BlackRock was one of the market leaders when it came to focusing minds on climate risk. The asset manager – which in 2022 launched over 85 new ETFs globally and reported $393 billion of long-term net inflows, while also returning $4.9 billion to shareholders – made waves in 2020 with a hard-hitting letter on climate risk by CEO Larry Fink and an emphatic focus on ESG across all of its portfolios.
Fink had told CEOs in that influential 2020 letter that “the investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets”.
The same year BlackRock told clients: “By the end of 2020, all active portfolios and advisory strategies will be fully ESG integrated… at the portfolio level, our portfolio managers will be accountable for appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions.”
BlackRock goes silent on ESG
As BlackRock wrapped up its Q4 2022 earnings report and reflected on the outlook for 2023 this month, it was deafeningly silent on the climate and ESG however.
Over the course of a January 13 earnings call – the transcript of which extended to over 8,600 words – neither “climate” nor “ESG” were mentioned even once.
The mood was one of a hard-headed return on client returns: financial ones; period.
As BlackRock CEO Fink told analysts on the earnings call: “Over the past year, BlackRock has been the subject of a great deal of political and media discourse. Some of these people have suggested we are either too progressive, some of them suggested we’re too conservative in how we manage our clients’ money.
“I want to just tell everybody, we’re neither. We’re a fiduciary,” he emphasised.
“We put our clients’ returns first. We offer every client investment choices and then pursue their objectives that they choose and the performance they seek.”
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The firm’s CEO told analysts: “I want to make it clear to our clients, our shareholders, and all our stakeholders that we will not be deterred in pursuing the outcomes that our clients desire” (he did not directly specify who might be doing this “deterring”).
“This steadfast focus has not only enabled us to deliver for our clients but also to drive growth for each and every one of our shareholders. Since our IPO in 1999, BlackRock has delivered a 7,700% total return to our shareholders, and this is the strongest return of any financial services company in the S&P 500 over that period,” the CEO said.
That reference to “outcomes our clients” desire may, perhaps, have been the subtlest of nods to ESG (after all, as Morningstar data shows, annual flows into ESG products as a proportion of total flows into the ETF and ETC market ballooned to a record high of 65% in 2022 from 14% in 2019.) But an open nod to climate risk, emissions targets, board diversity, supply chain risk or “purpose” amidst this rhetoric? Not a single one.
Perhaps that’s not so unusual: A review of earnings call transcripts for the same quarters in 2020 and 2021 shows just a brace then a trio of mentions for ESG respectively in those Q4s. After all, such public disclosures are times to reassure the markets about growth (46 mentions), income (39 mentions), or perhaps technology (18 mentions.) Yet there is no hiding the fact — and Fink’s comments and omissions reflect this — that the very term “ESG” has become a culture wars football.
Is ESG Satanic?
Is ESG satanic?
It’s the sort of ludicrous clickbait question or SEO search term that would not have been thinkable a few short years or even months ago, but it may yet drive traffic to this story, thanks in no small part to the world’s second richest man, Elon Musk.
Speaking days after BlackRock’s earnings call at the World Economic Forum, BlackRock’s CEO Larry Fink said that his stance on ESG had seen him vitriolically attacked: “For the first time in my professional career, attacks are now personal.
“They’re trying to demonize the issues” he told Bloomberg TV.
That terminology may not have been accidental.
He spoke after Elon Musk on January 16 tweeted that the “S” in ESG stands for “Satanic” in response to a conspiratorial post about the World Economic Forum, drawing a flurry of replies from inflamed — and possibly engorged — followers including one suggesting that ESG stands for “Evil, Socialist, Garbage.”
That’s an increasingly popular view in certain political spheres.
BlackRock and fellow asset management behemoth State Street on December 15, 2022 appeared before the Texas Senate Committee on State Affairs, where they were grilled aggressively over their statements on ESG – after Texas Comptroller Glenn Hegar in August issued a list of financial companies he deemed to be boycotting the energy industry and said were thus “subject to divestment” and as West Virginia barred some of the largest underwriters like JPMorgan, Goldman Sachs, Morgan Stanley, Wells Fargo, and BlackRock, from winning state business because of their approach to sustainable finance; other states have taken similar steps, as Reuters has reported.
The hostility has various roots: Legitimate frustration at the greenwash rife in the markets as firms slap “ESG” labels loosely on products that are anything but environmental-focussed or governance-conscious (Goldman Sachs and BNY Mellon were both fined by regulators in 2022 for failing to comply with their own ESG policies and procedures that they had marketed to intermediaries and fund trustees); concern that excessive legislation is driving up costs for oil and gas companies, even as the world still relies on them heavily; while Musk — who has also dubbed ESG a “scam” — is no doubt still smarting at the decision by S&P Global to boot Tesla from its flagship S&P 500 ESG index, citing the company’s weak handling of a federal investigation into multiple deaths linked to its self-driving cars and claims of racial discrimination.
The animus has escalated to the extent that ESG is a talking point on the political fringes; which are, of course, increasingly less “fringe” and more influential.
Be bold enough to search for “ESG + Socialism” for example and you will swiftly encounter myriad articles making the claim that, per one example, “there are a myriad of forces at work within and outside the United States that aim to remake and advance an elite socialist grip on how businesses are governed and how our economy works.”
“ESG”, it adds, “appears to facilitate a new form of elitist regulatory socialism.”
The campaign by Republican state officials to bar financial institutions from winning business because of their stance on ESG meanwhile could have cost taxpayers as much as $708 million in higher interest payments due to reduced competition, according to one study, commissioned by non-profit The Sunrise Project, and released January 12.
Bad news for taxpayers, clearly. But as the report emphasises: “We understand that some in the financial services industry are now regarding these state ESG restrictions and blacklists as a growing threat to their overall business activity, even if fees from investment banking services in the municipal bond market tend to be small contributors to overall company profits.”
Expect a great deal less talk from the BlackRocks of the world about (as in 2020) how “all active portfolios and advisory strategies will be fully ESG integrated” and more about (as in 2023) about how such firms “offer every client investment choices and then pursue their objectives that they choose and the performance they seek.”
Blame “Satan” or blame a human instinct for self-preservation in a rapidly warming world, but globally, meanwhile, regulatory pressure to improve ESG or non-financial disclosures — however these are branded and however flawed the myriad frameworks around them may be — looks set to just keep growing in 2023.