11 Sep PUBLIC PENSION CORNER #56: Texas and BlackRock: Mending Fences?
NEWS:
I. SEC Sues Proxy Advisor ISS
Amid the Trump Administration’s efforts to rein in the proxy advisory duopoly (Institutional Shareholder Services (ISS) and Glass Lewis), the Securities and Exchange Commission has sued ISS, claiming that the proxy advisor had failed to turn over all of the information requested by the Commission as part of an investigation started earlier this year:
The SEC filed the subpoena-enforcement action Friday in the U.S. District Court for the Eastern District of Pennsylvania, saying ISS had refused to fully comply with an administrative subpoena seeking information about its proxy recommendations and voting activity.
The agency’s Division of Examinations began reviewing ISS in March and requested data related to the firm’s recommendations and votes, the SEC said. After ISS did not produce all of the requested information, the enforcement division opened an inquiry and issued a subpoena on July 21.
The SEC said ISS has continued to withhold some records despite extended deadlines and repeated efforts to resolve the dispute. The regulator said its investigation remains in the fact-finding stage and that it has not concluded ISS violated federal securities laws.
II. California Amends Climate Reporting Rules Again
The California Air Resources Board (CARB) has issued new guidance for companies as they prepare to meet the state’s climate reporting laws. The new document is intended to give companies more options for meeting their obligations under the legislation:
The new guidance confirms a series of measures by the regulator to “exercise enforcement discretion” to ease the transition into the new reporting requirements for companies, including allowing the use of emissions data already collected for the prior fiscal year, not requiring Scope 1 and 2 data from companies that had not yet collected the data in the past, and accepting emissions data even without limited assurance, for the 2026 reporting cycle.
The new guidance confirms key measures provided by the regulator during the transition period, including allowing companies to submit Scope 1 and Scope 2 emissions for their prior fiscal year based on information they already have or were collecting when the 2024 enforcement notice was released, and allowing companies that were not collecting or planning to collect data at the time of the enforcement notice to not submit Scope 1 and 2 reporting data for the first reporting cycle. Companies that will not submit data during the first cycle are requested to submit a statement of non-reporting on company letterhead.
For the first year of reporting, CARB said that it will allow for a variety of formats for the submitted data, including existing annual reports including Scope 1 and 2 emissions, existing Scope 1 and 2 data reported to other programs or voluntary initiatives, or CARB’s Draft Scope 1 and 2 Template. CARB also indicated that it will not require the use of a specific emission factor dataset for 2026 GHG emissions reporting.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Texas and BlackRock: Mending Fences?”
Last week, The Wall Street Journal carried an op-ed celebrating the boom in corporate moves to Texas. The piece was penned by Michael Toth, the director of research at the University of Texas’ Civitas Institute, and he noted that between April and June of this year, “12 publicly traded companies voted on plans to reincorporate in Texas.” That’s a significant number, and the folks in Texas should be pleased by that – even more so given that one of the 12 was ExxonMobil, the 13th-largest company in the world (by revenues) and the second-largest energy company. Texas is winning – and winning bigly.
Interestingly, though, Toth didn’t frame the story strictly as a victory for Texas and its recent legislative efforts to persuade businesses to relocate there. Rather, he framed it as the thawing of relations between the Lone Star State and BlackRock, the largest asset manager in the world. Texas and BlackRock had been feuding for the last several years, Toth notes, because the asset manager’s leadership role in the anti-fossil-fuel ESG movement had threatened the state’s livelihood. But that’s all in the past now, Toth continues:
In 2020, CEO Larry Fink declared climate change a “defining factor” in evaluating companies. The following year, BlackRock joined a coalition of investors committed to helping companies reach net-zero emissions by 2050 and voted for 47% of shareholder proposals focused on environmental and social goals. Mr. Fink’s 2021 annual letter to shareholders pledged to “embed” race and sex-based diversity goals into “everything we do.”
BlackRock’s public embrace of ESG and DEI made it a target in Texas. In 2022, Lt. Gov. Dan Patrick called for putting BlackRock “at the top of the list” of financial companies barred from state contracts because of its policies toward fossil fuels. Attorney General Ken Paxton and 18 other Republican attorneys general accused the firm of putting left-leaning ESG and diversity policies ahead of maximizing investment returns.
Then things changed.
Toth goes on to describe how BlackRock turned against ESG, how Texas mended fences with the asset manager, and how the state’s efforts to update its business code have made the Texas-BlackRock partnership even more secure. He concludes, declaring that “BlackRock’s votes are a powerful endorsement of [Texas’] efforts” and that BlackRock’s support for redomiciling to Texas “send[s] a signal to public companies: Texas’ corporate-law reforms are compatible with shareholder value.”
I could quibble with some of Toth’s details here. For example, BlackRock didn’t really “change” all that much. Yes, it now votes against almost all ESG shareholder proposals, but as even Toth concedes, that’s because they’re “low quality” proposals. In the real world, BlackRock still manages roughly one-third of all ESG funds globally. “Change” is relative.
The bigger issue here, though, is Toth’s effort to portray this as a major thaw between Texas and BlackRock enabled by their shared appreciation for good governance. Texas made changes to its corporate laws, and BlackRock approved because those changes are good for business and good for shareholders.
It may be true that Texas’ reforms are good for everyone, but that’s BlackRock’s primary concern here. As always, BlackRock’s concern is BlackRock.
Under the SEC’s Rule 14a-8 (which the SEC is preparing to eliminate, for the record), a shareholder must hold $25,000 worth of a company’s shares for one year, $15,000 for two years, or $2,000 for three years in order to file a shareholder proposal. That’s a pretty low bar for corporate engagement, especially at the three-year level. Under Texas law SB 1057 – the much-ballyhooed corporate reform to which Toth refers – a shareholder must hold $1,000,000 worth of a company’s shares for six months to file a proposal. Period. Needless to say, that’s a much higher bar – one that eliminates proposals from all except the largest shareholders.
Additionally – and maybe more to the point – under 14a-8, shareholder proposals are sent to all shareholders as part of the company’s proxy statement, at the company’s expense. Under SB 1057, the shareholder making the proposal must solicit 67% of all vote-entitled shares before even being placed on the ballot. In practice, this is probably even a higher bar than the ownership threshold. This amounts to a full-scale proxy fight in terms of logistics and cost: hiring soliciting agents, handling mailings, making EDGAR filings, and complying with SEC proxy rules – all at the shareholder’s expense. For a mid-cap or small-cap company, the costs can easily exceed the value of the shareholder’s actual stake. Functionally, only very large shareholders, well-funded activist campaigns, or the company’s allies can realistically finance such an effort.
To be perfectly clear, the reforms legislated under SB 1057 (and its companion bill SB 29) are opt-in provisions, meaning that any company redomiciling to Texas would need to amend its governing documents to be subject to the Texas-exclusive thresholds. To date, none of the companies that have redomiciled to Texas this year have done so (or at least none that can be identified). Indeed, ExxonMobil went out of its way to reassure shareholders that it was not opting in. ArcBest Corp., a transportation and shipping company, changed its charter explicitly to reject Texas’ thresholds. To date, the Texas shareholder proposal rules do not apply to anyone.
At the same time, however, you can see where this is going, especially given that the SEC is formally planning to eliminate its shareholder rules under 14a-8, and has explicitly argued that this is an effort to throw the matter back to the states. BlackRock, the largest asset manager in the world and the second-largest passive asset manager, can play the long game here. It can wait for the SEC to make Texas law more attractive to redomiciling companies. Additionally, it holds hundreds of millions or billions of dollars in every company on the S&P 500, as well as numerous other indexes. And you don’t. Moreover, it has massive resources available to undertake any campaign it chooses. And you don’t.
BlackRock’s fence-mending with Texas isn’t about good governance or wanting to be a team player. It’s about raw power. It is, as I said, about BlackRock, and nothing else.
To be fair, that’s not exactly a shocking revelation. People (even people who run massive asset management firms) are maximally self-interested. That’s the way the world works.
Still, this serves as a reminder: everything about the ESG story – the embrace of ESG, the dismissal of ESG, the Texas fight, the Texas reconciliation, and countless other storylines – has always been about self-interest. Larry Fink was for ESG when he thought that was good for BlackRock, and he’s publicly anti-ESG now because he thinks that’s good for BlackRock, even as his firm more quietly dominates the ESG asset management world.
Again, none of this necessarily makes Fink and BlackRock bad actors. But it does make any pretension that the company has other, more noble motives extremely naïve, to the point of foolishness.
One can complain that in Adam Smithian or Tocquevillian terms, Fink’s conception of self-interest is not “rightly understood” and is therefore destructive. But that, I’m afraid, is a story for another day. For now, just be aware that BlackRock – and Vanguard, and State Street, and every other massive firm in the asset management game – loves Texas’ new rules because they benefit them – at smaller shareholders’ expense.
