BlackRock (NYQ:BLK) has launched a campaign to explain its ESG approach and a misunderstanding that it is anti fossil fuels, which has led to its ban by some Republican-led states.
- BlackRock is responding to claims it is boycotting investments in fossil fuel companies.
- The firm is defending its investment practices from antagonism to ESG investing in some US States.
- Addressing criticism of its ESG approach is vital to avoid further withdrawals from BlackRock funds.
BlackRock has pointed out that its investments include $170 billion in oil and gas. It also highlights the fact that 35 million US citizens trust it to manage their investments. Concerns have been raised, however, that its defence of ESG seems to downplay a prior commitment to sustainable investment.
BlackRock’s defence follows Republican States’ refusal to work with the world’s largest asset manager. Estimates of withdrawals to date have hit $1 billion, a relatively small sum against the $10 trillion held by BlackRock in January 2022. BlackRock has much to lose if more US states abstain from doing business with it.
Why BlackRock had to explain itself on fossil fuel investing
BlackRock’s defence is the latest manoeuvre in its ongoing battle against some republican-led states in the US. Anti-ESG sentiment directed at it has already resulted in bans on doing business in Florida, Texas and Louisiana.
The actions of these states came after the attorney generals of 19 US states delivered an open letter that made accusations that the use of an ESG investment lens was a dereliction of fiduciary duty, and warned that its use was open to anti-trust action.
ESG has been labelled a “fascist” strategy by the Republican establishment. Opponents are calling it anti-free market and an anti-fossil fuel assault from the “woke left”, which seeks to impose diversity, inclusion and equity standards on companies resistant to its implementation.
Louisiana’s actions, for example, could see the removal of over $1.3 billion in funds currently managed by BlackRock. It alleges the focus on political and social goals detracts from BlackRock’s duty to maximise investor returns.
Fiduciary duty surely involves risk assessment
What is being lost in the whole argument is the consideration that ESG factors, whether physical or policy-based, are simply one element of providing effective risk-adjusted returns. Failing to factor in the impact of environmental, social and governance concerns on long-term profit and loss could itself be considered a dereliction of fiduciary duty.
BlackRock’s commitment to “setting the record straight” seems to fall short of claiming this, although it does connect climate risk to driving financial outcomes for clients. In fact, details about its stewardship role and proxy voting independence despite its membership in investor-led climate action groups like Climate 100+, may invite criticism from other major clients, like New York City, which has demanded more support for climate action.
Blackrock’s mixed ESG messaging downplays climate risk
The first message on BlackRock’s campaign is to clarify that it is not against investing in fossil fuels, and has in fact directed $170 billion in investments to listed US fossil fuel companies. Instead of discussing the potential upside of investing in the clean energy transition, BlackRock merely points to partnerships with energy companies to fund innovation and new technologies relating to current and future power needs.
It is interesting that BlackRock is appealing to investors directly, rather than responding to specific State criticism, especially given the current politicisation of ESG. This is further hammered home by presenting the actions of the anti-ESG movement as “limiting the freedom Americans have” in choosing not just how their money is invested (funds), but also who (asset managers) invests it. Such restrictions, it argues, puts investment performance at risk.
A further “mom and apple pie” appeal comes from stating that “open competition, the free flow of information, and freedom of opinions are core to the strength of US capital markets”. The firm points to itself being part of that strong system, having helped “millions of Americans save for their retirement”.
BlackRock emphasises its focus on driving successful financial outcomes by being on top of trends that affect all sectors. It is worth noting, however, that the firm refers to climate risk as “one such trend”, rather than engaging in a nuanced discussion of how the investment environment is changing.
BlackRock said in a May 2022 statement that it planned to support fewer climate resolutions. This raised concern, prior to the current debate, that it was already responding to pressure from the fossil fuel lobby.
Overall, BlackRock appears to be sitting on the fence with its latest campaign. This could land it in trouble with investors that are calling for it to strengthen its efforts to invest sustainably.
Some investors may want clarification on sustainability
While BlackRock faces opposition in some US states based on being viewed as pro-ESG, the comptroller of the City of New York has raised concerns that it may be backtracking on its climate commitments. At stake is about $43 billion in retirement plans that are managed largely by the firm.
BlackRock may have missed an opportunity to take a stronger stance on sustainability. Prior to being targeted by the anti-ESG movement, sustainability seemed to be a core focus for the asset manager. Chief executive Larry Fink’s 2021 letter, for example, stated that “climate risk is investment risk”.
The current campaign cites the relevance of the risks and opportunities presented by a transition to a low-carbon economy to the long-term financial interests of its clients. Yet, in support of this position, it points to the fact that 90% of S&P 500 companies publish sustainability reports, rather than the fact that 75% of institutional investors surveyed recently described ESG as a fundamental part of fiduciary duty.