It’s time for full transparency on ESG boardroom activism

Activist investors will use this proxy season as an opportunity to pressure public companies to pursue political agendas. Congress needs to ensure that asset management firms are complying with proper disclosures so that beneficial owners of the assets being managed, such as retirees, are aware of the environmental, social and governance engagement being conducted with board directors.  

This proxy season asset managers will likely engage companies’ board directors on ESG topics that have little to no bearing on the financial performance of a company and fail to offer exclusively financial benefits to clients. So far, Lowe’s and Coca-Cola have been targeted for their position on abortion while gun maker Sturm Ruger & Co. has been forced to create a human rights report. 

These types of shareholder proposals foreshadow the engagement that could take place this year.

This investor pressure coupled with the Securities and Exchange Commission’s recent rulemaking on extraneous shareholder proposals paints a picture of both political actors within the Biden administration and certain asset managers tag teaming to require companies to pursue actions or disclose information with little to no pecuniary value. Rule 14a-8 under the Securities Exchange Act of 1934 was errantly revised by the SEC to make it harder for public companies to exclude extraneous shareholder proposals knowing full well that about 80 percent of all stock in the S&P 500 is owned by institutional investors, not individuals. 

The SEC’s proposed amendments have empowered asset managers and ignored individuals. 

It remains to be seen how the disclosure of this information significantly alters the “total mix of information” made available with regard to the overall pecuniary returns that investors seek. More likely, the disclosures are purely a political power play. 

The three largest asset managers control a significant portion of proxy voting power. BlackRock, Vanguard and State Street hold a “median stake of 21.9 percent in S&P 500 companies” representing “24.9 percent of the votes cast at the annual meetings of those companies.” Staff for the Senate Banking Committee released a report at the end of 2022 pointing out that asset managers could be violating Schedule 13D under the Securities Exchange Act due to their increased board engagement and activism. According to the report, the asset managers have been using “abbreviated” Schedule 13G disclosures, which can only be used if there is no intent to control a company. 

Today, asset managers are not required to disclose their engagement with public companies on ESG topics unless they file under 13D. However, SEC Commissioner Mark Uyeda has observed that “nearly all” of the asset managers with the largest funds use the truncated 13G forms instead of the full disclosures required in 13D. Uyeda points out in his speech that “this dichotomy in disclosure obligations between a company and an asset manager seems at odds with a disclosure regime aimed at providing material information to all shareholders.”

Reviewing compliance with 13D could enhance accountability with asset managers and offer greater insight into private ESG engagement with portfolio companies.

The most salient example of activism is when activist hedge fund Engine No. 1 convinced asset managers to use their voting power to replace board directors at Exxon Mobil. 

Another example is Vanguard’s voting power over publicly traded utilities. Last November, a group of 13 states and their attorneys general filed a motion to intervene and protest Vanguard’s application to the Federal Energy Regulatory Commission (FERC) to extend their broad authorization for acquisitions of voting securities of publicly traded utilities. According to the motion, Vanguard’s membership in international climate organizations conflicts with their commitment not to acquire voting securities “for the purpose of exercising control or management” of utilities. 

Although Vanguard has since left the Net Zero Asset Managers Alliance (NZAM), it is still a member of the Ceres Investor Network which is partnered with NZAM, the Paris Aligned Investment Initiative and Climate Action 100+. 

ESG engagement with board directors could harm consumers if their utility “costs went up because of substitution to more expensive energy sources.” This conflict could also apply to other asset managers such as BlackRock since they are also a member of various international climate organizations. 

As the 118th Congress kicks off, members should seek bipartisan solutions to ensure that consumers, companies and individual investors understand how their money is being used by asset managers to pursue political agendas versus engaging to enhance financial performance and pecuniary returns. 

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