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Larry Fink
can’t catch a break. He’s chairman and CEO of
BlackRock,
the largest investment manager in the world, with $8.5 trillion of assets under management. In the battle over sustainable investing and the spread of environmental, social and governance policies across Wall Street, both sides are gunning for him.
Red-state governors and Republican attorneys general—many from oil- and gas-producing states—have attacked Mr. Fink as the leading industry spokesman for ESG, which they view as an elaborate cover for the climate-change movement and a backdoor means of reducing carbon emissions by starving the energy industry of investment capital. Using a shoot-the-messenger approach, 19 states have publicly called BlackRock on the carpet with regard to ESG. Texas and West Virginia are already starting to claw back state business from the company.
But BlackRock also sits squarely in the sights of ESG advocacy groups such as the United Nations-supported Principles for Responsible Investment, or PRI. It would like nothing better than for BlackRock to issue a company press release forswearing oil and gas companies in all the funds it manages. Turning Mr. Fink on this point has become PRI’s strategic mission because of the obvious domino effect it would have on Wall Street.
Clearly, Mr. Fink agrees with the ESG argument. His annual missives to the business community reflect his personal beliefs. He sits on the board of trustees of the World Economic Forum, and his family foundation helps fund the Center for Sustainable Business at the NYU Stern School of Business. He puts his time and his money where his mouth is on ESG.
Since sustainability policy is pushed down from the corporate suite at every firm on Wall Street, it would be simple for Mr. Fink to direct BlackRock portfolio managers to stop buying oil and gas investments in their respective funds. He hasn’t done so. Why?
Roughly two-thirds of BlackRock’s assets are composed of passive index and exchange-traded funds, where the firm has no call on security selection and can’t screen out oil and gas names. On the active side, though, energy investments remain well-represented in the firm’s debt and equity mutual funds. Pulling the plug on fossil-fuel investments would pose a serious competitive threat to the buy-side behemoth that Mr. Fink and his co-founders have built for 30 years.
Consider what would have happened had BlackRock instituted such a ban at the beginning of 2022. With oil and gas prices sharply higher since February, many of its benchmark funds would have meaningfully underperformed both the broader market and the competition in the year-to-date period. It would take 10 years for such bad numbers to drop out of the company’s track record.
Everybody on Wall Street approaches ESG differently. Despite the marketing hype, most firms are in the same camp as BlackRock and still adhere to their fiduciary responsibility by placing a priority on generating returns for their clients. But unlike BlackRock, where the ESG concept is embraced, many investment management firms aren’t toeing the sustainability line willingly. They aren’t following BlackRock’s lead so much as being pushed in the same direction by activist groups.
PRI currently has more than 5,000 member signatories, demonstrating the power of moral suasion—even on Wall Street—plus the futility of targeting a single firm like BlackRock, even if it is the industry leader.
With PRI membership comes a prescribed system of ESG conformity predicated on pressure and surveillance. Asset managers strong-arm the companies they invest in, while asset owners (such as public pension funds) hold the feet of their investment managers to the fire. Similarly, every buy-side account leans on all of its counterparties for ESG compliance, particularly investment banks and investment consultants.
A lot of capital has been raised for sustainability-targeted funds, including more than $500 billion at BlackRock alone. As a stand-alone investment strategy with risks fully disclosed, including the potential loss of financial performance, ESG funds aren’t an issue. The problem arises when ESG is used as the means to the end of creating a sustainable global financial system, where capital flows are directed, societal outcomes are targeted over returns, and asset prices are effectively controlled—all of which are the stated goals of the U.N.’s PRI.
ESG isn’t yet choking off capital to energy companies, but this will happen once financial regulations are put in place that codify the PRI agenda by requiring climate and other sustainable disclosures, establishing ESG mandates and redefining fiduciary duty. At that point, it won’t matter if an investment manager is a true ESG believer or a conscientious objector because compliance won’t be optional.
This process is already happening in Europe and the U.K. The Securities and Exchange Commission is following suit by proposing new rules that would require public companies to provide detailed reporting of their climate-related risks, emissions and net-zero transition plans. This is the tomorrow war that the ESG opposition needs to start waging today, rather than picking a personal and political fight with Mr. Fink and BlackRock.
In addition to more legal pushback on the regulatory front, there needs to be greater scrutiny of the undue influence that sustainability-focused nongovernmental organizations such as PRI exert on the financial markets. Specifically, how is it that PRI, a nonprofit registered in England and Wales, is able to dispense ESG-related investment and legal advice in the U.S. and lobby government officials over sustainable-finance regulations?
The battle to keep ESG in the specialized investment box where it belongs and limit its systemic spillover is larger than any one firm or individual. It isn’t a barroom brawl to be won by knocking out the biggest guy in the place.
Mr. Tice is an adjunct professor of finance at New York University’s Stern School of Business. His forthcoming book on ESG and sustainable investing will be published by Encounter Books in 2023.
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