A False Retreat?

The Big Three claim to have backed away from ESG, but their behavior shows otherwise

The mighty ESG triumvirate—BlackRock, Vanguard, and State Street—claim they’ve given up the fight.

Late last month, BlackRock released figures showing that it voted for just 7% of ESG shareholder proposals in the 2023 fiscal year, down from 22% in 2022 and 47% the year before. Vanguard soon followed, claiming it voted for just 2%. State Street hasn’t released its 2023 stats, but in May, the firm appeared to walk back its most punitive ESG voting practices. Conservatives ate it up. “Vanguard joins BlackRock in rejecting more ESG proposals,” Fox Business cheered. “[T]he ESG movement will RIP,” declared the New York Post.

But dictators rarely cede their power so peacefully, and the Big Three are no exception.

Their voting hasn’t changed. BlackRock said so itself: "our stewardship policies for 2023 build on our approach in prior years. We do not anticipate material changes in our voting as a result." Vanguard said the same: “our approach to evaluating shareholder proposals—including those on environmental and social matters—has been consistent over time.” So did State Street, claiming it has been “consistent[]” in its ESG voting, and wasn’t planning to change its approach in light of recent backlash.

The Big Three were telling the truth. A July Morningstar analysis showed that both BlackRock and State Street supported the majority of 100 key environmental and social proposals—the most divisive proposals targeting the largest American companies—over the past two years. Vanguard, often heralded as the most investor-friendly of the Big Three, still voted for 50% of “workplace equity” proposals and 40% of climate proposals—an order of magnitude larger than the 2% figure it trumpets to the press.

So how did BlackRock and Vanguard make their numbers look so good?                

Here’s one trick: The firms excluded any management proposals, where the company lays out a plan to fight climate change or increase diversity, and then puts it to a shareholder vote. The firms’ excuse? These proposals were made by management, so it’s not really BlackRock’s or Vanguard’s ESG activism, but that of the company itself.

That’s not just a cop out, it’s false. The Big Three are all signatories to the UN Principles for Responsible Investment (UNPRI), through which they vow to take “action on priority ESG issues” including “shaping outcomes in line with planetary boundaries [and] inclusive societies." To meet this commitment, the Big Three field teams of engagement professionals who urge companies to adopt ESG goals. In 2023, BlackRock’s 70-member team held 1,662 engagements on environmental issues alone—engagements that come with the implicit (and sometimes explicit) threat that directors that resist Blackrock’s mandates may soon find themselves out of a job.

That pressure is working. But now that companies have fallen in line, the trillion-dollar asset managers pulling the strings claim these ESG initiatives were not their idea.
That’s not the only way they juiced their stats. According to their own reports, the Big Three frequently voted “no” not because they opposed the ESG measure on the merits, but because the proposal was redundant with what they had already pushed management to do.

Just look at Amazon: BlackRock voted against a plastics reduction proposal, but only because the company had already agreed to reduce plastic waste following BlackRock’s “yes” vote last year. Or Starbucks: Vanguard voted against an audit of the company’s union-busting practices, but only because Vanguard met with Starbucks’s management, who assured Vanguard that the company had already agreed to undertake one.

Accordingly, when the Big Three vote “no” due to redundancy, the “no” vote doesn’t mean that they disagree with the ESG goal, but that they agree so vehemently that they’ve already convinced the company to pursue it, such that a “yes” vote isn’t needed. From the perspective of investors focused exclusively on maximizing financial value, counting these “no” votes as a rejection of ESG—rather than an emphatic endorsement—defies credulity.

But even this gamesmanship doesn’t tell the whole story. The Big Three have also benefitted from a rule change at the Securities and Exchange Commission that makes it easier to submit proposals. As a result, ESG proponents filed some truly zany proposals in 2023—things like asking Starbucks to switch to vegan milk and Coca-Cola to consider relocating to a pro-abortion state. Stuff even the Big Three can’t find a way to get behind. But they surely appreciated the proposals nonetheless, since these easy “no” votes helped them appear more moderate while continuing to vote for the big ticket ESG items they really care about.

There’s no doubt that BlackRock and Vanguard, at least, have been trying to create the appearance of retreating from ESG. The three-letter acronym is now verboten at BlackRock, stripped from Mr. Fink’s annual letter and recent reports. But the rebranding is in name only: “ESG” is now “conscientious capitalism”; “E” is now “climate and natural capital”; “S” is now “company impacts on people.” This is not progress. It is obfuscation-by-thesaurus.

As for Vanguard, it made a noisy exit from Net Zero Asset Managers last winter and admitted that ESG investing does not outperform. Superficially more substantive steps than BlackRock, to be sure. But Vanguard remains a member of other, equally ESG-focused organizations like UNPRI, and continues to advertise ESG-themed funds.

Here’s the real test: If the Big Three were truly committed to doing right by investors, they’d seek to undo the harm they’ve already done. Some of this year’s proposals held their feet to the fire: One asked Chevron to rescind an emissions reduction proposal the Big Three supported in 2021; another asked Home Depot to rescind the racial equity audit BlackRock voted for last year. The Big Three voted “no” on both. Rather than retreat from the ESG battlefield, the Big Three steadfastly defend the territory they’ve already conquered, with sights set further ahead.

In this light, the Big Three’s latest reports appear less like surrender and more like an attempt to fake ESG’s own death. Hopefully, investors who truly care about refocusing corporate America on business, rather than politics, will see them for what they are: wartime propaganda, intended to convince their critics to lay down their arms.