What BlackRock Gets Right in its Newly Minted Human Rights Engagement Policy

Malcolm Rogge is a Research Fellow in the Corporate Responsibility Initiative of the Mossavar-Rahmani Center for Business and Government at Harvard Kennedy School, and a Lecturer at the University of Exeter School of Law. This post is a response to BlackRock’s 2021 Engagement Priorities. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In March 2021, BlackRock Investment Stewardship published a short but consequential document titled “Our approach to engagement with companies on their human rights impacts.” This represents a significant move by the investment management firm into the global “business and human rights” policy debate. Based in New York City, BlackRock Inc. is the world’s leading investment firm with assets under management worth close to $9 trillion. A publicly traded company, it holds at least a 5% stake in more than half of the firms in the S&P 500. The value of its stock has increased 300% over the last decade. BlackRock’s priorities for 2021 include engaging with firms “whose business practices have breached international norms set forth by the UN Guiding Principles on Business and Human Rights (UNGPs) and the OECD Guidelines for Multinational Enterprises.” What does BlackRock get right in its newly minted global policy on international human rights? The answer to this question might not be what you expect.

As in many countries, asset managers in the United States are governed by fiduciary trust laws that give primacy to creating value for investors. If human rights are to be considered at all, asset managers are strongly compelled to consider them only in terms of their instrumental and material value to investors. This situation creates a conundrum for decision makers at firms like BlackRock, since the calculated instrumentalization of human rights for shareholder gain might well be seen to debase the very foundation of human rights.

Defining materiality has proved to be a politically sensitive endeavor. New rules that came into effect in the last days of the Trump administration require investor fiduciaries in most cases to consider only “pecuniary factors” when deciding whether to invest in a company. This hotly debated requirement was locked into the fiduciary standards of “prudence” and “loyalty” under the US Employee Retirement Income Security Act (ERISA), a law that is intended to protect the beneficiaries of employee pension plans. A spartan reading of these new rules suggests that asset managers may consider a company’s human rights impacts only insofar as they have a “material effect” on the risk and/or return of an investment. But the future of these new rules is already in doubt. In the same month that BlackRock published its international human rights engagement policy, the US Department of Labor, under the direction of the newly formed Biden administration, signaled its intent to revisit the new rules. While the Department has stated that it will not enforce them, until such time as the rules are amended or rescinded, they remain, at the very least, a relevant consideration for investment managers.

So, what are BlackRock’s people to do if they want to stay within the bounds of US fiduciary law and client expectations while upholding human rights, rather than undermining them? Investment managers who mean well on human rights issues have to reconcile their sense of moral duty with what they and their clients regard to be their legal duty. They must also be very careful about what they say publicly about how human rights figure into their decision making. The primacy given to materiality in US investor fiduciary law is reflected directly in BlackRock’s approach to engagement on human rights. BlackRock takes pains to frame its approach as integral to its sworn mission to protect and create value for its investor clients; human rights risks to people are treated instrumentally insofar as such risks have potential to rebound onto investors.

In this narrow respect, BlackRock gets it right: it succeeds in integrating a global policy on international human rights engagement that is squarely in line with US investor-centered fiduciary law. Not only that, BlackRock’s executives and other decision makers are facially protected from potential claims of breach of investor fiduciary duty. But what else does the firm’s approach to human rights achieve? How does BlackRock’s approach uphold and respect the human rights of the very people that human rights norms were created to protect? If it succeeds at all in this respect, it does so indirectly, as we shall see.

BlackRock’s policy makes it official that its sole motive for engaging companies on human rights is to deliver value for its clients. This singular motive leads the firm to prescribe that, beyond serving their shareholders, “companies should also consider their other key stakeholders.” Such concerns matter to BlackRock because a company’s “poor relationships” with stakeholders “may create adverse impacts that expose a company to legal, regulatory, operational, and reputational risks and jeopardize their social license to operate.” In other words, it is important for companies to hear the concerns of stakeholders because, over the long run, it helps to generate sustainable value for shareholders. Here, BlackRock’s approach is a textbook example of how the “business case” for corporate social responsibility is said to be “embedded” into a firm’s strategy; it is also an exemplar of the “enlightened shareholder value” approach. By this method, championed by finance theorist Michael Jensen, shareholder value may be derived by using the insights of stakeholder theory.

When BlackRock talks about risks that are linked to human rights issues, it signals its alignment with investor fiduciary law by giving primacy to material risks to business over risks to people whose human rights may be adversely impacted by a company’s actions. A different approach is taken by the author the UNGPs, John G. Ruggie. He has demonstrated a preference for giving primacy to the risk to people. For instance, in his 2016 recommendations on human rights for FIFA, the international football association, Ruggie explained that, “[t]raditional enterprise risk management systems focus on risks to the enterprise itself … [but when] it comes to considering human rights risks, the essential starting point is risk to people.” This shifting of priorities was reinforced in a speech given in January this year, in which Ruggie stated that, “human rights due diligence can be included within a broader enterprise risk management system … [a]s long as the company is not simply looking for financially material risks to themselves, but rather looking for salient risks to people they are impacting.” But, when risks to business are given primacy over risks to people, as they are in BlackRock’s stated approach, mitigating or halting a company’s adverse human rights impacts is not the primary goal; rather, the aim is to make sure that the investor’s long-term pecuniary interests are not negatively impacted by rebound effects. While it is possible that BlackRock’s instrumental approach will benefit people whose human rights could be adversely impacted by business activity, such benefits will be incidental rather than central to the firm’s mission.

How is all of this expected to work on the ground? The practical problem, as BlackRock tells it, is that “[u]nmanaged potential or actual adverse human rights issues can not only harm the people directly affected, but also expose companies to significant legal, regulatory, operational, and reputational risks.” In contrast, companies that proactively address human rights issues can, “in addition to mitigating against such risks, also create opportunities for improved stakeholder relations, increased productivity, higher quality products, better positioning for its corporate reputation, and a stronger purpose-driven culture.” The evidence shows, according to BlackRock, that such efforts can increase long-term value and make it less expensive to acquire capital. Given all of this, BlackRock’s big ask for companies is “to implement processes to identify, manage, and prevent adverse human rights impacts that are material to their business, and provide robust disclosures on these practices.” Once again, the emphasis here is on material risk to business, not on the human rights risk to people (though both are noted). In this respect, BlackRock’s human rights engagement policy is legally astute, but the self-interested motive might be regarded as troubling from an ethical perspective. How seriously should we take such concerns?

It is impossible to impute personal motives solely by analyzing a policy statement; nonetheless, BlackRock’s choice of words does give some clues about the mixed motives that are in play. Reading between the lines, one gets the impression that the people at the helm of BlackRock want to do better than instrumentalizing human rights for investor gain. After all, they could easily avoid making statements on human rights in such a public way. And the argument that such overtures are just another style of marketing is not satisfactory. BlackRock’s human rights engagement policy is a precisely calibrated and carefully lawyered document—certainly no collection of slogans or feel-good bromides. So, what is really going on? Does US investor fiduciary law bind well-meaning investment managers in a straitjacket?

Needless to say, BlackRock puts itself in a very awkward position by urging companies to strive to prevent adverse human rights impacts because such impacts could hurt BlackRock’s clients. Certainly, the pain felt by human rights victims is real and lamentable; but seen through the prism of fiduciary law, the injuries that investors might sustain are graver. By putting a price on the human rights risk to people in terms of the material harm that such risks might pose to investors, BlackRock’s official line assumes the unsavory flavor of negating the intrinsic value of human dignity, the foundation of all human rights.

And yet, such a glum result is not where the moral tale of “responsible investment” has to end. Where the purist is unhappy, the principled pragmatist may still thrive. Given the constraints that it faces, BlackRock’s instrumentalist approach to human rights could turn out to be the best thing that it can do to move businesses to do a better job of preventing, mitigating, and remedying human rights risk to people. While still signaling compliance with fiduciary norms, BlackRock might find some success in “mainstreaming” the idea of corporate respect for human rights in the companies that it invests in. Indeed, it is remarkable to see the world’s leading investment management firm telling businesses that, “[c]ommunity harm or displacement, particularly using contested land or infringing on indigenous peoples’ rights, can damage community support and jeopardize access to resources vital to operations.” The business case rings loud and clear: human rights harm to communities can jeopardize corporate success. While not so pure itself, BlackRock is good enough to raise a red flag over development on contested lands and the infringement of indigenous rights. Coming from a global firm with unparalleled clout, this kind of language should not be dismissed as mere window dressing. But just how much credit does this $124 billion firm deserve for putting words on a page?

As always, the devil is in the details. BlackRock warns that it will scrutinize whether a company that it invests in “prioritizes human rights across its value chain.” Here, BlackRock is interested in whether a company conducts a scoping exercise to determine which potential human rights impacts on people should be highlighted for the sake of managing any financial, legal, and reputational risks that could rebound onto the company. Corporate action on human rights is placed within the framework of value optimization. Beyond this, BlackRock lists several practical steps that companies can take to manage human rights risks to business. These include creating a board committee on human rights issues, undertaking human rights risk assessments, tracing the supply chain, engaging with stakeholders, implementing grievance mechanisms, and providing “access to remedy to address actual human rights impacts.” As it happens, this list of action items is derived directly from the UNGPs. BlackRock even cites the importance of obtaining and maintaining “the free, prior, and informed consent of indigenous peoples for business decisions that affect their rights.” No doubt, BlackRock has in mind events like the months-long protests that were led by the Standing Rock Sioux Tribe against the Dakota Access Pipeline project in 2016–17. Extractive industry firms will duly note that BlackRock calls on companies to “provide access to resources and/or compensation in the event of displacement or destruction.” This is important because the human rights risks to people of development-induced displacement are well established in social science literature.

For company directors, BlackRock fires a shot across the bow, warning that, “[w]e may vote against directors if, in our assessment, a company is not effectively addressing or disclosing material human rights-related risks or impacts.” Whether such admonishments help to move the needle on corporate respect for human rights on the ground remains to be seen. The focus on materiality is mandatory. Materiality is about money; as such, we come back to the question of whether instrumentalizing human rights for making a profit debases the very concept of human rights. Indeed, it may. But we must also acknowledge that investor fiduciary law in the US today is unrelentingly fixed on investor protection, not on protecting human rights, or civil rights. And to be sure, the ultimate beneficiaries of investments should be given appropriate protection, especially those workers who will one day rely on their pensions to meet their basic needs.

As we can see, BlackRock treads a fine line in its treatment of human rights. If it puts serious efforts into engaging with companies on human rights, we can hope that some of the most severe human rights risks to people that are known today will be mitigated or prevented in the future. It could mean also that companies, through effective human rights scoping exercises, will uncover previously unknown or unacknowledged risks to people. We shall see. Those in civil society who stand watch on corporate accountability know that countless hours of vigilance are still needed. When adverse human rights impacts do occur, it is possible that BlackRock’s approach to engagement will move some firms toward providing an appropriate and timely remedy for harm. Is it enough? No. No one has ever said it would be or could be. More robust regulatory and accountability mechanisms are also needed urgently. Indeed, this need was recognized recently by the European Parliament, which adopted a draft mandatory corporate human rights due diligence law around the same time (March 10, 2021) that BlackRock published its human rights engagement policy.

Some will argue that BlackRock’s foray into “business and human rights” is a tactical move intended to stave off heavy-handed government regulation. Such arguments, however, are flawed because the more likely long-term result of BlackRock’s stratagem is to help open the way to an expanded repertoire of pro-social regulatory reforms. Whether BlackRock’s voluntary move into the human rights policy realm represents a giant leap toward corporate respect for human rights, or just one small step in the right direction, will be a matter for debate. The practical effect of its policy on minimizing and preventing harm to human rights victims around the world is what matters most.

This essay, with accompanying footnotes, is available for download from SSRN.

This essay represents my independent personal views only and are not necessarily those of any organization or person with whom I am or have been affiliated.

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