BlackRock Downgraded by UBS Over Growing ESG Investing Risks

BlackRock Downgraded by UBS Over Growing ESG Investing Risks
A sign for BlackRock Inc. hangs above the company's building in New York on July 16, 2018. (Lucas Jackson/Reuters)
Andrew Moran

BlackRock’s focus on the latest Wall Street craze—environmental, social, and governance (ESG) investing—has turned into a risky affair for the world’s largest asset manager, a UBS analyst recently said.

Brennan Hawken, an analyst at the bank, downgraded the stock of BlackRock (NYSE: BLK) to Neutral from Buy and slashed the stock price target to $585 from $700 over growing pushback to its ESG efforts.

“We are downgrading BLK to Neutral based on environmental pressure to earnings and risk from the firm’s ESG positioning,” Hawken wrote in a note, stating that BlackRock could face increased regulatory inspection and the possibility of diminished fund management business.

“BLK’s early and energetic adoption of ESG principles in its fund management and shareholder proxy activities have positioned the firm as an ESG leader in our view. However, as performance deteriorates and political risk from ESG has increased, we believe the potential for lost fund mandates and regulatory scrutiny has recently increased.”

According to Market Beat, the average analyst rating is a “Moderate Buy,” with a price target of $776.46.

But could BlackRock CEO Larry Fink witness the Wall Street titan come under pressure over sustainable investing?

BlackRock recently launched a new webpage with a focus on “setting the record straight” on its ESG investments, dispelling some of the misconceptions being spread and regaining control of its corporate messaging.

BlackRock CEO Larry Fink speaks at a forum during the opening of the Clinton Global Initiative (CGI), a meeting of international leaders in New York on Sept. 19, 2022. (Spencer Platt/Getty Images)
BlackRock CEO Larry Fink speaks at a forum during the opening of the Clinton Global Initiative (CGI), a meeting of international leaders in New York on Sept. 19, 2022. (Spencer Platt/Getty Images)
“The energy industry plays a crucial role in the economy, and, on behalf of our clients, BlackRock has invested $170 billion in U.S. public energy companies,” the company wrote. “We are also partnering with energy companies and start-ups to fund new technology and innovations that will power the global economy, now and in the future. Despite these investments, BlackRock has recently been accused of ‘boycotting’ oil and gas companies.”
The company offers a long list of ESG-focused exchange-traded funds (ETFs) that concentrate on climate change, data privacy, accounting practices, product liability, and ethics.

Republicans Uninterested in ESG Investing

In recent weeks, a plethora of Republican officials have divested from BlackRock over its ESG policies.
Recently, Louisiana Treasurer John Schroder wrote a letter (pdf) to Fink, explaining that the state would liquidate approximately $800 million from the financial institution’s exchange-traded funds (ETFs), money market funds, and mutual funds within three months. Schroder cited BlackRock’s ESG standards that promote green energy over conventional fossil fuels.

“Your blatantly anti-fossil fuel policies would destroy Louisiana’s economy,” Schroder wrote. “This divestment is necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector. In my opinion, your support of ESG investing is inconsistent with the best economic interests and values of Louisiana. I cannot support an institution that would deny our state the benefit of one of its most robust assets.”

South Carolina announced on Oct. 10 that the state would be divesting its roughly $200 million in BlackRock holdings by the year’s end.

“I will not allow our financial partners to undermine my fiduciary responsibility to maximize investment returns while accepting a prudent level of risk for the benefit of our citizens. It is imperative that we stand up to BlackRock and resist the pressure to simply fall into line with their leftist worldview,” South Carolina Treasurer Curtis Loftis explained.

Other U.S. jurisdictions have begun to divest tens of millions of dollars in state funds from BlackRock, including Arkansas, Utah, and West Virginia. In August, Texas and 18 other states penned a letter to Fink, threatening to remove state funds from these banks over BlackRock’s ESG objectives.

“Our states will not idly stand for our pensioners’ retirements to be sacrificed for BlackRock’s climate agenda. The time has come for BlackRock to come clean on whether it actually values our states’ most valuable stakeholders, our current and future retirees, or risk losses even more significant than those caused by BlackRock’s quixotic climate agenda,” the letter reads.

Writing in an op-ed on the Fox Business Network website, Nebraska Treasurer John Murante stated that BlackRock and other asset managers “have lost credibility on ESG investing.”

“Wall Street firms market themselves by referencing solid objects—a black rock. For firms making ESG commitments, the appropriate image would be a black box. Asset managers cannot have it both ways: either they maximize financial returns, or they push ESG and net zero,” he wrote.

While Florida didn’t specify BlackRock, Florida Gov. Ron DeSantis and trustees of the State Board of Administration (SBA) approved a measure to remove ESG criteria from $186 billion in state pension funds.

“Corporate power has increasingly been utilized to impose an ideological agenda on the American people through the perversion of financial investment priorities under the euphemistic banners of environmental, social, and corporate governance and diversity, inclusion, and equity,” the governor said in a statement in August.

But it isn’t only BlackRock that Republican-led states are divesting from because of so-called responsible investing. West Virginia announced that other financial institutions would be ineligible for state banking contracts, such as Goldman Sachs, JPMorgan Chase, Morgan Stanley, and Wells Fargo.

Despite the pushback from a host of Republican-led states, a recent report from PricewaterhouseCoopers states that the demand for ESG investments outstrips supply. The study shows that nearly 90 percent of institutional investors think asset managers should be more proactive in manufacturing new ESG products. Close to 80 percent of U.S. investors plan to bolster their allocations to ESG financial products over the next two years.

BlackRock shares fell about 2.7 percent on Oct. 14, to close below $551. Since the beginning of the year, the firm has lost 40 percent of its market value, or about $55 billion.

Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."