Texas state senators struggled for more than six hours last month to get straight answers from BlackRock and State Street, two of the world's largest asset managers, regarding what the Wall Street firms are doing to compel companies whose shares they own to get in line with the environmental, social and governance (ESG) movement.
When asked by state Sen. Bryan Hughes, chairman of the state Senate Committee on State Affairs, to clarify BlackRock’s pledge to Climate Action 100+ “to secure commitments from companies to reduce greenhouse gas emissions consistent with the Paris Agreement,” Dalia Blass, BlackRock’s head of external affairs, responded that the firm merely talks to companies whose shares they own to learn about their “material risks and opportunities.”
“We participate in Climate Action 100 to engage in dialogue with other participants, market participants, governments so that we understand issues that are relevant to our clients,” said Blass, who recently joined BlackRock from the Biden administration, where she worked at the Securities and Exchange Commission (SEC).
The motto of Climate Action 100+ is “Global investors driving business transition.”
“The website doesn’t say anything about engaging in dialogue in Climate Action 100,” Hughes said. “BlackRock’s website says, ‘We have joined Climate Action 100 to help ensure the world’s largest greenhouse gas emitters take necessary action on climate change.’ True or false?”
Blass responded, “Sir ... what I can say ... two things ...”
Having repeated the question, Hughes asked, “Can BlackRock send us a witness who can tell us whether that’s a true or false statement on its website today?”
Blass said, “Sir, if you pulled that off our website, then that is on our website.”
State Street and BlackRock are two of the “Big Three” largest asset managers. Together with Vanguard, they manage approximately $20 trillion in assets on behalf of corporations, governments, and endowments, as well as the savings of tens of millions of people who are investing through vehicles such as 401(k) plans. Vanguard recently withdrew from its membership in NZAM and was excused from testifying in Texas.
Asset managers who support ESG policies typically make two contradictory claims. In order to make a case that they aren't violating their fiduciary duty to the people whose savings they manage, they argue that ESG isn't an ideology but rather an essential risk-management tool that they use to generate higher returns for clients.
Simultaneously, asset managers claim that, despite what they may have said or pledged, they actually don’t do anything to push the ESG agenda on companies and are, in fact, active supporters of the fossil fuel industry.
Blass told the senators that BlackRock has $107 billion invested in public energy companies in Texas.
"We've invested in Texas energy, just the past two years, $31 billion. We believe in these investments; we do not boycott oil and gas," she said.
State Sen. Bob Hall asked, "Where's the empirical data that supports that net-zero is good for the bottom line, that it actually would improve income, improve revenue? And the rest of the things that are stuck in that woke analysis, where is the empirical data that says this will actually be a benefit to the investment?"
Blass responded that, based on BlackRock's research, "we believe that an orderly transition to a low carbon economy is much more beneficial for our clients' portfolios. A disorderly transition can cost the global economy about a 25 percent reduction in GDP [gross domestic product]."
Heinel told the senators, "I have no evidence that this is good for returns in any time frame. In fact, we've seen the evidence to be quite contrary. Last year, if you didn't own energy companies, you did miserably compared to broad benchmarks. The year before, that was quite the opposite ... but that was just a happenstance, that's not because it's a good investment."
Regarding compliance with ESG criteria, BlackRock CEO Larry Fink said at The New York Times 2017 DealBook Summit that “behaviors are going to have to change, and this is one thing that we’re asking companies. You have to force behaviors, and here at BlackRock, we are forcing behaviors.”
Hughes cited a statement from Fink to CEOs in 2020:
“Climate change has become a defining factor in companies’ long-term prospects. ... We are on the edge of a fundamental reshaping of finance.”
The senator asked Blass how BlackRock thought finance should be reshaped.
The goal of finance as BlackRock sees it, has always been “to find opportunities for our clients and to manage risks in their portfolios so that we can produce the best risk-adjusted returns,” according to Blass. BlackRock’s mission hasn’t changed, she said.
“What we’re learning is, BlackRock says whatever it needs to say to whoever it’s talking to at the time,” Hughes said. “That’s what we’re experiencing today.”
Like BlackRock, State Street joined various ESG clubs such as Climate Action 100+, Ceres, and the Glasgow Financial Alliance for Net Zero (GFANZ) merely to learn “how to think about climate change,” Heinel said.
“We’re trying to understand how these various risks are becoming as important as traditional financial risks,” she said, citing as an example new taxes that may be imposed in Europe on “companies that they believe are bad actors from a climate standpoint.”
When asked to clarify why companies should follow ESG criteria, asset managers cite the effect of government policies, such as taxes and penalties for companies that don’t comply with the criteria, as well as state subsidies for renewable energy, all of which are part of what Blass called the “net-zero transition, the transition to a low carbon economy."
According to clubs such as Climate Action 100+ and GFANZ, the role of asset managers who join these clubs is to compel companies whose shares they own into compliance.
Heinel testified that, as an index fund manager, Vanguard must buy and hold the shares of companies included in a given index such as the S&P 500. Therefore, if they want to influence companies’ behavior, they must work with executives of those companies rather than avoid their shares.
“We engage with companies in our portfolios; we do not divest,” Heinel said.
State Street currently owns more than $140 billion in shares of energy companies.
“We do not discriminate against companies in any sector, including energy companies. … That means we do not tell those energy companies to shift their strategy or to drill more wells,” she said.
The lawmakers brought up the case of the Pirkey Power Plant, a coal-fired facility located near the hearing site, which although operationally viable, is being shuttered by its parent company, American Electric Power (AEP), shares of which are owned by BlackRock.
"Climate Action 100 says AEP is one of [BlackRock's] focus companies, and as you know, Climate Action 100 assesses utility companies based on whether they've assigned a retirement date to each and every coal unit with a full phase out by 2040," Hughes said.
"That means that GFANZ, working with BlackRock, has said it's better to make the companies keep the coal plants and manage them down—that means to shut them down—rather than sell them to someone else who will keep operating them and keep the power and the jobs coming," Hughes said.
Blass responded that "managing down" doesn't mean closing plants and that BlackRock is an investor in carbon-capture technology to reduce emissions.
"We're scared to death about what you're going to do to our citizens in the state of Texas," state Sen. Brian Birdwell said, noting that one-third of the state's electricity generation comes from coal-fired plants.
Hall said, "You told us earlier that your objective was to maximize investments. Now, you're telling us that your objective is zero carbon emissions. Which is it?"
Blass said, "Our objective as a fiduciary asset manager is to provide the best risk-adjusted returns for our clients. We do that by looking at how the companies are managing their risks and as the global regulators, including here in the United States, are moving more and more toward a regulatory system around net zero and carbon production. We look at how they're managing that to make sure that, long-term, they're able to produce results for our clients."
State Sen. Lois Kolkhorst said she worries about the “disadvantage for our country as we bend to ESG but some of our competitors do not.” China has dramatically increased its investment in coal-fired power plants, but “right here in the county in which we sit, we’re going to decommission a coal plant because of ESG scoring; because AEP is being forced to do that to be eligible to compete to get funds,” she said.
“China, Russia, and India are putting their countries first,” she told Blass and Heinel. “While we’re all bending to some scoring where you all sit around a table.”
Hall said that when the pollution and emissions from the construction and disposal of wind turbines and solar panels are factored in, the environmental benefits of renewable energy are unclear.
"All the concrete and steel and construction, that gets left out of the carbon analysis, and they just pretend that it only exists once it's in place and the blades are turning," he said. "The analysis that ignores the manufacturing and the disposal process of solar panels—huge impact to the environment, that gets left out. So we're going to run around saying, 'Oh, this is low carbon impact.'
"It's not, it's a lie."
Lander took the opposite tack from red state AGs.
"BlackRock now abdicates responsibility for driving net-zero alignment in its own portfolio by saying that it does not ask companies to set specific emissions targets, and that its participation in NZAM does not mean BlackRock is setting or meeting any net-zero targets," he wrote.
Lander said he would be "reassessing our business relationships with all of our asset managers, including BlackRock, through the lens of our climate responsibilities."
Blass declined to answer questions about what her firm would do in light of New York's action.
BlackRock recently was granted a three-year exemption by the Federal Energy Regulatory Commission (FERC) that allowed it to own up to 20 percent of U.S. public utility companies; Vanguard is currently seeking the same approval. Vanguard’s withdrawal from NZAM, which occurred simultaneously with its request for an exemption from FERC, was condemned by climate activist and former Vice President Al Gore as “irresponsible and short-sighted” and by Lander as a “cowardly walk-back.”
"New York can do whatever they want to do, and the crazy coast can do whatever they want to do," Hall said. "This is Texas, and we do things a little bit different here. We happen to believe in the truth, we happen to believe in honesty, and we believe in having real objectives."
State Sen. Paul Bettencourt told Blass and Heinel that "you better reconsider your positions because it's, in my mind, an open-and-shut case that you're not compliant with [Texas] Senate Bill 13," which requires that the state divest from companies that boycott fossil fuels.
"You can't tell the truth to a simple question," Bettencourt said. "All the discussion today is managing [the Pirkey Power Plant] effectively down to zero. It means you're going to shut the plant down decades ahead of its economic life. And that's not good for this local area, it's not good for the Texas grid, it's not good for economic reality as I understand it."
Kolkhorst said, “I am moving toward a conclusion that your two firms are something we shouldn’t invest in because we have different goals. Maybe you can’t serve two masters. Maybe it should be more along the Florida lines where we say, 'You’ve made a decision, we respect that decision, and we take our marbles and go somewhere else.'”
Florida announced on Dec. 1, 2022, that it would no longer do business with BlackRock, removing about $2 billion of state assets that were under BlackRock's management. Investment bank UBS downgraded BlackRock's shares in October, stating that "as performance deteriorates and political risk from ESG has increased, we believe the potential for lost fund mandates and regulatory scrutiny has recently increased.”
The organization stated that "BlackRock recently disclosed that two-thirds of its largest clients, collectively representing $3.3 trillion in assets under management, have committed to support the energy transition through investments in their portfolios. This is almost 1,000 times the overall amount pulled from the asset manager so far by Republican-led states including Louisiana, West Virginia, and Texas."
A recent survey of 2,000 retail investors by Consumers' Research found that 70 percent of retail investors said the primary goal of their investments is to save for retirement or supplement their income; only 3 percent said their primary investment goal is to drive sustainability, and 2 percent said it was to drive social change.
By contrast, large state pension funds, such as CalPERS, CalSTRS, the New York State Pension System, and New York City's public pension funds, which together control nearly $1 trillion in assets, are active supporters of ESG investing.