Behind the Scorecard
The grades are based on a review of 50 of the most extreme ESG-oriented shareholder proposals (“The Fiduciary-Free 50”) from 2022 and an accompanying points system. Proxy votes are cast and disclosed to the SEC by the individual funds managed by investment companies such as BlackRock (commonly referred to as fund families). At each fund managed by the fund family, every supportive vote translated to zero points for the fund family, a vote against was 10 points, and an abstention or split vote was five points.
A fund family’s score reflects the sum of points scored compared to the maximum points possible had the firm adhered to their strict fiduciary duty to investors and voted against each of these shareholder proposals. For example, a fund family such as BlackRock manages 99 individual (non-ESG branded) funds that voted on one or more of the Fiduciary-Free 50 shareholder proposals. Across these 99 funds, BlackRock scored 11,940 points out of possible 17,450, which equates to a score index of 6.8 (11,940 divided by 17,450 x 10), or a C grade based on the scale provided below. The lower the score, the greater the alignment with ESG activism – and departure from strict adherence to fiduciary duty.
- 8.5 to 10 A
- 7.0 to 8.4 B
- 5.0 to 6.9 C
- 3.0 to 4.9 D
- 1.0 to 2.9 F
- 0.0 to 0.9 F-
How the process works and who votes
There is a complex set of rules, governed by the Securities and Exchange Commission, to qualify an issue for a shareholder vote. What’s noteworthy is that individuals – private citizens – only own about 25 percent of shares held in publicly-traded companies. The remaining shares are owned by institutions – typically mutual fund and ETF families, such as BlackRock, State Street, and Vanguard. These entities effectively determine the company policies even though the money being invested is “owned” by people whose pension funds and savings are being managed by these large money management institutions.
Today, more than half of the total investment in stock-based funds is allocated to passively managed ETFs and index funds, which simply mirror benchmarks such as the S&P 500. Here’s why that’s significant, as explained in a 2022 report prepared by the Republican staff of the Senate Banking Committee:
A retail investor who buys an index fund does not own the stocks in the fund. Those stocks instead are owned by the fund, which means that the fund’s manager may vote those shares. Even though they buy that voting power with other people’s money, that voting power gives asset managers like the Big Three [BlackRock, Vanguard, and State Street] enormous influence (emphasis added).
This is a fundamental point. Institutions are voting on behalf of tens of millions of shareholders – representing trillions of dollars in capital. Yet many fund managers are staking out positions that are at odds with the preferences of these shareholders. As noted in a study by professors at Duke, UC-Berkeley, Columbia, and New York University, “Compared to institutional investors, retail shareholders do not support environmental, social, and governance (ESG) proposals to the same degree.”
Vanguard’s stance is in stark contrast to that of BlackRock, whose CEO, Larry Fink, has been vocal about pushing companies to embrace the ESG agenda. In February 2023, Vanguard’s CEO, Tim Buckley, told the Financial Times:
We don’t believe that we should dictate company strategy. It would be hubris to presume that we know the right strategy for the thousands of companies that Vanguard invests with. We just want to make sure that risks are being appropriately disclosed and that every company is playing by the rules.
He added that, “Our research indicates that ESG investing does not have any advantage over broad based investing.”