BlackRock’s Approach to Companies that Manufacture and Distribute Civilian Firearms

Open Letter from BlackRock Inc. : As it has for many people, the recent tragedy in Florida has driven home for BlackRock the terrible toll from gun violence in America. We believe that this event requires response and action from a wide range of entities across both the public and private sectors.

It has put a spotlight on the role of companies that manufacture and distribute civilian firearms. Many of these companies are privately owned, but some of the largest manufacturers and retailers are publicly listed companies and are therefore held in the portfolios of millions of individual and institutional investors around the world.

There are three publicly traded companies in the US whose primary business is firearms manufacturing: American Outdoor Brands, Vista Outdoor and Sturm, Ruger. BlackRock holds none of these firearms manufacturers in our active equity portfolios (where stocks are selected by our portfolio managers within guidelines agreed to by clients). In BlackRock’s index equity products (where stocks are determined by third-party index providers) – these three companies represent 0.01% of total assets.

Because the companies in an index are determined by third-party index providers, when a client chooses an index that includes a firearms manufacturer, we are unable to sell those shares regardless of our view of the company. Within those constraints, we are addressing the issue of firearms companies in index portfolios in two ways:

Offering our clients a choice of products that exclude firearms manufacturers and/or retailers if clients choose to do so;

Engaging with firearms manufacturers and retailers in which our clients are invested regarding business policies and practices as we describe further below.

Offering our clients products aligned with their values

BlackRock manages money for a diverse set of investors, including pension plans, insurers and individual investors, who have a broad set of views on firearms. Over the past two weeks, we have reached out to our clients to help them understand their exposure to civilian firearms companies. We have a continuing dialogue with many clients and are helping them explore their options for altering or eliminating their firearms exposures.

We currently offer our clients mutual funds and ETFs that use social criteria as part of the process for determining which companies are included in such portfolios. These products include the industry’s largest socially responsible ETF, which excludes firearms and other companies. We are also exploring ideas for new funds, including index-based portfolios that exclude just firearms manufacturers and retailers.

Of course, it is our clients’ decision when and how to use these products to achieve their goals. It is their money, not ours.

BlackRock’s approach to engagement

As BlackRock CEO Larry Fink recently wrote in a letter to companies in which we invest as a fiduciary for our clients, “In the $1.6 trillion in active funds we manage, BlackRock can choose to sell the securities of a company if we are doubtful about its strategic direction or long-term growth. In managing our index funds, however, BlackRock cannot express its disapproval by selling the company’s securities, as long as that company remains in the relevant index. As a result, our responsibility to engage and vote is more important than ever.”

We have an obligation to our clients to engage with companies in equity-index portfolios to promote sustainable business practices that can create long-term value.

“To prosper over time,” he wrote, “companies must benefit all of their stakeholders, including shareholders, employees, customers and the communities in which they operate.”  He went on to say that key to long-term success for companies is “understanding the societal impact of your business” and how it will “affect your potential for growth.”

As part of our corporate engagement, BlackRock regularly speaks with company management and directors to understand their company’s business strategies and their response to changing dynamics in their industry and society at large.

Engagement with civilian firearms manufacturers and retailers

For manufacturers and retailers of civilian firearms, we believe that responsible policies and practices are critical to their long-term prospects. Now more so than ever.

That is why, over the past week, we have reached out to the major publicly traded civilian firearms manufacturers and retailers to engage in a discussion of their business practices. We have already had constructive discussions with some, and we are continuing to pursue our engagement with them all.

BlackRock believes that engagement is most effective and has the greatest potential to drive change when it is done through private dialogue. As is our long-established practice, the specifics of our discussions with individual companies and their responses to us will remain private.  However, below are some of the topics that, depending on the state of our engagement with each company and its policies and practices, we are focused on.

With manufacturers, the topics on which we are engaging, among others, include the following questions:

– What is your strategy and process for managing the reputational, financial and litigation risk associated with manufacturing civilian firearms?

– How do you assess the financial, reputational and litigation risk of the various aspects of your product lines and how each of those products is distributed?

– What steps do you take to support the safe and responsible use of your products?

– How do you determine where you will allow your products to be distributed? (Do your distribution channels include private sales? Do you require distributors to disclose to you warnings received by the Bureau of Alcohol, Tobacco, Firearms & Explosives? Do you monitor whether distributors and retailers of your products have a high volume of their guns identified as having been used in crimes?)

– What strategies do you employ to monitor how your products are being sold? (Do you require retailers to certify that they do background checks? Do you require training of retailer staffs? Do you have a process in place to flag orders of unusual size or identify patterns of disproportionate sales?)

– Are you investing in Research & Development to promote the safety of your products (e.g., effective trigger locking technology)? What is your strategy in this area?

With retailers, the topics on which we are engaging, among others, include the following questions:

– What types of firearms do you currently sell? And what share of your revenue and profit do they represent?

– What is your strategy to manage the reputational, financial and litigation risk associated with selling these products?

– What are your policies and practices for determining to whom you will sell firearms? (Do you set age limits? Do you require background checks and what is the rigor of those background checks?)

– What steps do you take to ensure compliance with relevant laws regarding who may or may not purchase firearms? (e.g., prohibiting felons or domestic abuse offenders from purchasing firearms; sales to minors of certain products; training provided to employees so they comply with applicable laws and regulations.)

– What licensing do you have for your gun sales?

– What other strategies do you employ to prevent the potential misuse of firearms you sell? (e.g., limits on bulk purchases, preventing straw purchases where one person uses another’s identity for a background check) How do you assess the reputational, financial and litigation risk of such misuse for your business?

– What steps do you take to support and promote gun safety education at the point of sale?

In our engagement, we are fundamentally looking to understand whether the company has the appropriate policies and controls in place and is sufficiently managing the risks associated with these issues.

The responses from companies and the strategies they employ will vary given the variety of companies. Dick’s Sporting Goods, for example, announced that it will no longer sell assault-style rifles and that it will no longer sell firearms to anyone under 21 years of age.  Walmart and Kroger separately announced that they will raise the age requirement to 21 years of age for purchasing firearms and ammunition at their stores. We will monitor these and other companies to assess their policies and practices in light of evolving societal expectations.

Proxy voting

Our corporate engagement is just one step in our investment stewardship related to these companies.  Another key aspect of investment stewardship is voting on specific proxy proposals and on the election of a company’s directors.  BlackRock casts these votes based on what we determine to be the best long-term interest of our clients.

Given BlackRock’s size, we are often a large investor in most public companies – though not a controlling shareholder.  As a result, we cannot dictate what a company should do, nor is it our place to do so.

We encourage company management and directors to enter into engagement conversations directly with our investment stewardship team so that we can develop a well-informed view of their company in advance of proxy voting. Based on our engagement conversations and our long-term view of the company, we may vote against specific directors or we may vote against management on shareholder proposals.

Engagement is a long-term process. Yet this is an issue of tremendous urgency and we are bringing, and will continue to bring, a sense of urgency to our engagement efforts in this area.