Investment

Sen. Sullivan looks to curb power of giant investment firms embracing ESG

Sen. Dan Sullivan (R-AK) has introduced legislation to rein in the power over corporations enjoyed by the biggest asset managers, many of whom have provoked Republicans by embracing “Environmental, Social, and Governance” standards for businesses.

The Investor Democracy Is Expected Act would give more power to passive investors who invest their money in mutual and exchange-traded funds through firms like Vanguard. It would require money managers to vote proxies based on their clients’ wishes rather than the firm at large. Such a provision could limit the power of massive money managers to penalize oil companies, for instance, which are discouraged under ESG standards.

As passive investment vehicles such as ETFs and index funds have exploded in popularity, the three largest money managers (Blackrock, Vanguard, and State Street) have consolidated enormous voting power over publicly traded companies using the money of their clients, something that Sullivan and the dozen other Republican co-sponsors see as market distortion.

The three giants manage over $20 trillion in combined assets and represent more than 25% of all votes cast at the annual meetings of companies. Blackrock, Vanguard, and State Street are also the largest owners in 96% of the S&P 500. That consolidation gives them considerable sway in voting on various corporate proposals, including those that individual fund investors might not support.

“The more we dug into it, the more it was, like, ‘Wait, why are they the ones who get to vote these shares, not the beneficial owner who actually own them?'” Sullivan told the Washington Examiner during an interview.

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“Our bill is quite simple. It just says that the beneficial owner who owns the shares is the entity or person entitled to vote — not the managers of these massive passive index funds,” he added.

The legislation would allow individual passive investors to have shareholder voting power when their money manager owns more than 1% of a company’s voting securities. It also requires investment advisers to provide proxy statements and other information to fund investors and stipulates that those advisers must allow third-party recommendations on a basis that permits a broad diversity of views.

If an individual fund investor has no interest in voting on the various matters that their companies are mulling, their vote would not be returned to the money manager. Instead, it would just not be considered.

The cost of implementing the pass-through voting would be shouldered by the funds or their investment advisers, rather than by the companies in the portfolio. Investment advisers could also forgo voting altogether and not have to pay any of the costs associated with the legislation.

“If you have a financial stake in a company, you should have a say in that company’s decision-making process. But too often, shareholders are at the whim of Wall Street advisers who are not required to put the best interest of investors above their personal agendas or motives,” said Sen. Chuck Grassley (R-IA), one of the bill’s co-sponsors.

“Our commonsense proposal will cultivate much-needed transparency and ensure advisers answer to their investors, not the other way around,” he added.

BlackRock CEO Larry Fink said in 2020 that climate change would be a “defining factor” in its investment assessments, and Blackrock has repeatedly faced pushback by Republican-led states for its prioritization of ESG.

“As stewards of our clients’ capital, we ask businesses to demonstrate how they’re going to deliver on their responsibility to shareholders, including through sound environmental, social, and governance practices and policies,” Fink said in his annual letter to CEOs released this year.

Some red states have pushed back against ESG initiatives. For instance, Texas Gov. Greg Abbott signed a bill that banned state investments in businesses that cut ties with the oil and gas industry.

While the senator’s legislation has a dozen Republican co-sponsors right now, it will need bipartisan support to pass through Congress and land on President Joe Biden’s desk.

Sullivan said that some Democrats had expressed their interest in supporting the legislation. He said that lawmakers who are concerned with good corporate governance and look at the numbers are shocked because of just how much control the three entities have.

The issue of concentration of wealth and consolidation of power gets a lot of senators on both sides of the aisle interested, Sullivan added.

The Alaska lawmaker also told the Washington Examiner that his office has been in contact with some of the major investment funds in question and, “surprisingly,” they haven’t been pushing back against the legislation.

“Some have even indicated they support my bill,” Sullivan said, noting that it is interesting because the legislation would eviscerate some of those firms’ power to make decisions. “I think, at a certain point, they probably recognize that they don’t have a monopoly on wisdom.”

When contacted by the Washington Examiner, a BlackRock official acknowledged that the money it manages is not its own and belongs to the clients, noting that the money manager launched an initiative that allows some institutional investors to vote.

“We look forward to working with members of Congress and others on ways to help every investor — including individual investors — participate in proxy voting if they choose,” the official said.

Vanguard struck a similar tone when contacted for comment.

“As always, in regard to this issue, Vanguard is singularly focused on our clients and their long-term success. Vanguard believes it is important to give investors more of a choice in how their proxies are voted, and we are committed to working with clients, policymakers, and others to help ensure long-term investor voices are heard,” an official said.

The Washington Examiner also asked State Street for comment about the legislation.

CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER

Sullivan said that if the bill doesn’t pass through this Congress, it will next year if Republicans wrest back control of the House and Senate in the midterm elections.

“If this law passed, Joe Biden would have a very hard time vetoing this. He’d look like the biggest stooge of big finance in American history,” Sullivan said. “If this law passes, any president is going to sign it.”




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