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States pushback against Blackrock reflects wider resistance to ESG

Republican states in the US.

Allegations of a dereliction of fiduciary duty and anti-trust complaints against Blackrock by 19 US states reflects a wider resistance to enacting regulation in support of sustainability. Major concessions to the fossil fuel industry were necessary to pass the climate change measures in the Inflation Reduction Act, demonstrating the power of anti-sustainability lobbies, especially in Republican states.

The allegations from attorney generals of 19 U.S. (Republican) states in a letter to the chairman of Blackrock (NYQ:BLK) carry with it an implicit threat to financial services firms attempting to do good, of losing their right to operate in those states.

West Virginia decided to ban five major financial institutions from doing business in the state in July 2022, due to their plan to limit involvement with the fossil fuel industry.

Resistance to tackling climate change and implementing sustainability measures may make little headway in an important market like the U.S. if policy makers raise obstacles, influenced by special interest groups like the fossil fuel lobby.

Ironically, a letter to the chairman of the US Securities and Exchange Commission (SEC) in April, 2022 opposing its new climate-related disclosures rule was signed by 19 senators from almost the same states. All of the signatories of both letters shared the same party affiliation (Republican).

Allegations that read like adolescent complaints

The allegations against Blackrock by the 19 states list compliance and legal terms like ‘Duty of Care’ and ‘Anti-Trust’, but the underlying reasoning is clearly partisan, and seem to lack sound legal or environmental bases – and completely ignoring the risks of climate change.

The actions of groups like Climate Action 100+ and GFANZ (Blackrock is a member of both), are cited as examples of anti-trust activity, especially since these entities `tout their market dominance”.

In citing ‘Duty of Loyalty’ as something the firm should uphold, the letter states that a commitment to financial returns should supersede any actions around promoting net zero, the Paris Agreement, or acting on climate change.

In fact, the letter makes a very telling admission when it alleges Blackrock is failing in its fiduciary duty – “it strains credulity to believe that a sole focus on financial returns would lead an asset manager to manage all assets for the achievement of net zero by 2050 and make climate issues the number one portfolio company engagement factor”.

On the subject of energy boycotts, the letter points to Blackrock’s actions to vote against the board and president of Fortum (HEL:FORTUM), an important engagement tool, as a penalising action that is contrary to the financial interests of its own clients.

Blackrock caught between a rock and a hard place

BlackRock hasn’t helped its cause, as its own resistance to parts of the SEC’s rule for disclosure of greenhouse gas emissions by listed companies will provide further ammunition to its opponents.

Its major complaint is that higher resulting compliance costs could confuse investors on costs directly pertinent to a company’s profits and the bottom line may weaken its stance on championing long-term climate change benefits at the expense of near-term profits.

The letter to the SEC from 19 US Senators follows a similar theme to the Blackrock letter, alleging that the proposed rule is “not within the SEC’s mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation”.

Yet, an important part of what the SEC does is to require listed companies and financial market participants to “… regularly disclose significant financial and other information so investors have the timely, accurate, and complete information they need to make confident and informed decisions about when or where to invest”.

The SEC has found support for its action from large companies like Microsoft (NMS:MSFT) and Salesforce (NYSE:CRM), as well as pension funds like CalPERS. The latter example, in fact, would fly in the face of the dereliction of duty allegations made against Blackrock.

Deepening climate action divide along party lines

Republican leaders and lawmakers have vilified the term ‘ESG’, with the state treasurer of West Virginia, Riley Moore, claiming his action to ban banks was how ESG could be defeated.

The Republican establishment has labelled ESG as a fascist strategy being used by the “woke left” against free markets and the fossil fuel industry, and imposing diversity, inclusion and equity standards on firms that don’t want it.

However, multiple studies have shown an increasingly positive correlation between financial performance and sustainability, refuting the anti-free market claim.  Texas has already banned banks that engage with sustainability concerns from operating in the state, which a recent study suggests could raise borrowing costs. A smaller pool of banks competing for the same business, with a potentially higher cost of capital, could be the likely reason

The study estimates that interest costs could increase by $300-$500 million, or 1-1.5%, on $32 billion in borrowing, due to the Texas law that prohibits municipalities from working with banks that have ESG policies.

As has been argued widely, perhaps combining environmental, social and governance policies under one umbrella (ESG) is not just impractical in terms of achieving the climate and sustainability changes required. In a country like the United States of America, combining a war on fossil fuels (E) with the social and governance change agenda makes ESG an easy target for critics.

The impact of rising economic uncertainty and high inflation on forthcoming midterm elections could help gauge the steepness of the incline faced by those looking to make positive climate and sustainability changes in the US.

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