The ESG Fiduciary Gap

Vivek Ramaswamy is the Executive Chairman at Strive Asset Management. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian Bebchuk, and Roberto Tallarita; Does Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; Companies Should Maximize Shareholder Welfare Not Market Value (discussed on the Forum here) by Oliver Hart and Luigi Zingales; Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee (discussed on the Forum here) by Max M. Schanzenbach and Robert H. Sitkoff; and Exit vs. Voice (discussed on the Forum here) by Eleonora Broccardo, Oliver Hart and Luigi Zingales.

The largest fiduciary breach and the most significant antitrust violation of our time may be hiding in plain sight: a small group of large asset managers are using a vast base of client funds to advocate for social agendas unrelated to those clients’ long-run financial interests.

The largest three U.S. passive asset managers—BlackRock, State Street, and Vanguard, sometimes called “the Big Three”—manage approximately $20 trillion of capital on behalf of clients and exert staggering social influence on American companies. They collectively own more than 20% of the S&P 500, and, as of 2017, constitute the largest shareholder in almost 90% of those companies.

These asset managers are, first and foremost, fiduciaries for their clients. As fiduciaries, they owe their clients the duty of care and the duty of loyalty. These duties are taken from trust law, and center around a fundamental principle called the “sole interest rule.” As explained in the Restatement (Third) of Trusts, the “sole interest rule” requires fiduciaries to act “solely” and “exclusively” in the interest of the persons to whom their fiduciary duties are owed.

Under the sole interest rule, asset managers cannot be influenced by their own interests, by the interests of third-party “stakeholders,” by “social” objectives, or by any motives other than what’s best for their clients. Accordingly, the Uniform Prudent Investor Act makes clear that “[n]o form of so-called ‘social investing’” is lawful “if the investment activity entails sacrificing the interests of trust beneficiaries . . . in favor of . . . the particular social cause.”

Despite this bedrock principle, the Big Three are all promoting the ESG agenda rather than focusing on clients’ interests alone. BlackRock, for example, is the world’s largest asset manager, and has made a “firmwide commitment to integrate ESG information into investment processes across . . . all of [its] investment divisions and investment teams.” And it has made good on this promise. It has used its financial clout to push American companies to cut their carbon emissions, conduct racial equity audits, restrict legal gun sales, commit to net zero, limit the number of white men on their boards, and more. Vanguard and State Street have also jumped on board, pledging fealty to ESG principles and leveraging their clients’ shares in much the same way. Where there was once a “sole interest,” there now are many.

Antitrust issues also abound. BlackRock is currently under investigation for antitrust violations precisely because of its coordinated ESG activism through groups like Climate Action 100+, Net Zero Asset Managers, and Glasgow Financial Alliance for Net Zero. Vanguard and State Street are members of many of the same groups. In fact, until recently, as Arizona’s Attorney General has observed, “Wall Street banks and money managers [were] bragging about their coordinated efforts to choke off investment in energy.”

U.S. antitrust statutes are broad by design. They forbid competitors from entering into any agreement with the purpose or likely effect of reducing supply in a relevant market. Here, through these groups, BlackRock is cooperating with its competitors to make concerted efforts to decrease marketwide output in fossil fuels. That is no secret; it is the very purpose of these organizations. Net Zero Asset Managers, for example, makes clear that it has an “expectation of signatories” like BlackRock to force a “rapid phase out of fossil fuel[s],” including by, for example, refusing to finance new coal projects.

If the CEOs of Exxon, Chevron, and Shell decided to cut gas production and prices then spiked, the DOJ Antitrust Division would be making arrests. But when the Big Three pressure them to do the same thing, it is praised as “ESG.”

ESG investing is also rife with conflicts of interest. While BlackRock pressures U.S. companies like Exxon and Chevron to reduce oil production to fight climate change, BlackRock remains a large shareholder of foreign firms like PetroChina without making similar demands abroad. While BlackRock claims everything it does is to benefit its clients, it lobbied the U.S. government for China-friendly policies and urged investors to triple their assets allocated to Chinese companies at precisely the moment that BlackRock was seeking the CCP’s approval to launch mutual funds in the country.

State actors are now advancing policy solutions to these problems, but market problems demand market solutions first. That’s why I founded Strive Asset Management this year. Strive aims to offer a new choice in the marketplace that advocates for companies to focus exclusively on delivering excellent products and services to their customers to maximize shareholder value, without advancing unrelated social or political agendas.

To that end, I recently wrote letters to the boards of Apple, Disney and Chevron questioning their decisions to embrace ESG agendas that don’t appear to advance business goals—including Apple’s racial equity audit, Chevron’s carbon emissions caps and Disney’s opposition to Florida’s Parental Rights in Education Act. ESG proponents often argue that such practices are in the “long-run interests” of stockholders, but they’re not. In each case, the groups that advanced these policies were clear that their primary motivations were nonpecuniary. The nonprofit behind the Chevron proposal wanted to push “Big Oil to go green”; Disney employees believed they were fighting for LGBTQ+ rights; the nonprofit that pressured Apple to conduct a racial equity audit seeks to dismantle “white supremacy.” Agree or disagree with these objectives, they aren’t about the interests of stockholders. So it’s no surprise that each company initially resisted these efforts, before eventually changing course.

The strongest argument on behalf of corporate social activism is that society endows corporate shareholders with benefits like limited liability that ordinary persons don’t enjoy. “Companies need to earn their social license to operate every day,” BlackRock CEO Larry Fink has said. Maybe, but that’s for lawmakers to decide, and for now the law is clear: Corporate boards, like their asset manager brethren, are obligated to act with the sole purpose of advancing the best interests of stockholders. As an asset manager that cares deeply about fulfilling our fiduciary duties, I will do everything I can to ensure that our portfolio companies do too.

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