BlackRock’s decision to enable investors to directly engage with underlying companies is set to revolutionise the ESG ETF space while simultaneously alleviating one of the biggest concerns surrounding the rise of passives.
Last week, it was revealed the world’s largest asset manager is set to offer institutional investors the opportunity to vote directly with companies, instead of the firm partaking itself.
As a result, investors in some 40% of BlackRock’s $4.8trn equity index assets will be able to vote at shareholder meetings, effective 1 January 2022.
The firm said the decision was made in response to an increasing number of clients demanding more say in the direction of the companies they are passively invested in, especially when it comes to ESG and climate metrics.
In a letter to clients, BlackRock said: “This capability…responds to a growing interest in investment stewardship from our clients. These options are designed to enable you to have a greater say in proxy voting.”
How ETF issuers engage with the underlying companies they own is becoming an increasingly important focus for investors. There is currently a wide dispersion between asset managers on their ESG and climate voting records with many still voting in favour of management in the majority of cases.
The move by BlackRock will give investors greater powers when it comes to holding companies to account and in turn, tackles an argument that is typically thrown at the passive management industry.
However, where this decision will have the greatest impact is around concerns the rise of index investing is leaving control of the US economy in the hands of a few companies – namely the ‘Big Three’ of BlackRock, Vanguard and State Street Global Advisors (SSGA) who account for over 80% of the US ETF market.
As part of the dramatic rise of passives over the past decade, the ‘Big Three’ have become major shareholders in the biggest companies in America and across the globe.
Numerous studies have been produced on the impact this could have further down the line, especially if the trend to passives continues as expected. One in particular from Jose Azar, professor at IESE Business School, Universidad de Navarra, found common ownership can create anti-competition issues for rival companies.
In particular, he studied the price of aeroplane ticket prices between 2001 and 2014 and found prices were 3-7% higher “due to common ownership” versus “a counterfactual world” where companies were owned separately.
By handing voting rights to investors instead of retaining them itself, BlackRock will no longer be beholden to concerns it may vote favourably towards company management that is not in the best interests of consumers and the wider economy.
Should other issuers follow BlackRock’s lead, this will give more power to investors, the ones with skin in the game, while going some way in calming ownership fears.
As Eric Balchunas, senior ETF analyst at Bloomberg Intelligence, said: “All big firms should offer to democratise their voting. This would help solve the worry over too much passive power.”