Debunking BlackRock’s Defense of ESG

Responding To Claims Made In BlackRock’s September 6, 2022 Letter

1.    BlackRock’s ESG Activism Is Consistent With Its Fiduciary Duties (False)

2.    BlackRock Is Just Doing What Its Clients Are Demanding (False)

3.    BlackRock’s ESG Activism Serves Long-Term Financial Goals (False)

4.    BlackRock Is Transparent About Its ESG Activism (False)

5.    BlackRock Operates With Undivided Loyalty (False)

6.    BlackRock Hasn’t Engaged in “Coordinated Activity Implicating the Antitrust Laws”  (False)

7.    BlackRock Does Not Tell Companies To Meet Emission Reductions Standards (False)

8.    BlackRock Has Not Engaged In A Boycott of Energy Companies (False)

1. BlackRock’s ESG Activism Is Consistent With Its Fiduciary Duties (False)

BlackRock’s Claim: “Our participation in these [ESG] initiatives is entirely consistent with our fiduciary obligations.”

FALSE.  BlackRock’s ESG initiatives are an attempt to use other people’s money to further a political/social agenda that many do not agree with.  This is illegal and in breach of BlackRock’s fiduciary obligations.

Like every other asset manager that accepts funds from state pension systems, BlackRock’s fiduciary duty is simple and unequivocal.  BlackRock must act with one sole, exclusive motive: to maximize financial returns for the hard-working employees whose money they invest.

ESG initiatives are not consistent with this duty.  

ESG has never been precisely defined, but it basically refers to a progressive agenda defined in important part by race/gender “diversity and inclusion” objectives as well as by environmentalist objectives such as “net-zero” or the banning of fossil fuels.  It is worth noting that nowhere in BlackRock’s letter does the company mention the “diversity and inclusion” initiatives that it has pushed onto companies over the objections of company directors.   These “diversity and inclusion” initiatives, such as corporate “racial equity audits,” are promoted by activist shareholders and other parties who expressly describe these initiatives in terms of achieving “social justice” or exposing “white supremacy,” not in terms of maximizing shareholder or investor returns.  Yet BlackRock has supported these initiatives.

Candid descriptions of ESG investing by its own proponents frequently and routinely refer to it as a form of “social impact” investing or “socially responsible” investing.  BlackRock itself has described its own ESG funds as “societal impact” funds.  BlackRock’s CEO Laurence Fink has described ESG initiatives as advancing the interests of a company’s “stakeholders” rather than solely its shareholders, and as a way for companies to earn their “social license to operate.”  People can agree or disagree with the ESG agenda, but what is clear is that it is not motivated solely and exclusively to maximize investor returns. 

Simply put, ESG furthers social or political causes that some people believe in and others do not.  It is a form of “social investing,” and social investing has long been prohibited by fundamental principles of trust law and fiduciary duty.  BlackRock is not permitted to take retirees’ money and use it to further partisan social or political causes. 

Further Reading:

2. BlackRock Is Just Doing What Its Clients Are Demanding (False)

BlackRock’s Claim: “BlackRock clients representing more than $3.3 trillion in assets have committed to support that transition [from fossil fuel to “clean energy”] through investments in their portfolios. Our role is to offer them data and analytics, investment insights, and thought leadership about the impacts of the energy transition on their portfolios.”

FALSE.  This is misleading and non-responsive.  The $3.3 trillion figure referenced here is the amount of assets invested in BlackRock’s expressly-described ESG-themed funds.  The problem lies in what BlackRock does with the other $7 trillion of investor money that BlackRock manages.

Contrary to the misleading impression that BlackRock seeks to create here, BlackRock does not merely offer ESG-themed investments to clients interested in furthering the ESG agenda.  Instead, according to its own public statements, BlackRock has made an express “firmwide commitment” to ESG in “all its portfolios” at “every level.”  In other words, BlackRock pushes the ESG agenda on every company in which it invests—not just those in its explicitly ESG-themed funds, but even in companies in its index funds, where clients have not consented to the progressive ESG agenda and likely do not even know that BlackRock is using their money to promote that agenda. 

For example, BlackRock votes its index fund shares to promote the ESG agenda despite the fact that most people who have put their hard-earned money into these funds don’t know BlackRock is doing so and have not authorized BlackRock to do so.  For example, using index fund shares, including shares bought with money from state pension funds, BlackRock voted in favor of activist environmentalist Scope 3 emissions requirements at Chevron, and in favor of an activist environmentalist slate of directors at Exxon.  These measures were detrimental to the profitability of these US energy companies.  They were not authorized by the hardworking retirees whose money BlackRock manages.

For clients who support the ESG agenda and who have deliberately chosen to invest in “clean energy” or “green” companies, BlackRock is of course free to offer data, investment insights and “thought leadership” about the “energy transition.”  But with the other $7.3 trillion in assets managed by BlackRock—money allocated to BlackRock by clients such as state pension funds that have not chosen to invest in ESG funds—BlackRock cannot legally promote the ESG agenda.  That, however, is exactly what BlackRock does.

Further Reading:

3. BlackRock’s ESG Activism Serves Long-Term Financial Goals (False)

BlackRock’s Claim: “In managing our clients’ assets, BlackRock seeks to realize the best long-term financial results . . . .  We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes.”

FALSE.  As an investment fiduciary, responsible for the retirement security of hundreds of thousands of hard-working employees, BlackRock is not permitted to act on unsubstantiated, unproven, evidence-less “beliefs.” 

Because of BlackRock’s history of describing and championing ESG in terms of achieving “social impact,” “stakeholder capitalism,” and “social responsibility” objectives, and because of the billions of dollars BlackRock has made by promoting ESG investing, there is today ample reason to believe that BlackRock’s ESG initiatives are motivated by a social/political agenda or by self-interested profiteering, rather than solely to maximize “financial results.”  In these circumstances, BlackRock cannot merely state its “beliefs” that ESG enhances “long-term financial results.”  Instead, the burden is on BlackRock to come forward with objective, empirical financial evidence proving that ESG increases shareholder and investor return. Where “it is possible to question fiduciaries’ loyalty” to the single-minded pursuit of retirees’ financial interests, “intensive and scrupulous” inquiry is appropriate, and substantial, objective and “independent” evidence must support the fiduciaries’ claims that, despite the appearance of mixed-motive investing, they are in fact acting solely and exclusively for their retirees’ financial benefit.  Howard v. Shay, 100 F.3d 1484, 1488-89 (9th Cir. 1996) (quoting Leigh v. Engle, 727 F.2d 113, 125-26 (7th Cir. 1984)).

BlackRock has not come forward with any empirical proof that ESG furthers “long-term financial results.”  On the contrary, considerable evidence indicates that ESG is detrimental—significantly detrimental—to investor return.  As stated in a March 2022 report issued by the Harvard Business Review:

ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.

Earlier attempts to show an ESG “alpha”—a higher rate of return—have now been called into question by academic research. “‘There is no ESG alpha,’ said Felix Goltz, research director at Scientific Beta . . . . ‘The claims of positive alpha in popular industry publications are not valid because the analysis underlying these claims is flawed,’ with analytical errors ‘enabling the documenting of outperformance where in reality there is none.’”  Id

In 2021, according to data from Morningstar, out of 170 U.S.-centered funds with ESG mandates, only 49 (less than a third) outperformed the S&P 500 index, and as of mid-February, 2022, fewer than a quarter of those funds had done so. A recent study of a “comprehensive sample of self-labeled ESG mutual funds” found that “ESG funds appear to underperform financially relative to other funds within the same asset manager and year.” A leading rating agency’s study of data from 2010 through 2017 in a large U.S. equities index concluded that ESG-based “[s]tock selection (asset selection) accounted for an annual drag on returns of -1.45 percentage points. . . . [S]electing companies with high ESG ratings led to underperformance.

In addition, specific ESG initiatives backed by BlackRock appear to be plainly indefensible in terms of maximizing shareholder value.  For example, BlackRock supported a Scope 3 carbon emissions cap at Chevron in 2021 and a racial equity audit at Apple in 2022.  BlackRock has never come forward with any empirical evidence demonstrating that these environmentalist and social-justice ESG initiatives, often opposed by the company’s own directors, are in the best interests of the company or its shareholders.

In fact, the groups that advanced these policies were clear that their primary motivations were nonpecuniary. For example, an official of the Service Employees International Union said it “spearheaded” Apple’s racial-equity proposal because companies have “a negative effect on marginalized communities—including Black people, women, LGBTQ+ individuals, and people with disabilities—by reinforcing systems of inequity and creating products with real-life dangers.” Color of Change, which pressured the company to do the audit, says its mission is “to hold companies accountable for the ways they perpetuate white supremacy.”  And the Dutch nonprofit behind Chevron’s Scope 3 proposal said its goal is to “change oil companies from within” by pushing “Big Oil to go green.” Agree or disagree with these objectives, they aren’t about advancing the interests of stockholders. 

Further Reading:

4. BlackRock Is Transparent About Its ESG Activism (False)

BlackRock’s Claim: “[T]he free flow of information . . . is core to the strength of US capital markets. . . .  Because we aim to be transparent stewards of our clients’ investments, we are open about our voting priorities, engagements, and voting record.”

FALSE. BlackRock maintains a shroud of secrecy around nearly everything it does, including its corporate “engagements,” its discussions with climate activist groups, and its discussions with political actors and pension fund allocators. 

Corporate “engagement” is the euphemism used by BlackRock (and other asset managers) to refer to communications between BlackRock personnel and corporate officers in which BlackRock seeks to induce companies to pursue ESG or other policies it favors.  BlackRock does not release any record of these “engagements.”  It does not release the relevant emails; it does not provide transcripts of the relevant conversations.   If BlackRock were genuinely committed to “transparency,” it would release these communications, and it would discontinue the practice of secret communications between itself and company officers.

In addition, BlackRock has not been transparent in its dealings with activist groups like Climate Action 100+, Net Zero Asset Managers, and Global Alliance for Net Zero, or the members of such organizations (who are purportedly BlackRock’s competitors).  To date, it does not appear that BlackRock has released any of its correspondence with such groups, meeting minutes, agendas, or the progress reports on its corporate engagements.  Indeed, even BlackRock’s link to the “memorandum” that BlackRock submitted when it joined Climate Action 100+ appears to be broken.  If the reason that BlackRock has failed to release this information is because these groups themselves insist on operating in secrecy, and so have forced BlackRock to sign an NDA as a condition of participation, this fact itself is both telling and troubling.  But if that is not the case, BlackRock should disclose these materials.  If BlackRock now agrees that sunlight is the best disinfectant, and that the “free flow of information” is critical, BlackRock should publicly disclose and release all of its communications with these groups, other members of such groups, and the companies with which it has engaged. Otherwise, any commitment to “transparency” rings hollow.

BlackRock has further engaged in dramatically different closed-door discussions about its ESG plans with red state and blue state clients, hoping the two would not compare notes. While BlackRock has told states like Texas that “BlackRock didn’t mean—or no longer believes—many of the disagreeable things the company and Mr. Fink have said” about its previous climate commitments, BlackRock has told cities like New York that BlackRock has committed to managing all assets under management in accordance with net zero.   Given that BlackRock has made contradictory commitments to engage or refrain from ESG activism depending on whose money it is trying to attract, any claim that BlackRock has acted with “transparency” cannot save BlackRock from legal scrutiny.  In other words, any alleged transparency counts for little when BlackRock’s say-anything strategy means it transparently keeps contradicting itself, leaving investors more confused than ever on where BlackRock’s actual priorities lie.

Further Reading:

5. BlackRock Operates With Undivided Loyalty (False)

BlackRock’s Claim: “Being a fiduciary to our clients is a foundational principle of BlackRock. . . . .  Your letter also suggests that BlackRock [acts with] . . . “mixed motives” inconsistent with BlackRock’s duty to act solely in its clients’ interests. [This] is [not] the case.”

FALSE.  The August 4 Attorneys General letter has a section entitled “Duty of Loyalty” and explains that “BlackRock’s commitment to the financial return of state pension funds should be undivided,” yet BlackRock is promoting net zero and other commitments for reasons other than maximizing financial returns.  BlackRock’s primary response issues a blanket denial of any mixed motives, claiming that everything it does is in client’s financial long-term interests.  This argument is debunked in Sections 1 and 3 above. 

In addition, however, BlackRock’s close ties with China present serious conflicts of interest, which further calls into question its loyalty to its U.S. pension fund clients.  For example, BlackRock owns over a trillion shares in PetroChina, the Chinese state-owned oil and gas giant, giving it a 5.7% stake in that company.  PetroChina is a likely beneficiary of BlackRock’s efforts to force U.S. oil and gas companies to reduce production, yet BlackRock has never disclosed this stark conflict of interest to its American investors.  In addition, BlackRock has a strong interest in growing its asset management business in the Chinese market, and is wary of saying or doing anything that will upset its Chinese regulators.  This financial self-interest compromises BlackRock’s ability to make unbiased investment decisions on behalf of its U.S. clients, and creates an additional reason to question BlackRock’s fulfillment of its duty of loyalty.    

Further Reading:

6. BlackRock Hasn’t Engaged in “Coordinated Activity Implicating the Antitrust Laws”  (False)

BlackRock’s Claim: “Your letter also suggests that BlackRock’s participation in climate-related working groups reflects . . . coordinated activity implicating the antitrust laws. . . .  [That] is [not] the case. . . . [W]e have made it clear that we do not coordinate our votes or investment decisions with external groups or organizations.  Rather, we make such decisions independently and in the long-term economic interests of our clients. . .  For example, when we joined Climate Action 100+, BlackRock . . . explicitly stat[ed] that our participation was not an informal or formal agreement to (i) buy, sell, hold, or vote our shares together with any other CA100+ signatory, or (ii) act in concert with any other signatory to acquire or consolidate control over any company or its board.”

FALSE.  BlackRock is currently under investigation for antitrust violations precisely because of its coordinated ESG activism through groups like Climate Action 100+, Net Zero Asset Managers, and Glasgow Financial Alliance for Net Zero.  In fact, until recently, as Arizona’s Attorney General has observed, “Wall Street banks and money managers [were] bragging about their coordinated efforts to choke off investment in energy.”

U.S. antitrust statutes are broad by design.  Contrary to BlackRock’s misleading statement, they do not apply only to explicit agreements to jointly buy or sell shares or attempt hostile takeovers.  On the contrary, antitrust law forbids competitors from entering into any agreement with the purpose or likely effect of reducing supply in a relevant market, and that is exactly what BlackRock, along with other large asset managers, appears to have done.

As federal courts have explained, “horizontal agreements between competitors are antitrust’s most ‘suspect’ classification, which as a group provide closer scrutiny than any other arrangement.” In re Terazosin Hydrochloride Antitrust Litig., 352 F. Supp. 2d 1279., 1312 (S.D. Fla. 2005) (quoting Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and their Application (2d ed. 2005)). Such an agreement is “per se illegal” where “it is formed with the objectively intended purpose or likely effect of increasing prices or decreasing marketwide output in the short run, with output measured by quality or quantity.” Id.

Here, there is no question that, through these groups, BlackRock is cooperating with its competitors to make concerted efforts to decrease marketwide output in fossil fuels. That is no secret; it is the very purpose of these organizations. Net Zero Asset Managers, for example, makes clear that it has an “expectation of signatories” like BlackRock to force a “rapid phase out of fossil fuel[s],” including by, for example, refusing to finance any new thermal coal projects. 

In response, BlackRock appears to argue that it has not violated the antitrust laws because even though the group of competitors agreed to reduce output, they left the specifics of how to go about doing so to each competitor to decide independently.  This is no defense.  It makes no difference if BlackRock pressures fossil fuel companies to reduce output through “engagements” while other signatories seek to achieve the same goal by refusing to provide new financing to coal projects while yet other signatories vote for shareholder proposals demanding companies adopt emission reduction targets.  If a group of competitors get together and agree to reduce output, that is a “naked restraint on trade” and a flagrant violation of antitrust law.   

Environmentalist activism is not a defense to an antitrust violation.  The DOJ, for instance, previously launched antitrust investigations into car manufacturers who coordinated among each other to cut emissions standards in the name of the environment.  Significantly, the car manufacturers’ agreement left each company wiggle room as to how, precisely, it would make those reductions.  Other members of Glasgow Financial Alliance for Net Zero—including JP Morgan Chase, Bank of America, and Morgan Stanely—are reportedly considering leaving GFANZ precisely because they have antitrust concerns.    BlackRock’s membership in environmental activist organizations raises substantial antitrust issues, and its claim to the contrary is false.

Further Reading:

7. BlackRock Does Not Tell Companies To Meet Emission Reductions Standards (False)

BlackRock’s Claim: “BlackRock’s engagement and voting around climate risk does not require that companies meet specific emissions standards.”

FALSE.  BlackRock voted in favor of a Scope 3 emissions cap at Chevron in 2021.  And in doing so, it explained that it wants its portfolio companies to “set rigorous GHG emissions reduction targets, and act on an accelerated timeline” towards net zero.  More broadly, BlackRock’s 2021 letter to CEOs stated as follows:

we are asking companies to disclose a plan for how their business model will be compatible with a net zero economy – that is, one where global warming is limited to well below 2ºC, consistent with a global aspiration of net zero greenhouse gas emissions by 2050. We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.

BlackRock’s claim that the company does not itself set “specific emissions standards” may literally be true, at least as it pertains to specific numerical targets, but it routinely points to other standard setting organizations such as the Science Based Target Initiative, which it claims are “working on [such] guidance.” Accordingly, BlackRock’s claim that it does not set “specific” standards is thus at best highly misleading; to the extent BlackRock’s statement is meant to imply that BlackRock does not demand the companies it is invested in to reduce their carbon emissions consistent with net zero goals, it is outright false.

Further Reading:

8. BlackRock Has Not Engaged In A Boycott of Energy Companies (False)

BlackRock’s Claim: “BlackRock does not boycott energy companies . . . .  BlackRock, on behalf of our clients, is among the largest investors in public energy companies, and has hundreds of billions of dollars invested in these companies globally. . . . Such a significant investment in . . . energy industry companies . . . is completely at odds with any notion of a boycott.”

FALSE.  As explained in the AGs’ original letter, the mere fact that BlackRock holds energy companies in some of its portfolios is no defense to an energy boycott claim.  That’s because the anti-boycott laws are specifically defined to include any action intended to punish energy companies, not just divestments.  BlackRock acknowledges this fact, but claims that its ousting of pro-fossil fuel board members is done purely for long-term financial reasons, not to fulfill its net zero pledges to organizations like Climate Action 100+.  For the reasons discussed in Sections 1 and 3 above, this long-termism argument fails. 

Further, BlackRock’s ousting of board members is not the only punitive action it has taken against fossil fuel companies.  Net Zero Asset Managers, for example, expects that its signatories will take action to “immediate[ly] cancel[] all new thermal coal projects” and refuse to “allocate additional capital to companies which are constructing new thermal coal projects.”  Any cancellation or refusal to finance new thermal coal projects, or agreement to do so only at higher rates or less favorable terms, or pressuring of other financial or insurance institutions to do so, would also constitute penalization of energy companies, and thus violate anti-boycott laws.

Further Reading: