‘The Big Three’ must prioritize returns over ESG propaganda

Politics has subdued corporate boardrooms and hampered investment returns. Some asset management firms have lost focus on maximizing retirement plan returns and have become addicted to the public relations scam of “environmental, social, and governance” standards.    

Investment advisers such as BlackRock, Vanguard and State Street (the Big Three) have prioritized their own public relations agenda and subverted their responsibility to maximize their clients’ returns. 

Instead, the Big Three have embraced environmental, social and governance (ESG) standards that lack a uniform definition. Like the “wins above replacement” statistic in baseball, the ESG metric will differ depending on who calculates it. Subjective criteria for investments and proxy votes endangers returns for retirement and pension plans. Decisions should be based on objective quantitative analysis, not amorphous and ancillary criteria that have no substantive effect on the financial performance of a company. 

The ruckus over Tesla’s removal from the S&P 500 ESG Index exemplifies the differing views on what qualifies as an ESG investment. The lack of a uniform definition calls into question the legitimacy of ESG criteria in general. 

The Big Three’s massive concentration of voting power raises concerns about whether these firms are adhering to their fiduciary duty as required by law. The Big Three manage over $20 trillion in assets. To put that in perspective, total deposits in all U.S. commercial banks are about $18 trillion and in 2020 the U.S. gross domestic product (the largest in the world) was $20.95 trillion. 

The Big Three also control “more than 20 [percent] of the shares of S&P 500 companies and almost 30 [percent] of the votes cast at the annual meetings of those companies.” The Big Three on average “cast a combined 25 [percent] of the proxy votes” at the 250 largest publicly-traded companies in the U.S. according to an academic study by Caleb Griffin.

Index fund investors cannot vote on shareholder proposals because they do not own the underlying assets held by the fund. New legislation would return investment power back to investors in passively managed index funds. Sen. Dan Sullivan’s (R-Alaska) Investor Democracy is Expected (INDEX) Act would ensure that the Big Three vote on proxies that are in line with the preferences of their clients, such as individual retirees, police and firefighters.

The INDEX Act guarantees that investment advisers will put the economic interests of Americans’ retirement and pension money first. Investment advisers of passively managed index funds will not be able to vote on shareholder resolutions that put politics above maximizing returns for nest eggs. At the end of the day, Americans want to make sure that when they retire, they have maximized their savings for themselves and their posterity. 

BlackRock is failing to prioritize its role to find returns for 401(k) plans, in clear violation of the Employee Retirement Income Security Act of 1974 (ERISA). In most cases, investment advisers, such as BlackRock, are pursuing voting and investment strategies that conflict with the fiduciary duties of a retirement plan manager. The plan manager is statutorily obligated under ERISA to make decisions “solely in the interest of the participants and beneficiaries.” 

BlackRock’s ESG activism conflicts with a plan manager’s fiduciary duty to the individuals invested in the retirement plan. According to one U.S. Supreme Court case, the benefits a plan manager must provide to retirees are for the “exclusive purpose” of providing financial benefits to plan beneficiaries. Allowing the Big Three to pursue votes and investments based on nonpecuniary ESG benefits is a violation of both statute and court precedent. 

BlackRock is continuing to pressure companies to focus on climate risk based on the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). In a Case Western Law Review article written by Bernard Sharfman, BlackRock’s “engagement strategy is arguably not appropriate for enhancing the financial benefits of its beneficial investors, including those who” have a 401(k). Even some bankers have begun to admit that climate risk is negligible. 

Pressure from regulators also influences the Big Three’s investment and voting behavior. One study claims that the ESG rhetoric from the Big Three “may be designed to generate a positive public image; their actions designed to keep regulators at bay.” These investment and voting decisions are not made based on how to maximize returns, but to ensure the Big Three are shielded from regulatory scrutiny. 

Americans deserve to get the most out of their retirement plans. Politics needs to be removed entirely from investment decision-making. The INDEX Act is one way investors can finally start to maximize returns without the headache of political interference.  

Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.