There has been a longstanding debate over corporate social responsibility (CSR), which can be defined as “the obligations and inclinations, if any, of corporations organized for profit, voluntarily to pursue social ends that conflict with the presumptive shareholder desire to maximize profit.”[1] One important school of thought contends corporations should be run so as to maximize shareholder wealth. The other major school of thought argues that directors and managers should consider the interests of all corporate stakeholders in making corporate decisions. Judges and scholars in the latter camp define the “socially responsible firm” as “one that becomes deeply involved in the solution of society’s major problems.”[2] In particular, they emphasize the corporation’s obligation to consider the impact of its actions on nonshareholder corporate constituents, such as employees, customers, suppliers, and local communities.
Although there long have been some investors who preferred to invest in socially responsible corporations, mainstream investors were primarily concerned with profit maximization. In recent years, however, there has been growing investor interest in environmental, social, and governance (ESG) investing. Although that term “resists precise definition,” it is generally defined as “an umbrella term that refers to an investment strategy that emphasizes a firm's governance structure or the environmental or social impacts of the firm's products or practices.”[3]
Unlike older forms of CSR activism, proponents of ESG activism contend that it is largely grounded on economic rationales:
The two primary rationales that together form the “business case” for this form of “responsible investment” are the prospect of higher long-term returns, and improved firm-level risk management and portfolio-level risk analysis. For example, the PRI affirms that a focus on ESG matters “may better align investors with the broader objectives of society,” but its fundamental rationale is solidly grounded in shareholder primacy—namely, that “consideration of [ESG] issues is part of delivering superior risk-adjusted returns” to investors over the long run.[4]
The big question, however, is the extent to which the big institutional investors that operate mainly passively managed index funds are engaged in ESG activism. Towards that end, I direct your attention to: Griffin, Caleb, Environmental & Social Voting at Index Funds (February 14, 2020). Available at SSRN: https://ssrn.com/abstract=3542081 or http://dx.doi.org/10.2139/ssrn.3542081
By voting one-quarter of shares at large public companies, just three index funds increasingly control American corporate governance. Nowhere is this control more acute than in the case of environmental and social (“E&S”) voting. The “Big Three” funds — Vanguard, BlackRock, and State Street — have the power to determine the fate of the bulk of E&S proposals.
This Article demonstrates that, despite a considerable marketing focus on their E&S efforts, overall support for E&S proposals is low for the Big Three. In the 2018-2019 proxy season, Vanguard’s largest funds supported 7.5% of unique shareholder E&S proposals, while State Street’s largest funds supported 22.7% of such proposals and BlackRock’s largest funds supported 7.1% of such proposals. Other funds support E&S proposals at far higher rates (e.g., Deutsche Bank at 77.9%) and far lower rates (e.g., Dimensional at 0%).
Whether or not one agrees with the normative recommendations that article draws from that data, the data is fascinating. Blackrock's CEO Larry Fink has made a big deal out of ESG activism and Blackrock's marketing emphasizes those issues. But the data doesn't bear out a real commitment.
[1] David L. Engel, An Approach to Corporate Social Responsibility, 32 Stan. L. Rev. 1, 5–6 (1979). “Note that the definition excludes acts beneficial to nonshareholder constituencies which, although detrimental to profits in the short run, lead to long-run profit maximization.” Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L. Rev. 819, 863 (1981).
[2] Robert D. Hay & Edmund R. Gray, Social Responsibilities of Business Managers, in Managing Corporate Social Responsibility 8, 11 (Archie B. Carroll ed. 1977).
[3] Max M. Schanzenbach, Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by A Trustee, 72 Stan. L. Rev. 381, 388 (2020).
[4] Virginia Harper Ho, "Enlightened Shareholder Value": Corporate Governance Beyond the Shareholder-Stakeholder Divide, 36 J. Corp. L. 59, 82 (2010).
