BlackRock (BLK) is under increasing pressure to review its Environmental, Social, and Governance (ESG) investing strategies as a backlash against the practice grows.
This year at least seven states have pledged to pull more than $3 billion collectively from BlackRock, which manages $8 trillion in assets, citing concerns that taking factors such as climate change into account when investing in companies does a disservice to shareholders.
Arizona and North Carolina are the most recent states to call attention to BlackRock, which in recent years has positioned itself as an industry leader in ESG investing. Arizona’s treasurer revealed last week the state had divested more than $543 million in investments from the asset manager, while North Carolina’s treasurer called on BlackRock CEO Larry Fink to resign over his position on ESG.
The Republicans leading the backlash say they’re concerned BlackRock’s sustainable investment policies endanger the U.S. energy industry, and fall outside of the firm’s fiduciary duty to deliver returns to shareholders.
Others, however, say the reaction is politically motivated, and driven by oil and gas lobbyists.
Janet Cowell, a Democrat who served as North Carolina state treasurer from 2009 and 2017, said she factored additional climate risks into investment decisions when serving in the role, and didn’t think it did a disservice to her fiduciaries. “My sense of the backlash is it’s manufactured by a very concentrated oil and gas industry that’s worried about the sustainability of their industry and profits.”
BlackRock first announced in 2020 it would prioritize sustainability in its investment strategy by taking into account the risks posed by climate change when constructing portfolios, and pledging “to make sustainable investments the standard” through funds focused on the issue.
“Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” Fink said in a letter to CEOs published that year.
In the year that followed, BlackRock’s ESG-focused exchange-traded fund (ETF) became the largest sustainable ETF in the world, with a market cap of $25 billion by the end of 2021, up from $1.5 billion in January 2020. The firm grew its main ESG fund, which gives investors exposure to companies rated for having favorable environmental and social practices, by including it in its most popular portfolio for investment advisers, Bloomberg reported in December 2021. Investors may not even have been aware they were investing in an ESG fund, Bloomberg said, because it wasn’t in a portfolio that was marketed as such.
Why states are pulling money from BlackRock
As the value of ESG funds has fallen this year, Republican leaders of several states have expressed concern that BlackRock’s sustainable investment strategies are harmful to shareholders as well as oil and gas companies.
In an Oct. 5 statement Louisiana’s state treasurer John Schroder announced his office would divest all investments from BlackRock, arguing the firm’s ESG-focused strategies—such as asking companies to commit to achieving net-zero greenhouse gas emissions—“would cripple our critical energy sector.” Shortly thereafter South Carolina announced it would pull $200 million worth of BlackRock holdings by the end of the year, and Missouri said it would divest $500 million from state pension funds managed by the firm.
On Dec. 1 Florida’s chief financial officer Jimmy Patronis said the state would divest $2 billion worth of BlackRock-managed state assets. In a statement Patronis said using the state’s cash “to fund BlackRock’s social-engineering project isn’t something Florida ever signed up for. It’s got nothing to do with maximizing returns and is the opposite of what an asset manager is paid to do.” Arkansas and Utah have also divested state funds from BlackRock, and a Texas Senate committee has asked BlackRock to appear before a hearing this week to discuss how its policies may affect the state’s public pensions.
Major ESG funds are performing worse than the S&P 500 this year. BlackRock’s primary ESG fund, ESGU, has fallen 18.3 percent, while the S&P 500 index is down 16.8 percent.
In a Dec. 9 letter North Carolina state treasurer Dale Folwell called on Fink to resign, saying his political agenda had gotten in the way of his fiduciary duty. The state has not yet said if it will divest state funds from BlackRock.
Though ESG is becoming an increasingly important platform for Republicans, BlackRock has also drawn plenty of criticism from the left for falling short on its sustainability commitments. A recent letter published by activist investor Bluebell Capital questioned the firm’s commitment to exit investments such as thermal coal producers, noting the asset manager maintains a 6.23 percent stake in Thungela Resources Ltd, a South Africa-based thermal coal exporter, and a 9.13 percent stake in Glencore, one of Australia’s largest coal producers. New York City’s comptroller wrote a letter to Fink in September expressing concern its investments don’t align with climate goals.
BlackRock has consistently delivered for clients and shareholders, including the citizens of North Carolina, the company said an emailed statement regarding the North Carolina state treasurer’s letter. The asset manager pushed back on claims it’s either “too progressive or “too conservative,” saying it put clients’ interests first to deliver investment performance.
