The U.S.’s largest passive investors—BlackRock, Vanguard and State Street Global Advisors—are pushing the companies they own to improve their business practices by focusing on gender diversity on boards and climate-risk disclosure.
Although active investors have traditionally led stewardship efforts, the Big Three, with nearly $11 trillion in combined assets under management, are stepping up their efforts because they realize corporate behavior is strongly linked to long-term shareholder value. They’re also likely to influence other stakeholders to pay greater attention to stewardship.
That’s the message from Jon Hale, head of sustainability research at Morningstar. Hale spoke with the heads of stewardship from the Big Three earlier this month at the Morningstar ETF conference and shared their comments in an article he published on Morningstar’s web site.
State Street’s Rakhi Kumar told him, “Index investing is like being married, with divorce not an option; you have to work out your differences.” Vanguard’s Glenn Booraem said, “Passive ownership is like being in a car you can’t get out of. We need a good driver, i.e., the board and management. Governance structures are the seats and airbags.”
The Big Three’s efforts aren’t just a passing fad, Hale tells Financial Advisor. They “want to make sure management is focused on long-term kinds of issues, not just ‘hitting earnings next quarter’ kinds of issues,” he says.
Regarding stewardship, “State Street has definitely been the leader of the three,” says Hale, followed by BlackRock. Both firms are largely institutionally focused and are likely facing demand from institutional clients to engage in stewardship, he says.
Vanguard is more retail-based, he says, and therefore may be more hesitant to take a stand on issues that may seem political. It arrived later to the stewardship party, but Hale isn’t surprised it’s now trying to keep up with its peers.
In August, Vanguard released its first report revealing how its proxies were voted and describing its approach to stewardship. Vanguard had “an added impetus,” he says, noting that earlier this year ESG firm Walden Asset Management filed a shareholder resolution with the asset manager that asked it to be more transparent.
BlackRock, Vanguard and State Street have penned “open letters” to companies they own, asking them to improve gender diversity on boards and to disclose their efforts to address climate risk. Studies show companies that have a diverse group of decision makers outperform companies that do not. Long-term fiduciaries also realize companies will be better off if they understand the very real risks that climate change poses for them and their businesses, says Hale.
In May, 62 percent of Exxon Mobil shareholders voted for the oil and gas company to begin producing an annual report to reveal the impacts of climate change on its business. State Street supported this proposal last year, when it received about 40 percent of the vote, he says, “so the assumption was that BlackRock and Vanguard, who are big shareholders, were the ones that pretty much shot it all the way up into the 60 percent-plus territory.”