The ESG Investing Backlash Arrives

The letter is significant politically and financially. These AGs represent states with public pension funds that invest in BlackRock and other funds on behalf of state employees. The states need to know they are getting the best financial returns possible in the market to meet their commitments to retirees.

The ESG movement has infiltrated investment standards with little scrutiny for several years, led by BlackRock CEO

Larry Fink.

Former BlackRock executives such as White House economic policy chief

Brian Deese

also have influence in the Biden Administration.

The risk is that ESG measures that Mr. Fink and others claim are voluntary will become standard in corporate America with almost no debate. The next step is likely to be regulatory mandates. The Securities and Exchange Commission has already proposed a climate-change rule that would impose a vast new mandate across the U.S. economy for reporting CO2 emissions.

“Based on the facts currently available to us, BlackRock appears to use the hard-earned money of our states’ citizens to circumvent the best possible return on investment, as well as their vote,” says the AGs’ letter.

It adds: “BlackRock’s past public commitments indicate that it has used citizens’ assets to pressure companies to comply with international agreements such as the Paris Agreement that force the phase-out of fossil fuels, increase energy prices, drive inflation, and weaken the national security of the United States.”

The eight-page letter goes on to ask detailed questions about BlackRock’s relationship with climate-change advocacy groups, its support for net-zero carbon emissions, and how its ESG advocacy conflicts with its fiduciary duty to investors, among other things. The AGs add that “BlackRock’s coordinated conduct with other financial institutions to impose net-zero also raises antitrust concerns.”

BlackRock for its part insists that it is merely looking out for the best interests of investors, and that a concern for issues like climate and social equity are a vital part of that mission.

This debate is important because the political allocation of capital is an increasingly large problem. It steers investment from its highest potential return toward companies or industries favored by politicians. The tax and climate subsidy bill that President Biden will sign this week is the latest example. The bill establishes a new and expanded level of coordination between big government and big business in the name of climate change.

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Meanwhile, an intriguing new investment alternative to ESG funds has gone public. Strive Asset Management last week announced its first exchange-traded fund, DRLL, a passively managed energy index fund designed to mimic BlackRock’s passive U.S. energy index fund, IYE. Strive says it raised more than $100 million in assets under management and had $160 million in traded volume in its first week.

We have no brief for any particular business model. Let everyone compete for the investment dollar and see who prevails and offers the best return. But the Strive model is notable because it says it will use shareholder engagement and proxy voting to impress a non-ESG policy on companies. Strive says it will use proxy measures to persuade companies to pursue the overriding goal of maximizing return to shareholders. This is an antidote to the “stakeholder” model of corporate governance that is the fraternal twin of ESG standards.

Strive is an infant in the industry with giants like BlackRock that manage trillions of dollars. But if ESG is such an attractive investor option, firms like BlackRock shouldn’t mind funds that offer different choices. The best news is that the U.S. may finally get a real debate over ESG and politicized investment.