The financial lexicon got a new term in 2022: "anti-ESG." It's the latest incursion of politics and the culture wars into the financial sphere, and one that has thrust BlackRock, the world's largest asset manager, into the hot seat.
Over the past few months, the pushback against environmental, social, and governance investing—known as ESG—has escalated sharply, particularly in Republican-led states. In Florida, Gov. Ron DeSantis and the State Board of Administration adopted a resolution barring the state from considering ESG factors in its investment management practices. Texas has blacklisted 10 asset managers, including BlackRock, for supposedly "boycotting" the fossil fuel industry. West Virginia has barred five financial institutions, including BlackRock, from new state business on the grounds that they boycott fossil fuel companies. And with U.S. midterm elections looming and the country's political acrimony showing no signs of dissipating, this could be just the beginning.
While most of the major asset management firms offer some ESG options, BlackRock (ticker: BLK) has emerged as the leader in the space—and its public face. So, it's no surprise that the company has been directly targeted by some of the efforts to oppose investments that weigh the impact of climate change or diversity. That includes an August letter that Arizona Attorney General Mark Brnovich and the attorneys general of 18 other states sent to the asset manager, challenging its motives for pushing into ESG, pointing out what they deemed to be inconsistencies and conflicts with BlackRock's public statements and commitments to the green energy transition, and demanding answers about the firm's investment policies.
"BlackRock is an easy target given that they're the largest asset manager," says Kyle Sanders, an equity research analyst with financial services firm Edward Jones who has been covering the firm since 2016.
BlackRock declined to comment for this story. In letters to state officials and media statements, the firm has dismissed the allegation that it boycotts fossil fuels, calling it "not a fact-based judgment," and emphasized its fiduciary duty to its clients, "which don't allow our investment decisions to be based on any specific political or social agenda."
This week, the firm released a new letter responding to the attorneys general, in which BlackRock said it sought to "clarify misconceptions" about the firm, including inaccuracies about its motive for participating in various ESG-related activities.
"In managing client assets, BlackRock seeks to realize the best long-term financial results consistent with each client's investment guidelines. Our participation in these initiatives is entirely consistent with our fiduciary obligations," the firm said. It also stated it "doesn't boycott energy companies or any other sector or industry."
Given how quickly the anti-ESG push is evolving, it's too early to say for sure how much of a threat such state actions pose to BlackRock's business. So far, there is little evidence that they have hurt the investing titan in any significant way. But being shut out of potentially lucrative money management deals in numerous states certainly could have an impact in the longer term.
More immediately, the situation has put BlackRock in the awkward position of becoming the face of "woke" investing—a somewhat ironic place to be for a firm that has invested billions in the fossil fuel industry. Now, BlackRock finds itself publicly insisting on its oil bona fides, while at the same time continuing to market its climate-sensitive ESG funds.
Becoming an ESG heavyweight
BlackRock's dominance within ESG is hard to overstate: the firm has seven of the 10 largest ESG funds, including the top two, iShares ESG Aware MSCI USA ETF (ESGU) and iShares ESG Aware MSCI EAFE ETF (ESGD). In the second quarter of this year, ESGU topped the chart for flows into sustainable mutual funds and ETFs, attracting $477 million, according to Morningstar (MORN). Last April, the firm introduced the BlackRock U.S. Carbon Transition Readiness ETF (LCTU), in what was the largest ESG ETF launch ever. Currently, assets held in ESG ETFs total about $102 billion, with BlackRock managing about 60%, says Todd Rosenbluth, head of research at VettaFi, a financial research and data company.
BlackRock's outspoken CEO, Larry Fink , has become one of the industry's loudest voices on ESG investing—for better or worse—in large part thanks to two letters the firm published in 2020. In one addressed to CEOs, Fink said "climate risk is investment risk" and "every government, company, and shareholder must confront climate change." In another, to clients , he noted: "We believe that sustainability should be our new standard for investing."
BlackRock's first ESG ETF—the iShares MSCI USA ESG Select ETF (SUSA)—was launched on January 24th, 2005.
During the company's third quarter 2021 earnings call , Fink said, "BlackRock is a leader in this, and we are seeing the flows, and I continue to see this big shift in investor portfolios as they move away from traditional indexes to more sustainable types of indexes."
BlackRock's 2009 acquisition of Barclays Global Investors helped the firm become the leading player in ETFs, thanks to the iShares suite of products. That market dominance has enabled it to win inflows for its sustainable investing products. "BlackRock's ESG suite is competitively priced as the firm is able to use its scale as an advantage," says Rosenbluth. "BlackRock also has strong relationships with institutional investors that have been early adopters on ESG."
There is also been strong demand from institutional and retail investors for ESG products in recent years, driven by factors such as an increasing awareness of climate risk and the need for companies to institute diversity, equity, and inclusion (DE & I) policies, and BlackRock has been ready to meet that demand.
"It has been two years since I wrote that climate risk is investment risk," Fink said in his 2022 CEO letter . "And in that short period, we have seen a tectonic shift of capital. Sustainable investments have now reached $4 trillion. Actions and ambitions toward decarbonization have also increased. This is just the beginning – the tectonic shift toward sustainable investing is still accelerating."
Observers don't expect to see that trend reverse. "BlackRock is likely to continue to see new money move into their ESG ETFs. And existing shareholders are likely to stay loyal," says Rosenbluth. "They are in these strategies for the longer term because this subset of investors has prioritized environmental, social, and governance in their investment practice."
The firm—and investors—respond
So far, BlackRock investors appear to be largely shrugging off the anti-ESG controversy—even when it has the potential to block the firm from significant business opportunities: BlackRock's shares closed higher on the days in August when Florida and Texas blocked state fund managers from investing in funds or companies that make investment decisions based on ESG factors (though the stock has since given up those gains in the market swoon following Fed Chairman Jerome Powell's remarks at Jackson Hole.)
Harry Papp, managing partner of L. Roy Papp & Associates, an Arizona investment advisor, calls ESG "a strong profit center" for BlackRock. Papp has clients who have owned BlackRock shares for a decade and he sees no reason for that to change. "We are buying BlackRock right now," he says. "We think it's attractive."
Some of those involved in the managing state funds—including in locations where BlackRock and ESG are being targeted—remain skeptical that the moves will have any major impact.
Papp sits on the boards of the Arizona State Board of Investment Board of Investment —which looks after about $16.5 billion in short-term investments for the state and state agencies and also oversees the state's $7.5 billion Permanent Land Endowment Trust Fund—and the $18 billion Public Safety Personnel Retirement System , which invests on behalf of the state's police, firemen, judges, corrections staff, and elected officials. Both entities own BlackRock stock, which has a healthy dividend of 2.8%. He says the firm is "a cash flow machine" and "a very secure company."
Papp dismisses Brnovich's letter as "political theater," adding: "I don't think it's going to be a serious problem for BlackRock."
For now, it appears anti-ESG legislation will have a muted effect on BlackRock's bottom line. In Texas, for example, the Texas Teachers Retirement System—the state's largest investment fund—owned 64,779 shares of BlackRock on July 31, according to a list of holdings on its website. That is worth around $45 million today, based on BlackRock's closing price of $691.92 on Thursday. To put that in perspective, BlackRock's assets under management at the end of the second quarter stood at $8.5 trillion.
Despite the spike in anti-ESG headlines, "there are still lots of insurance funds, foundations, and institutions that are racing to embrace ESG," says Sanders of Edward Jones. "BlackRock is also winning mandates because there are a lot of people who want ESG and more climate-related products."
The relative stability of ESG funds during this tumultuous market is an indication of their staying power. During the second quarter, open-end and exchange-traded funds overall in the U.S. suffered steep outflows of $200 billion, according to Morningstar. But U.S. sustainable fund flows fared better, with a more modest $1.6 billion in outflows . "The continued growth of U.S. sustainable funds even during a period of poor performance could signal that investor demand for sustainable funds is 'stickier' than broader U.S. demand," wrote Alyssa Stankiewicz, associate director of sustainability research at Morningstar.
Sanders says ESG investing is one of the fastest-growing areas in asset management in terms of new products and where money is flowing and BlackRock needs to be offering ESG products because they have a responsibility to their shareholders. "If they weren't pursuing ESG products, where a lot of investors want to invest, BlackRock shareholders might be disappointed the company isn't capturing the market opportunity and they would potentially be losing out on future profits," he says.
Aniket Shah, global head of ESG and sustainable finance strategy at Jefferies, notes that for every red state pushing back on the sector, there is a blue state that is embracing it. "For all of the backlash, there is at the same time incredible support for ESG in the State of New York, State of California, State of Illinois," says Shah. "There are two sides to this that are being drawn around political lines."
Less clear-cut risks emerge
Still, the anti-ESG movement does present BlackRock with a public relations challenge. Over the years, environmental groups have criticized the firm for not doing enough to divest from oil and gas companies. Now, to rebut states that accuse it of boycotting energy companies, BlackRock is touting the fact that it has "hundreds of billions of dollars invested in these companies globally" and about $170 billion invested in U.S. companies, potentially giving ammunition to those who've accused it of greenwashing.
Meanwhile, the company finds itself in the middle of political debate over climate change and accusations that "woke" or politically correct ideas are unfairly influencing the business world.
For all the strength of BlackRock's ESG business, and the sector as a whole, it's still too early to know how the anti-ESG movement will evolve—and what future risks it might trigger. Or what legal challenges the firm might mount in response.
"We are still in the early days of seeing how this all plays itself out. We don't know what's going to come next. We don't know what the legal response is going to be," says Shah. "This is fairly new territory and ESG is a newer concept and there hasn't been this kind of action before."
Write to Lauren Foster at firstname.lastname@example.org
BlackRock Bet Big on Climate Change. Now It's Being Targeted By the Anti-ESG Movement.
Credit: By Lauren Foster