolution to a majority vote for the motion. For many public companies, a large fund group may hold (on behalf of fundholders) 10% or more of shares outstanding. In 13 out of the 23 cases where an ESG resolution failed by 10% or less in 2019, Vanguard held a stake in the company of more than 10%. For BlackRock, this was true in four instances. Of the 23 ESG resolutions that achieved between 40% and 50% support, 19 would have passed if supported by Vanguard, and 15 would have passed if supported by BlackRock."


BlackRock's voting record on ESG proposals appears to be one reason why, as indicated in this press release, As You Sow submitted a shareholder proposal to BlackRock asking for a report on how the company plans to fully implement the new BRT Statement. (BlackRock sought to exclude the proposal on the basis of Rule 14a-8(i)(7), the ordinary business exclusion, but the SEC, without issuing a formal letter response, was unable to concur.) According to AYS, shareholders are demanding that "companies exercise leadership on a broader range of environmental, social, and governance issues. They want company actions to be integrated with the BRT statement, not contradict it." While BlackRock has been a leading advocate on many issues of corporate social responsibility, AYS contends that BlackRock's publicly reported proxy voting record does not appear to be aligned with its advocacy positions, revealing "consistent votes against virtually all climate-related resolutions. A recent New York Times article notes that Blackrock votes its proxies against shareholder advocates on 93 percent of all social and environmental shareholder resolutions filed. These actions are not aligned with the new 'purpose of a corporation,' but instead undermine the core principles of the statement."

Notably, however, the NYT column cited by AYS also provides the BlackRock counter-argument, which is that they take a nuanced approach with proxy voting as "only one tool in [their] toolbox"; they "have the largest investment stewardship team in the industry," and frequently engage with management even in the absence of shareholder proposals. In addition, they vote "against corporate directors when 'we do not see progress through engagement [and] support shareholder proposals that we believe will enhance the value of our clients' investments, but blindly voting for shareholder proposals is not a responsible approach to stewardship.'"

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