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States are supposed to act in the best interests of citizens and retirees. Divesting from E.S.G. funds and companies like BlackRock that run them may create legal jeopardy.
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+(Video) Profits vs. purpose: The ins and outs of ESG funds
By Ron Lieber
The fight between red states and BlackRock, the world’s largest asset manager, has been a gawker’s delight.
Republicans don’t normally line up to punch the chief executive of a giant Wall Street firm in public. In places like Louisiana and North Carolina, however, that’s exactly what’s been happening to Laurence D. Fink, the longtime leader of BlackRock.
The fight is over BlackRock’s stance on E.S.G. investing. BlackRock believes that a focus on a company’s environmental, social and governance challenges is the very definition of prudence — and that how investors address those challenges will increasingly affect profits, too. State officials are calling out what they say is overly “woke” behavior by the asset manager.
The big challenge here is the differences of opinion about what constitutes an asset manager’s fiduciary duty. And an interesting split has emerged among the red states that dislike BlackRock’s public stances. Louisiana, citing its fiduciary duty, has taken money away from BlackRock. North Carolina, citing its fiduciary duty, has not.
Mr. Fink has challenged companies to consider E.S.G. factors and called out government officials.
“Stakeholders are pushing companies to wade into sensitive social and political issues — especially as they see governments failing to do so effectively,” he wrote in his annual letter to chief executives in 2019.
Last year, he reinforced his message. “Stakeholder capitalism is not about politics,” Mr. Fink wrote in his 2022 letter. “It is not ‘woke.’ It is capitalism.” At the same time, he tried to dampen the criticism by noting that BlackRock did not divest from fossil fuel investments as a matter of policy. Some clients do, and others don’t, he added.
Nevertheless, some of his customers are mad. Last year, John M. Schroder, the Louisiana treasurer, announced plans to sell $794 million of investments managed by BlackRock. That’s a teeny tiny percentage of the $8.6 trillion the company was managing as of the end of last year. Still, it generated headlines and could lead to others like Mr. Schroder doing the same thing.
“According to my legal counsel, environmental, social and governance investing is contrary to Louisiana law on fiduciary duties, which requires a sole focus on financial returns for the beneficiaries of state funds,” Mr. Schroder wrote in a letter to Mr. Fink.
But then, Mr. Schroder made a curious comment. “This divestment is necessary to protect Louisiana from actions and policies that would actively seek to hamstring our fossil fuel sector,” he wrote. “Simply put, we cannot be party to the crippling of our own economy.”
Mr. Schroder is not talking about taxpayers’ or citizens’ best interests there, in terms of the state getting the lowest cost investments or the best returns on the money. Instead, he’s focusing on the state’s best economic interests.
I had hoped to talk to him or his general counsel about how he balances the state’s short-term interests with the possibility that using E.S.G. principles might deliver better returns over time. But it didn’t happen.
“Sorry, but the treasurer is not interested in providing a response,” a spokeswoman, Pamela Matassa, said in an email. She did not reply when I asked why he was uninterested.
Cynthia Hanawalt, a senior fellow at the Sabin Center for Climate Change Law at Columbia University, took a closer look at Louisiana at my request. In that state, she said, local officials are essentially asserting that if they allow their investment managers to use E.S.G. analytical tools, it will lead to a reduction in the use of fossil fuels and state revenues.
“Setting aside the question of whether or not that’s true, it does seem clear that their focus is not on optimizing returns,” she said.
The treasurer in North Carolina, Dale R. Folwell, has also taken an interest in the question of what he owes to his constituency. A spokeswoman, Maria Sebekow, wrote to me last month heralding a “bombshell” letter that Mr. Folwell had written calling on Mr. Fink to resign. “This is not mere posturing,” Ms. Sebekow’s pitch added.
But it did represent a kind of hedge. On one hand, Mr. Folwell did not mince his words during our interview. He quipped that E.S.G. should stand for energy independence, safe streets and neighborhoods, and good governance.
On the other hand, the treasurer quite pointedly did not fire Mr. Fink from overseeing some of the state’s money, even as he called on BlackRock’s leader to walk the plank. And that’s because he didn’t want to violate his duty to act in the best interests of the North Carolina residents to whom he answers.
“My fiduciary duty to those that teach, protect and serve, as well as to our retirees, directs that the current North Carolina Retirement Systems investments in BlackRock remain at this time,” he said in a statement. “Our job is to find the best value with the lowest cost and highest margin of safety.”
“Pulling money away from BlackRock and giving it to someone who will charge us four times as much is not the right thing for our members,” he said in an interview.
The fact that states keep invoking their fiduciary duty in different ways begs another question. Let’s say that BlackRock’s E.S.G. investments radically outperform whatever it is that states move their money into when they divest from BlackRock. Could that underperformance create an opening for a breach-of-fiduciary-duty lawsuit in a state like Louisiana, which has publicly declared that it’s worried about the regional economy and not just investors?
Maybe. It would certainly be fascinating to watch the courtroom slugfest. But there are high hurdles to clear for any enterprising lawyer looking to bring such a suit on behalf of a citizen or pensioner.
One big challenge would be the various forms of immunity that often shield state governments and the people who work for them.
Petitioners would also have to face down judges in red states. Jonathan Berry, a partner at the Washington law firm Boyden Gray who oversaw E.S.G. guidance and other regulatory matters at the Department of Labor during the Trump administration, imagined a scenario where he would be squaring off with California’s pension managers in that deep Blue state.
“I would not expect to be successful going up against Calpers in a California state court, really for anything,” he said. Lawyers making the case for E.S.G. in conservative states would face similarly long odds.
If they tried, however, they’d need to make the most, well, conservative possible case for this way of investing. These days, E.S.G. means 1,500 things to any 1,000 given investment professionals. Cynicism abounds as investment companies relabel existing funds with vague sustainability markers and then raise the fees they charge.
But at least some consensus is emerging around a definition of E.S.G. that doesn’t invoke an image of people chaining themselves to trees. “At its heart, E.S.G. investing is really about looking at all material risks,” said Sonal Mahida, a consultant on the topic who once worked for the oil giant Hess.
And if there’s a chance that an asset manager’s investment is vulnerable to risks that fall under the E.S.G. label, that asset manager is supposed to sit up and take notice, according to Ms. Hanawalt of Columbia. So it is odd that state officials who oversee asset managers seem to want to restrict those managers from using information that can help them do their jobs.
“There is a cognitive dissonance between political narratives and people’s practical obligations,” she said. “If there is reason to believe that companies are vulnerable to climate risk or the impact of some other E.S.G. factor, fiduciaries are obligated to consider those factors.”
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