New SEC Rules to Shed Light on BlackRock, Vanguard ESG Votes

New SEC requirements for BlackRock, Vanguard and other mutual fund companies to provide greater detail on their proxy voting records are poised to help socially conscious investors hold them accountable for their pledges on climate, diversity and other ESG priorities.

The Securities and Exchange Commission on Nov. 2 adopted rules that direct funds to give more information about their votes on environmental, social and governance issues, executive pay and other proposals considered at companies’ annual meetings. BlackRock Inc. and Vanguard Group Inc., which have promoted ESG investing, generally supported the enhanced disclosure, though SEC Republicans questioned whether the regulations were necessary.

Mutual funds have had to report on their proxy votes since 2003. But SEC Chair Gary Gensler has said those disclosures often vary among funds and can be of limited use to their investors. Under the new rules, funds must report their votes in categories like environment or climate and diversity, equity and inclusion, providing a more accurate view of their positions on hot-button corporate ESG issues like greenhouse gas emissions reductions and civil rights audits.

“This is the most important sustainability rule you’ve never heard of,” said Satyam Khanna, a former SEC ESG adviser who’s now a fellow at the Stanford Institute for Economic Policy Research. “Information about funds’ voting records has been practically incomprehensible to ordinary investors seeking to hold them accountable.”

Making Changes

The rules stemmed from the 2010 Dodd-Frank Act, which required investment managers to disclose their annual meeting votes on executive compensation. The SEC that year released a plan to mandate the reporting on “say-on-pay,” but didn’t require firms to categorize their votes using various ESG classifications at the time.

ESG groupings emerged in an updated proposal the agency issued last year. The new plan included 17 categories and about 90 subcategories, many of which had clear ESG ties.

BlackRock, Vanguard and other firms urged the SEC in letters to scale back its categorization system, and the agency complied. The final rules have 14 categories and no subcategories, just examples of matters that should fall under the various groupings.

“Political activities,” for example, was a stand-alone category in the proposal, but is now part of “other social issues.” That classification applies to matters that include lobbying, data privacy and consumer protection. All the data also will be machine-readable.

BlackRock and Vanguard representatives pointed to their comment letters on the proposal when asked for comment on the new disclosures.

Betterment LLC, an asset manager with ESG portfolios and clients investing in BlackRock and Vanguard funds, pushed the SEC to eliminate categories completely, saying machine-readable data will allow investment analysts to make their own classifications on funds’ proxy votes that can evolve over the years. But eliminating the proposed subcategories was a step in the right direction, said Boris Khentov, senior vice president of product strategy and sustainable investing at Betterment.

“That was a huge win for making the rule more durable,” Khentov said.

Helpful or Not?

The SEC’s Democrats and Republicans sparred over whether investors would find the increased disclosures on ESG and other topics useful before rules were approved 3-2 along party lines.

Republican SEC Commissioner Hester Peirce voted against the rules, but said she would have supported them if they stuck to say-on-pay reporting. The Investment Company Institute, which represents funds, urged the SEC to stick to nine categories of disclosures to help stave off the need for frequent updates in the future.

“There is obviously a tension between how precisely these categories are tailored and whether they are broad enough to easily incorporate new governance challenges,” said Caleb Griffin, a University of Arkansas School of Law professor who studies corporate governance. “If the categories become outdated, they would be less able to fulfill the purpose of providing relevant information to investors.”

Form N-PX, which funds have used to make proxy vote disclosures since 2003, is hard to digest, said Dorothy Lund, a USC Gould School of Law professor, who studies mutual fund voting.

The annual reports are currently limited to information about a vote’s subject, whether it concerns a proposal from shareholders or company management and whether it’s backed by a company, among other details. Funds don’t need to classify their votes by specific topics under the 2003 rules.

“Given how bad it was before, I think these are all improvements,” Lund said.

ESG Maturity

The rules, which will apply to proxy votes starting in July 2023, were the first regulations proposed at the SEC after Gensler became chair last year. Proposals on corporate climate change disclosures, funds’ ESG reporting and other plans with ties to socially responsible investing followed.

The Democrat has faced Republican attacks over his ESG agenda. The ESG disclosures in the fund proxy disclosure rules are “motivated not by investor protection, but by special interests,” Republican SEC Commissioner Mark Uyeda said in a statement.

Gensler has frequently defended his ESG work, saying investors want consistent and comparable data.

ESG disclosure is maturing and starting to get the support it needs from the SEC, said Andrew Behar, CEO of As You Sow, a shareholder advocacy group that pushes companies to be more socially responsible.

“It’s all moving us into a place where we can actually judge which companies are part of an economy based on justice and sustainability,” Behar said.