By Mark S. Nelson, J.D.
BlackRock, Inc. recently responded to a letter from numerous state attorneys general who accused the investment firm of boycotting energy companies and threatening to take legal actions against BlackRock over their perception that BlackRock was biased against companies providing carbon-based energy. In its response, BlackRock stressed its independence and transparency about how it and its customers cast votes on corporate policies. “Given our commitment to those saving for retirement, we are disturbed by the emerging trend of political initiatives that sacrifice pension plans’ access to high-quality investments – and thereby jeopardize pensioners’ financial returns,” said the letter from BlackRock. “Open competition, the free flow of information, and freedom of opinions is core to the strength of US capital markets.” BlackRock had previously sent a letter to states regarding energy investments in pension funds that had prompted 19 attorneys general to request a further explanation form BlackRock. The BlackRock response to the state attorneys general was signed by Dalia Blass, BlackRock’s Senior Managing Director and Head of External Affairs; Blass was formerly the Director of the SEC's Division of Investment Management during the Trump Administration.
Independence and disclosure. BlackRock began its response by noting that it is a fiduciary that offers its customers a diverse set of investment options and participates in ESG-related activities in a manner that is consistent with its obligations as a fiduciary. According to BlackRock, governments that account for 90 percent of GDP have already made pledges to achieve net zero with respect to carbon-based energy within decades. The firm also said that customers representing $3.3 trillion also favor a transition to cleaner energy.
More specifically, BlackRock denied that it assumes the U.S. and other countries will fully implement the Paris Agreement. But BlackRock said it does “encourage” companies to adhere to principles of climate disclosure grounded in work done by the Task Force on Climate-related Financial Disclosures (TCFD) in order “to provide investors with high-quality, globally comparable climate-related disclosures.”
BlackRock also denied that it unilaterally exercises authority over pension fund investments and votes. Rather, BlackRock said it adheres to investment guidelines set by its customers and that BlackRock has developed technology to allow its customers to determine how to vote proxies.
With respect to its own voting practices, BlackRock suggested that its influence is less significant than was implied by the state attorneys general. “We do not, as suggested in your letter, dictate to companies what specific emission targets they should meet or what type of political lobbying they should pursue. That is the role of the company’s management team and the board of directors – it is not the responsibility of minority investors such as BlackRock,” said the response letter. “Indeed, we have voted against shareholder proposals that, in our assessment, are intended to micromanage companies.”
The state attorneys general also had posited that BlackRock policies may violate antitrust laws or otherwise call into question BlackRock’s independence. BlackRock replied that it does not coordinate votes with outside groups. The firm then cited to examples in which it told outside groups that its participation in those groups would not drive investment decisions.
Moreover, the state attorneys general had accused BlackRock of boycotting energy companies. BlackRock said it was “troubled” by the emerging use of anti-boycott laws and regulations in the ESG context. BlackRock further explained that votes on company policies are not intended to punish those companies because votes are taken with an eye to those companies’ long-term value. BlackRock added that its efforts with respect to climate change are focused on the disclosure by companies of how such risks may impact their businesses.
Government responses to climate change. The government response to climate change and to other ESG issues more generally has in some instances involved the federal government or state governments taking some form of legislative or regulatory action, albeit with somewhat mixed results. For example, at the federal level, the SEC during the Trump Administration added a human capital disclosure requirement for public companies, which the current Gary Gensler-led SEC could potentially expand. The Gensler-led SEC also has proposed extensive climate disclosures for public companies and fund advisers to improve the consistency of such disclosures and to combat greenwashing by funds. Also at the federal level, the Biden Administration has sought to modify a Trump-era DOL rule that required ERISA fund managers to have pecuniary purposes for their investments. GOP bills in Congress would codify the Trump-era DOL guidance and/or deny the Biden Administration funding to implement its ESG policies.
At the state level, California recently failed to enact additional climate disclosures for companies doing business in the state and its efforts to legislatively diversity corporate boards have been successfully challenged in court. But questions remain about whether companies may voluntarily achieve many of the goals of California’s ESG laws even without a legislative mandate.
On the issue of climate change, some states, many of which host significant oil and gas or coal operations, have taken steps to push back against firms like BlackRock that are pressing for more transparency about the climate risks faced by public companies. Thus far, that push back at the state level has been more pronounced than the equivalent push back at the federal level, although largely because Biden Administration policy favors greater climate disclosure and Democratic Congressional majorities can effectively bar advancement of the numerous “anti-woke” laws proposed by Congressional Republicans.
The state attorneys general letter to BlackRock had questioned whether the firm sought the best possible returns for investors and, thus, seeks to advance one of the several arguments made so far in response to private and public ESG efforts. “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,” said the state attorneys general. “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.”