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How will the “revolution in shareholder democracy” impact investment stewardship?

By November 8, 2022No Comments

As part of the pushback on ESG, large institutional investors have come under increasing pressure from conservative states and asset owners for their support of ESG in their investment stewardship and proxy access engagement with companies. As a response to this criticism, Larry Fink, CEO of BlackRock, the world’s largest asset manager, announced on Wednesday a plan to allow BlackRock’s retail investors to vote on proxy battles for the first time. He characterized it as a “revolution in shareholder democracy” that will “transform the relationship between asset owners and companies.”

How this will work out in practice remains to be seen. As the FT article on the announcement, BlackRock opens door for retail investors to vote in proxy battles, noted, “Efforts to offer proxy voting choice to US small investors are complicated by laws that specify that the investment adviser of an American retail mutual or exchange traded fund is the one who votes the shares held by the fund.”

Once these details are resolved, it is clear that this move to “shareholder democracy” has the potential to reduce support for ESG-related shareholder proposals and proxy access. What is less clear is how this will impact and curtail the role that large institutional investors’ investment stewardship activities will play in advancing ESG through their ongoing stewardship and corporate engagement work. While managers may rightfully point out that ESG integration is central to prudent investment management and their fiduciary duty, they now face a highly politicized environment where some asset owners are explicitly demanding they not consider ESG factors in their decision making and by extension, their proxy access and stewardship activities.

While the issues behind ESG are here to stay and ESG integration is an increasingly accepted part of effective business management, the ability of large institutional investors to continue to play a leadership role in ESG as stewards of the commons may now be in question. On the positive side, this may be the catalyst needed for the ESG movement and leading investment managers to clearly define what ESG is and isn’t from an investment management perspective and how integrating material ESG factors into investment management contributes to shareholder value.