A BlackRock Inc. decision to give some of its biggest clients more power to vote at shareholder meetings just added a new twist to the raging debate at the heart of ESG investing.
The world’s largest asset manager revealed on Thursday that from next year, some institutional clients will be able to play a bigger role in shareholder votes. The move will apply to about 40% of $4.8 trillion in index equity assets that BlackRock manages.
The decision to give index investors more influence comes as the firm predicts a “vast reallocation” of capital into environmental, social and governance strategies. But amid the boom, there remain big questions over what constitutes an effective ESG approach.
The core of the dilemma: Is it better to punish companies that fall short by selling out, or to stay vested and try to bring about improvements through active ownership?
Perhaps because it’s easier, a lot of Wall Street ESG strategies have evolved around the former approach. BlackRock itself is the biggest issuer of ESG exchange-traded funds, which are marketed to investors as a way to steer cash toward good companies and away from bad ones.
Yet some of the most eye-catching corporate changes have been brought about by active investors, such as Engine No. 1’s victory in a fight to get board seats at ExxonMobil Corp., one of the world’s biggest emitters of carbon dioxide.
Tracking Costs
Recent research helps explain why the latter strategy is winning new believers.
Even as billions of dollars diverts toward firms scoring higher on ESG measures, the funding costs for bad actors have hardly budged, according to the study. It suggests that portfolio allocation ultimately does little to correct unethical behavior in the corporate world.
“A substantial increase in the amount of socially conscious capital is required for the strategy to affect corporate policy,” authors Jonathan Berk and Jules Van Binsbergen wrote in the August paper. “Given the current levels of socially conscious capital, a more effective strategy to put that capital to use is to follow a policy of engagement.”
Berk and Van Binsbergen -- from the Stanford Graduate School of Business and the Wharton School, respectively -- started with the assumption that effective divesting should result in higher costs of capital for the company that’s been sold.