BlackRock and its ESG woes

The firm, which ramped up its presence in the ESG world over the past few years, can’t seem to please everyone, despite its efforts.

The company with the biggest presence in sustainable investing, BlackRock, can’t seem to please everyone, despite its efforts.

The firm, which has more than $9.5 trillion in assets under management, has ramped up its presence in the ESG world over the past few years. It is by far the biggest ESG-themed fund provider in the U.S., both by total assets and new sales.

Yet, the slice of the company’s business in sustainable U.S. funds is quite small, representing just over 2.5% of its AUM in the country, according to data from Morningstar Direct. The firm is hardly seen as a sustainable investing leader by peers in the ESG community — and by all indications, the company does not want to be perceived as focusing solely on sustainability.

It is one of, if the not the biggest, investors in oil on behalf of its clients. In Texas alone, BlackRock has more than $100 billion invested in the fossil fuel business.

But in that state and others, it has become the posterchild for ESG, vilified by rightwing politicians for allegedly “boycotting” the oil business. Last month, Texas published a blacklist of firms, leading with BlackRock, that could be excluded from the state’s pension plans.

That followed a move by Florida governor Ron DeSantis seeking to ban that state’s pensions from considering ESG factors in investment decisions.

And late last week, Indiana attorney general Todd Rokita was the latest to attack what he called “woke causes,” dedicating much of his public statement to BlackRock.

“We must root out investment-management companies that scheme to leverage Hoosiers’ retirement funds to advance leftist social and economic agendas that otherwise cannot be implemented through the ballot box,” Rokita said.

As BlackRock is one of the big managers of the state’s pension assets, he “is demanding answers” from the company, pointing to its “‘firm-wide commitment to integrate ESG information’ into its investment processes.”

The company disputed the Texas Comptroller’s opinion that it boycotts fossil fuels, stating “this is not a fact-based judgment.”

“Elected and appointed public officials have a duty to act in the best interests of the people they serve. Politicizing state pension funds, restricting access to investments, and impacting the financial returns of retirees, is not consistent with that duty,” the firm said at the time. “Texans deserve access to the full range of asset managers, and investment opportunities, that can help them meet their retirement goals. We are proud to play our part.”

The company has maintained that providing a range of fund choices — sustainable or otherwise – is its priority and that that has not be affected by the anti-ESG pushes in some states.

So far, “the commercial impact of all this political rhetoric has been minimal,” said a source familiar with the matter. However, “I wouldn’t say that getting hammered from both sides [of the ESG debate] is good for morale,” they added.

MESSAGE FROM THE TOP

BlackRock CEO Larry Fink has for several years written in his annual letters to CEOs that “climate risk is investment risk.” In the most recent iteration, he made his case that stakeholder capitalism is apolitical and “not ‘woke’.”

“Most stakeholders — from shareholders, to employees, to customers, to communities, and regulators — now expect companies to play a role in decarbonizing the global economy,” Fink wrote in the 2022 letter. “Few things will impact capital allocation decisions — and thereby the long-term value of your company — more than how effectively you navigate the global energy transition in the years ahead.”

Some in the sustainable investing world say it’s the company’s overall message on the importance of ESG, rather than the holdings in its funds, that has attracted so much ire from state officials.

“They are the ones that are taking it on the chin, because they’ve been so outspoken on ESG. And the reality is that most of their ESG is greenwashing. It’s funny to see them being labeled as the [anti-ESG’s] bad guy, when they are still probably one of the largest fossil fuel investors in the world,” said Peter Krull, CEO of Earth Equity Advisors. “I’m not crying for BlackRock all that much, considering that they don’t really represent us, from a sustainable perspective.”

Many of BlackRock’s funds that bear ESG in their names contain extensive fossil fuel holdings, including those of Texas-based oil companies.

“No one is looking at the actual holdings. They’re not looking at the flow of capital. They’re looking at the label,” said Andy Behar, CEO of As You Sow. “If they renamed all their ESG funds … that would probably make the people in Texas and the red states happy.”

IT’S COMPLICATED

The blacklist Texas recently published includes nearly 350 U.S. mutual funds and ETFs from numerous managers, but only 10 investment providers are on the firm-specific list. It’s notable that Texas did not include any pure-ESG managers on the firm list, but it did include BlackRock, said Alyssa Stankiewicz, associate director of sustainability research at Morningstar.

“A ban against BlackRock is going to make headlines,” Stankiewicz said. “It wouldn’t make such a big splash if you were to ban Federated” or other firms like Calvert or Parnassus, she said.

BlackRock might not get much love from sustainable investing purists, but its role in the ESG world is important.

When viewed through Morningstar’s criteria, 11.4% of BlackRock’s U.S. mutual funds and iShares ETFs, or 62 of 544 total products, have an explicit ESG focus. Those products represented more than $65.5 billion as of the end of July, compared with nearly $2.5 trillion in its U.S. funds and ETFs that do not fit the sustainability criteria. At 2.56% of its funds, the percentage has grown immensely since 2015, when sustainable funds were 0.21% of its assets, Stankiewicz noted.

And most significantly, BlackRock’s funds account for more than 22% of the total $295.2 billion in U.S. sustainable funds and ETFs, according to the Morningstar data.

“You can’t understate the role that BlackRock plays when it comes to sustainable investing as a whole. While they weren’t the first or second asset manager to take this up in the U.S. or globally, their ability to catch up on best practices has been pretty impressive,” Stankiewicz said, citing the company’s data science capabilities, contributions to industry initiatives and content such as Larry Fink’s annual letters.

“Every move that BlackRock has on sustainable investing has a massive ripple effect in the industry.”

EVERYTHING FOR EVERYONE?

It’s inevitable that the world’s biggest asset manager would continue to provide plain-vanilla index funds packed with oil companies and polluters, Stankiewicz said. The company has a range of clients, with preferences varying by region, size and other factors, so offering a multitude of fund types is viewed as necessary.

“Smaller asset managers have an advantage when it comes to ESG investing, because they’re able to have more of a holistic firmwide approach to the issues of sustainability,” Stankiewicz said.

And BlackRock’s size means that it is likely to face criticism from somewhere, regardless of where it comes down on sustainability.

“That’s just the reality of being the largest asset manager in the world. You’re never going to be able to please all the people all the time,” said Dan Carreno, director of business development at Ethos ESG.

The company hasn’t wavered on its stated stance that “climate risk is investment risk,” but it has also pointed to its fiduciary duty to clients as a reason for continuing to invest in the fossil fuel business. In its 2030 net-zero statement, for example, it stated, “Our role is to help [clients] navigate investment risks and opportunities, not to engineer a specific decarbonization outcome in the real economy. The money we manage is not our own — it belongs to our clients, many of whom make their own asset allocation and portfolio construction decisions.”

Ahead of the 2022 proxy season, the company announced that it would allow institutional clients to vote their own shares in shareholder resolutions. It also explained that it supported environmental and social resolutions on behalf of clients at a lower rate this year, at 24%, compared to 43% in 2021. The company’s position on issues hadn’t changed, it said, but there was a dramatic increase in shareholder resolutions, some of which went further in their goals than those raised in prior years.

BlackRock did not offer any comments from the firm for this story, but public relations staff referred to previous public statements it has made.

“It’s totally clear that they are acting solely from the perspective of shareholder primacy,” Carreno said.

Ethos ESG has encouraged BlackRock to support more ESG shareholder resolutions and has met with its investment stewardship team on that topic, he said. That team is “very capable and very well intentioned,” he noted. Short-term financial results have prompted votes in favor of oil company management, he said. However, not prodding fossil fuel businesses to invest more heavily in alternative energy technologies “is just setting these companies up to not do well in a world that’s less dependent on oil.”

RISK AND OPPORTUNITY

Florida’s restrictions on pension fund investments point to “pecuniary” factors as being the only relevant ones to consider. But in the sustainable investing world, ESG factors have long been identified as financially material.

“We’ve got reams and reams of data … showing that ESG is pecuniary. It is relevant to risk and return,” Carreno said. “Approaching it from this risk standpoint, and being a very shareholder-centric firm seems to be in line with what these [anti-ESG groups] say [BlackRock] should be doing.”

But that won’t stop sustainable investing advocates from lobbying the company to do much more.

As You Sow, for example, has engaged with BlackRock after the asset manager signed onto a letter from the Business Roundtable on the “purpose of a corporation.” That statement identified the need to serve stakeholders ranging from employees, shareholders and customers to the communities in which businesses operate. As You Sow has taken issue with holdings in BlackRock’s funds that include private prison operators, fossil fuel companies and businesses linked with deforestation.

“Saying one thing but doing another isn’t good for business,” As You Sow’s Behar said.

“They’re not doing enough on climate by any means.”

Fossil Free Funds, a site operated by As You Sow, grades 11 BlackRock funds and iShares ETFs with an “A.” But it gives Ds and Fs to even more of the company’s funds that are specifically labeled as ESG or sustainable.

The SEC’s forthcoming rules on fund naming and marketing could prompt companies to put new labels on products. But until then, Behar said, “my recommendation to them is, ‘be honest.’”

“They have the capacity to create sustainable funds that are appropriate to their name.”

This story was originally published on ESG Clarity.