SEC Drops Investigation into BlackRock, State Street, with a Warning Over Participation in Climate Groups

The U.S. Securities and Exchange Commission announced on Wednesday that it has decided not to pursue enforcement action into asset managers including BlackRock and State Street, following an investigation into the potential regulatory violations through their participation with climate-focused engagement group Climate Action 100+ (CA100+) in voting to replace directors at ExxonMobil in 2021.

While acknowledging that “the investigation did not develop evidence that BlackRock or State Street agreed to vote proxies in certain manners,” the SEC said that it raised “serious concerns about the conduct of CA100 members,” and warned asset managers that coordinated shareholder actions could compromise their status as passive investors and trigger regulatory and disclosure obligations.

Launched in 2017, Climate Action 100+ is an investor initiative formed to target the world’s largest corporate greenhouse gas (GHG) emitters through engagement to reduce emissions, improve governance and strengthen climate-related financial disclosures.

In the new document, which focuses largely on BlackRock and State Street, the SEC revealed that it investigated whether Climate Action 100+ members may have violated securities laws in connection with a 2021 vote to elect a group of dissident directors to the board of ExxonMobil.

The vote followed a high-profile proxy battle, which ultimately saw activist investor Engine No. 1, backed by several CA100+ signatories including BlackRock, win three seats on the company’s board, in an effort to push the oil and gas giant to increase focus on the global energy transition to clean and renewable sources of energy.

The SEC investigation probed whether BlackRock and State Street and other investors used CA100+ as a means of coordinating their votes, which could potentially violate their position as passive investors, which carries a lighter regulatory burden.

The document noted that BlackRock and State Street both hesitated to participate in CA100+, but joined in 2020, after facing pressure from asset owners and media, including a $25 billion divestment by The Japanese Government Pension Investment Fund from BlackRock over climate-related concerns. Even while joining CA100+, BlackRock signed a statement declaring that it held sole discretion over its support for shareholder proposals, and State Street made similar efforts to document its independence.

In the document, however, the SEC said that it found evidence suggesting that the firms engaged in discussions with Ceres, an investor group supporting CA100+, regarding their ExxonMobil proxy voting, but acknowledged that “the investigation did not develop evidence that BlackRock or State Street agreed to vote proxies in certain manners or shared their proxy voting intentions with investors.”

Despite the decision, however, the SEC outlined concerns that it said were raised during the investigation around the participation of asset managers in groups such as CA100+. Most notably, the agency said that participation by large passive investors in climate and corporate engagement organizations could constitute coordinated action aimed at influencing corporate control, resulting in the formation of a “group” under Section 13(d) of the Securities Exchange Act, requiring disclosure of combined holdings if they exceed 5% of a company’s shares.

Additionally, the SEC warned that investors participating in coordinated engagement initiatives could lose their eligibility to report significant shareholdings under the simplified Schedule 13G framework, and instead be required to file the more demanding Schedule 13D, involving more extensive disclosures of their holdings, intentions and activities, as well as additional reporting obligations.

The new warning forms part of a series of moves by the SEC insulating companies from investor campaigns and influence, including initiatives targeting proxy advisory firms over their support for sustainability-focused shareholder proposals, and a recent proposal to rescind a key framework providing shareholders with a route to have proposals included in a company’s proxy statement for a shareholder vote.

In a statement provided to ESG Today, Michael Boudett, General Counsel at Ceres, said:

“Climate Action 100+ has always operated within U.S. securities law. It supports investors as they assess and address the financial risks that climate poses to the companies they invest in. It is up to every participating Climate Action 100+ investor to make their own decisions, including how they vote their shares.”