BlackRock Gives Choice To Clients Investing In A Low-Carbon Transition

The ESG Culture Wars rage on. On the investment front no asset manager has taken more incoming fire than BlackRock, the world’s largest asset management with an estimated $10.65 trillion in assets under management (AUM) as of June 30, 2024. It is taking fire from the right, such as red state legislation accusing BlackRock of boycotting fossil fuel companies. The remedy? Well, boycott BlackRock, of course and not let them manage assets for state pension funds! For example, in March of this year the Texas Permanent School Fund told BlackRock it will terminate its contract for managing around $8.5 billion.

But how much is BlackRock really boycotting fossil fuel companies? Facts suggest that these boycott moves are political theater based on no empirical evidence at all. BlackRock is the second largest shareholder (Vanguard is first and State Street Global Advisors is third) in the top three U.S. oil and gas companies (by market cap): ExxonMobil (market cap of $497.62 billion), Chevron ($284.22 billion), and ConocoPhillips (market cap of $130.62 billion). It also offers an iShares U.S. Oil & Gas Exploration & Production ETF (IEO) that has around $730 million in AUM. For those who want to go long on fossil fuel companies, here is a great opportunity to do so.

Adding to the irony, boycotts are proving to be damaging to the Texas economy. In their paper “Gas, Guns, and Governments: Financial Costs of Anti-ESG Policies,” Daniel Garrett and Ivan Ivanov conclude that interest costs of have increased by $300-500 million on $31.8 billion in debt due to boycotting of five banks. Building on this analysis, the Texas Association of Business and Chambers of Commerce Foundation commissioned TXP, Inc. to do further analysis. They found that the excess costs of fund raising by boycotting firms from bidding for state bonds “translates to $668.7 million in lost economic activity, value-added of $342.6 million, $180.7 million in annual earnings, 3,034 full-time, permanent jobs, and $37.1 million in State and local tax revenue.”

BlackRock is also taking fire from the left. For example, in January of this year, in an analysis of voting on 2023 shareholder proposals, the activist NGO ShareAction (“Our vision is a world where the financial system serves our planet and its people.”) asserted that BlackRock (along with Fidelity, State Street, and Vanguard) are “turning their backs on people and planet on an unprecedented scale.” In February of this year the grassroots environmental group Sierra Club (“working tirelessly to protect wildlife and wild places, ensure clean air and water for all, and fight the devastating effects of climate change”) castigated BlackRock for pulling its corporate membership in Climate Action 100+ (“an investor-led initiative to ensure the world’s largest corporate greenhouse gas emitters take appropriate action on climate change in order to mitigate financial risk and to maximize the long-term value of assets”) and transferring it to its smaller international organization.

While the right is asserting that BlackRock is trying to punish the oil and gas industry and the left believes it is not punishing it enough, both are missing the central point. BlackRock doesn’t have an agenda either way. It is not BlackRock’s job to play an industrial policy role to support the oil and gas industry. Neither is it BlackRock’s job to play a leading role in the energy transition. Rather, it has a fiduciary duty to its clients to earn the best risk-adjusted returns it can. As explained in an interview I did with Sandy Boss, then Chief Operating Officer for BlackRock’s Global Client Business, “As a fiduciary asset manager, we need to consider all the material risks and opportunities that can affect long-term value for our clients.” She also pointed out that “We care about how companies are navigating the energy transition because that can have significant implications for their business models and value.” BlackRock may decide that the fossil fuel sector should be over- or underweighted to renewables. It might decide to overweight some fossil fuel companies over others and the same with renewables companies.

But here’s the rub. Clients can have very different views on sector allocations, on allocations within a sector and, more, generally, what companies should be doing to navigate the energy transition based on different views about the speed and magnitude of climate change and its implications for a company. In the end, BlackRock’s job is to manage clients’ money in the way they are instructed to do so, along with the concomitant stewardship activities. Some investors will have the view that companies which are leaning hard into their views on the energy transition, such as through net-zero commitments and climate transition plans, are better long-term investments than those who aren’t. This is particularly true of many European investors.

In order to assess the desires of its European clients, in June 2023 BlackRock conducted a market survey of 200 European clients representing $9 trillion in AUM. It found “that 98% of them have set some kind of transition investment objective for their portfolios.” The firm also noted that all of its largest, strategic relationship clients have net-zero commitments. In light of that it, BlackRock developed a set of “Climate and Decarbonization Stewardship Guidelines” which differ from their basic “Global Principles” for their benchmark policy. The figure below illustrates the differences.

What’s important to note is that climate is included in the benchmark policy since it can have an effect on returns. The decarbonization policy is for those investors who have a more stringent view of what they expect their portfolio companies to be doing. Here is the list of European products to which the decarbonization policy will initially be applied. BlackRock has announced that more products will be added in the future. Clients with separately managed accounts can also choose to use this policy.

Here are the stewardship guidelines design principles for clients who see an advantage in having their portfolios aligned with and supportive of a transition to a net-zero economy:

· Prioritize sectors and companies that are critical to the transition to a low-carbon economy consistent with limiting global temperature rise to 1.5°C above pre-industrial levels

· Apply a sectoral approach to our analysis that acknowledges the unevenness of the low-carbon transition across sectors and markets

· Take a long-term, pragmatic approach that favors a transition that minimizes disruption to companies and their key stakeholders

· Focus on useful, contextualized disclosures that help inform investors’ views, while recognizing data limitations

· Be consistent with BlackRock’s position as a minority investor on behalf of its clients

Based on these principles are a set of voting guidelines regarding corporate disclosures (including transition plans), boards and directors (including voting against directors over concerns about climate risk), management proposals to approve a climate strategy or progress report, shareholder proposals on climate and low-carbon transition plans, and related matters (executive compensation; auditors and audit-related issues; mergers, acquisitions, asset sales, and other special situations; and other business relevant sustainability-related risk and opportunities).

As a result of the decarbonization policy choice it is likely that, in some circumstances, BlackRock will be voting on behalf of their clients who have invested in funds in the European Product List, differently than their other clients. This is perfectly appropriate. In the end, BlackRock must vote for those clients who authorize it to vote on their behalf in accordance with the selected policy—benchmark or decarbonization. Clients who don’t like either option can choose the Voting Choice offering or do the voting themselves.

It is worth noting that under its Voting Choice program, in 2024 BlackRock added two voting guideline options from the proxy advisory firm Egan-Jones. The first is the Wealth-Focused policy, introduced in 2005, which opposes: (1) stakeholder capitalism proposals, (2) those aimed at promoting DEI, and (3) those aimed at environmental issues such as Scope 1, 2, and 3 reporting and becoming carbon neutral. Interestingly enough, this choice has the caveat of “Exceptions only exist when proposals are directly tailored to revenue generation.” The second is the firm’s most popular Standard Policy, introduced in 2002, which offers “a ‘balanced’ approach” for “something in between the ESG policy and the Wealth-Focused policy.”

Opinions will differ about whether the European products are better investments than, say, the IEO ETF. The very nature of markets is that investors have different views on what is a good stock and what is a bad stock. All of these views get aggregated into a company’s stock price. Companies recognize that their investors have different views and should engage with them to then decide on strategy and capital allocation. That is a management and board decision, not an investor one. Even though some on the left and some on the right may wish it were.

Let me close with where I started. On August 4, 2022 BlackRock’s Chairman and CEO Larry Fink received a letter from 19 red state attorneys general expressing concerns about the firm’s energy investments. (BlackRock responded with a letter dated September 6, 2022.) Rather than pursuing self-harming boycotting, how about these folks, and whoever managing state money who share their concerns, suggest to BlackRock that it develop a set of stewardship guidelines that reflects their views. , Call it, say, the “American Energy Security and Jobs Stewardship Guidelines.” This is as legitimate a request as that of European investors.

I can’t speak for BlackRock, but I suspect that if the amount was large enough, they would get a fair hearing. While doing this won’t have the pugnacious polarizing political drama of boycotting, it is a sure fire way to have BlackRock manage their money in accordance with their investment beliefs.

Just a thought.