Texas Senate grills BlackRock, ISS, State Street reps on ESG

Texas state senators grilled representatives from BlackRock, ISS and State Street on Thursday over their investing practices and policies tied to ESG, or environmental, social and governance.

Dalia Blass, BlackRock's head of external affairs, testified first on BlackRock's policies and portfolios at an hourslong hearing held by the Texas Senate Committee on State Affairs in Marshall, Texas.

Republicans had subpoenaed BlackRock, Vanguard, State Street and ISS to interrogate their position on climate. However, Vanguard was not present at the hearing after earlier in the week saying it had withdrawn from the Net Zero Asset Managers initiative.

Sen. Lois Kolkhorst dismissed the idea that ESG helped portfolio performance.

"As I travel the state, people are becoming more aware of what ESG is, and I tell them 'It's about to affect all your lives,'" she said. "We're meeting about investments (of) some of the largest pension funds in the world, including in Texas."

Ms. Kolkhorst cited a study from Harvard Business Review published in March 2022 that found ESG investment funds tend to lag in performance vs. the overall market, based on data from Morningstar analyzing more than 20,000 mutual funds and $8 trillion of investor money.

"But none of the highest rated ESG funds outperformed non-ESG funds. Not one," she said.

Moreover, FTX earned a higher governance rating than ExxonMobil, according to one rating agency, she added.

Ms. Blass said BlackRock only advises its client as to their options, including pension funds in Texas; that ESG principles are determined by a third party, but that BlackRock's stewardship is done by the firm, which looks at physical and transitional risks in regard to net-zero emissions targets.

"We do not push companies towards net-zero but inform them of risk," said Ms. Blass.

Next up was Lorraine Kelly, ISS' global head of investment stewardship, who said, "Neither one (of Texas' pension funds) is using our benchmark policy. They just wanted another view. And we're actively engaged with TRS (Texas Teacher Retirement System) in discussion about policy which focuses on the G — and not the E and S — as a standard offering within ISS."

Lori Heinel, global chief investment officer for State Street Global Advisors, testified next, and said the firm "only serves client demands, they do not pick and choose. Investors can invest in fossil fuels if they want to or not, and we also have a ETF that is exclusively oil and gas centered."

State Street scores companies based on understanding of risks, and "We are not telling companies what to do, just informing them of potential climate related risks," she said.

ISS maintained there is neither bias nor an agenda in regards to fossil fuel companies, although one senator, Paul Bettencourt, said he is "firing ISS immediately based on a lack of recognition of the obvious".

"ISS recommendations to divest from fossil fuels is a prima facie evidence of having an agenda," Mr. Bettencourt said.

Mr. Bettencourt asked whether ISS "will generally vote against directors if the company doesn't implement greenhouse emission targets. How is this agnostic policy? Ladies, I encourage you to reconsider your position," said Mr. Bettencourt to the firm representatives in the room.