In two recently proposed rules, Financial Factors in Selecting Plan Investments and Fiduciary Duties Regarding Proxy Voting and Shareholder Rights, the Department of Labor (DOL) has made clear that under the Employee Retirement Income Security Act of 1974 (“ERISA”), Environmental, Social and Governance (ESG) investing does not have a place in the investment portfolio of an employer-sponsored pension plan and that a plan manager cannot participate in shareholder voting and engagement with portfolio companies unless these activities are expected to enhance the economic value of the plan.

What these two recent rules do not address is how an ERISA plan manager is to deal with the shareholder activism of an investment adviser with a large amount of delegated voting authority. This voting power is a result of both the large movement of assets into the index funds of a relatively small number of investment advisers, such as BlackRock, and the industry practice of mutual funds and electronically traded funds (“ETFs”) delegating voting authority into the hands of their respective advisers. An investment adviser’s shareholder activism is reflected in its rhetoric, disclosing the objectives of its activism, shareholder voting, and engagement with portfolio companies.

The shareholder activism of Blackrock and how it affects the fiduciary duties of an ERISA plan manager is the issue that I explore in my white paper “The Conflict Between BlackRock’s Shareholder Activism and ERISA’s Fiduciary Duties.” In this paper, I argue that an ERISA plan manager has a fiduciary duty, the duty of prudence, to investigatethe shareholder activism of BlackRock.  

BlackRock’s shareholder activism started slowly but has built up over time. In Larry Fink’s 2018 letter to CEOs, he stated: “Companies must benefit all of their stakeholders, including shareholders, employees, customers, and the communities in which they operate.”

In Larry Fink’s 2019 letter to CEOs, he explained that this stakeholder approach was all about the marketing of its investment products to millennials, a group that will eventually be the beneficiaries of a $24 trillion wealth transferfrom their baby-boomer parents. He believes that this group will have an enhanced focus on environmental, social,and governance issues. If so, this makes it imperative for BlackRock to act now to develop brand loyalty, not later. Coincidentally, it should also enhance BlackRock’s profitability, as ESG funds charge significantly higher fees.

In Fink’s 2020 letter to CEOs and in a companion letter to clients, he announced that BlackRock was going to implement its millennial marketing strategy by requiring public companies to disclose data on “how each company serves its full set of stakeholders.” Moreover, noncompliance is not acceptable. According to Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” In addition, and definitely not a surprise, he announced the launch of a large number of new ESG funds and a refocusing of shareholder engagement such that it puts a greater emphasis on stakeholders who are affected by climate change and gender equality.

Based on its second-quarter 2020 Global Quarterly Stewardship Report, BlackRock’s evolving rhetoric has been backed up by its shareholder voting and engagement. For example, it reported a 22% increase in total company engagements (974), compared with 2Q:2019. Moreover, it identified 244 companies that it believed were making insufficient progress integrating climate risk into their business models or disclosures. Of these companies, it took voting action against 53, or 22%, and placed the remaining 191 companies “on watch.” Those companies that do not make significant progress on integrating climate risk into their business models or disclosures risk voting action against management in 2021.

External pressure has also added fuel to BlackRock’s activism. In November 2019, Boston Trust Walden and Mercy Investment Services submitted a shareholder proposal to BlackRock demanding that it provide a review explaining why its climate-change rhetoric does not correspond with how it actually votes at shareholder meetings. The proposal was reportedly withdrawn after BlackRock agreed to give increased consideration to shareholder proposals on climate change and join Climate Action 100, an investor group that targets its shareholder activism at fossil fuel producers and greenhouse gas emitters.

The shareholder activism of BlackRock has important implications for an ERISA plan manager. In my white paper, I argue that a manager has a fiduciary duty, the duty of prudence, to investigate BlackRock’s shareholder activism. This duty applies not only to the BlackRock mutual funds or ETFs that an ERISA plan invests in but also to those BlackRock fund selections that it makes available to its participants and beneficiaries in self-directed accounts.

The fiduciary objective in this investigation is to ensure that this shareholder activism is consistent with a plan manager’s duty of loyalty under ERISA. That is, “solely in the interest of the participants and beneficiaries” and for the exclusive purpose of providing financial benefits to them. If that is not happening, these funds should be excluded from an ERISA plan.

I find that if a plan manager were to investigate BlackRock’s shareholder activism, it would find it to be in conflict with its (the plan manager’s) fiduciary duties. For example, BlackRock’s first objective is to increase the marketing of its investment products to millennials. Its second objective is to appease shareholder activists who threaten to attack the business decisions, procedures, and objectives of its own corporate management. In both cases, shareholder voting and engagement is not being executed solely in the interest of its beneficial investors, including those beneficial investors who are participants and beneficiaries of an ERISA plan. As a result, those BlackRock-managed funds where its investment stewardship team has been delegated voting and engagement authority should not be allowed to become part of an ERISA plan until remedial action is taken.

Moreover, in order for BlackRock to attract millennial investors, its shareholder activism must focus on “improving society” for various stakeholders and not just “generating profit” for its shareholders. This commingling of strategies can be understood as implementing a voting and engagement strategy that is at least partially based on non-pecuniary objectives, i.e., this activism is not being done for the exclusive purpose of providing financial benefits to plan participants and beneficiaries. Therefore, a plan manager, after complying with its duty of prudence to investigate and identify this mix of strategies, would be required to exclude those BlackRock funds that were associated with this kind of activity.

An ERISA plan manager cannot abdicate its fiduciary duties with regard to shareholder voting and engagement just because the plan now owns the voting stock of public companies indirectly through its share ownership in mutual funds and ETFs. As a result, a plan manager will be duty-bound to investigate the shareholder activism of BlackRock.