BlackRock's proxy votes reveal a nuanced stance

BlackRock Inc. is being publicly eviscerated by some pension funds, other investors and politicians for its stance on environmental, social and governance factors. But a closer inspection of the world's largest manager's ESG investments, votes and internal practices show that they are not all that revolutionary.

The firm in May 2021 committed to the Net Zero Asset Managers initiative, under which 77% of its assets under management would be aligned with net-zero by 2050 or sooner, up from 25% currently.

But the latest data show BlackRock voted in favor of climate change shareholder proposals fewer times than many of its rivals in the July 1, 2021, through June 30, 2022 proxy season.

And some of its ESG strategies, including its private capital energy transition funds, can still invest in fossil fuel companies.

"We expect to remain long-term investors in carbon-intensive com-panies, because they play crucial roles in the economy and in a successful (energy) transition," BlackRock said in its 2030 net-zero statement that set interim targets.

The Net Zero Asset Managers initiative represents 291 global managers with a collective $66 trillion in assets under management that have made net-zero commitments.

BlackRock, which managed $7.96 trillion as of Sept. 30, had a total of $475 billion invested in dedicated sustainable/ESG strategies across the company's actively and passively managed investment strategies as of June 30, according to data BlackRock provided to Pensions & Investments.

BlackRock is not alone in carefully straddling the fence. Many asset owners, including the nation's second-largest public pension plan and an ESG investing trendsetter, the $297.6 billion California State Teachers' Retirement System, West Sacramento, likewise eschew divesting from fossil fuels and prefer to press for change from within.

Kirsty Jenkinson, CalSTRS investment director of sustainable investment and stewardship strategies, said the pension plan is in the midst of building a multiasset-class portfolio that would further its sustainable goals while also adding return to the total fund.

To do that, CalSTRS is investing in strategies that will help reduce carbon emissions but it will also use its influence to urge fossil fuel companies to cut their emissions, she said.

For instance, CalSTRS has invested $1 billion in two new low-carbon transition readiness exchange-traded funds offered by BlackRock. CalSTRS has about $8.8 billion in sustainable global equity, $4.4 billion in sustainable innovative strategies and $16.3 million in sustainable private equity investments as of June 30, according to its most recent semiannual report.

Still, BlackRock remains under scrutiny by asset owners or the public entities that oversee them, based on the firm's public focus on ESG factors across the breadth of its investment strategies.

P&I has tracked a total of $1.5 billion in three terminations of BlackRock mandates, all announced in October, and more assets could be in jeopardy. For example, on Nov. 14, Mississippi Treasurer David McRae asked the board of the $29.4 billion Mississippi Public Employees' Retirement System, Jackson, to divest from BlackRock. In a letter to the pension plan board, Mr. McRae said that ESG policies lead to "higher costs for consumers, a weaker Mississippi job market, increased inflation, and smaller investment returns."

Meanwhile, other asset owners such as the $443.2 billion California Public Employees' Retirement System, Sacramento, have pushed back against what they say is the politicization of ESG because as long-term investors they say they cannot ignore data that is material to their investment performance.

BlackRock has defended its policies regarding climate risk from critics including 19 Republican U.S. state attorney generals who signed an Aug. 4 letter to the firm's CEO Laurence D. Fink, accusing the company of using "the hard-earned money of our states' citizens to circumvent the best possible return on investment" in its position on energy investments.

In response, Dalia Blass, senior managing director and BlackRock's head of external affairs, said in a Sept. 7 letter addressed to the Republican attorney generals: "We believe investors and companies that take a forward-looking position with respect to climate risk and its implications for the energy transition will generate better long-term financial outcomes. These opportunities cut across the political spectrum."

BlackRock's clients are continuing to demand ESG strategies across the investment spectrum, said Jessica Tan, New York-based managing director and head of sustainable and transition solutions, in an interview.

"We have never seen interest and investment in sustainability strategies so strong," she said, noting that the interest in and demand for sustainable strategies began earlier in Europe but now has spread to North America, Australia, the Middle East and Asia, including Japan, led primarily by institutional investors, family offices and other investor groups.

BlackRock "decided to go big in sustainability at the end of 2019 and into 2020 because the demand from investors was so clear," Ms. Tan said.

About half of BlackRock's investment clients invest in BlackRock's ESG strategies, which range from index products to actively managed equity fixed income, real assets, alternatives and private market strategies, Ms. Tan said.

More specifically, two-thirds of BlackRock's largest clients from its strategic partner program, with collective assets of more than $3.3 trillion, have committed to support the energy transition through investments in their portfolios, a BlackRock spokesman said in an email.

And 85% of respondents to the company's annual insurance survey with total assets of nearly $28 trillion reported they are likely or very likely to commit to specific climate objectives for their portfolio, a spokesman said. (Not all of the insurance companies that participated in BlackRock's survey were investment clients of the company.)

"Asset owners are powering forward and are exploring if they can integrate ESG factors into their portfolios. ESG is top of mind for institutional investors," said Tamara Close, founder and managing partner of Montreal-based Close Group Consulting LLC, in an interview.

"ESG is a requirement for money manager mandates, especially for European asset owners," she added, noting that institutional investors understand that the carbon transition is necessary. "It's one of the global megatrends investors are very interested in."

So far, only a few investors have divested money from BlackRock due to its ESG focus, P&I reporting showed.

The $6.5 billion Louisiana Department of Treasury, Baton Rouge, terminated a total of $794 million from various BlackRock strategies, said Louisiana Treasurer John M. Schroder, in an October news release.

Mr. Schroder said BlackRock urged companies to embrace net-zero "ESG investment strategies that would harm our fossil fuel industry, a vital part of our state's economy."

Another state treasurer, South Carolina's Curtis M. Loftis Jr., who is based in Columbia, said in an email that he will divest an additional $200 million from BlackRock funds before the end of the year over the company's sustainable investing policies.

Mr. Loftis said that for the past five years, he has "worked systematically to remove BlackRock managed funds from our state's various invested portfolios. I realized early on that ESG had the potential to seriously undermine our state's economy."

Mr. Loftis administers South Carolina's $3.2 billion Future Scholar 529 College Savings Plan Financial Advisor Program and its $2 billion Future Scholar 529 College Savings Plan Direct Program. A spokeswoman for treasurer did not provide information about the total amount the treasurer's office has divested from BlackRock over the past five years.

The $8.2 billion Missouri State Employees' Retirement System, Jefferson City, reported in October that it had terminated BlackRock for management of about $500 million in public equities after the firm refused to abstain from voting the plan's proxies. The system's board wanted BlackRock to "abstain from voting proxies on behalf of the plan due to concerns with (BlackRock's) public statements and record of prioritizing ESG initiatives over shareholder return," MOSERS said in a news release.

BlackRock's 2021-2022 proxy-voting record reveals it didn't vote for as many ESG shareholder proposals as some peers.

And BlackRock's votes for climate change proposals, for example, were actually fewer than some other very large money managers.

Proxy data from Insightia LLC, a division of Diligent.com, a provider of board governance software, showed that BlackRock supported 27.8% of climate change proposals compared with 38.4% for J.P. Morgan Asset Management and 28.1% for State Street Global Advisors.

Vanguard Group Inc. supported 25.8% of climate proposals, while Fidelity Investments voted "yes" for 16.4% of proposals.

Facing Republican-led divestment efforts, BlackRock for the second time this year expanded investors eligible to be included in its 1-year old proxy voting program, Voting Choice. In November, BlackRock allowed investors in some of its $90 billion in systematic active equity strategies to participate in Voting Choice.

In the third quarter, institutional investors committed an additional $157 billion to Voting Choice for a total of $452 billion.

Some in the industry are decrying the politicization of ESG.

"For a lot of U.S. pension plans when it came to climate transition investments, there was a weariness because the regulations under the last U.S. administration made it clear that sustainability was secondary to returns," said Andrew Brown, London-based head of private equity research at Willis Towers Watson PLC, in an interview. "We believe sustainability actually helps drive long-term returns."

"It hasn't helped that certain U.S. state pensions plans have recently pulled money out of certain managers because of managers' stances on sustainability," he said. "Maybe that is one of the reasons that the U.S. is a little bit behind Europe (in sustainability investing) because there is a fear of getting sued for making sustainable investments."

Just this month, the DOL finalized a rule to explicitly permit retirement plan fiduciaries to consider climate change and other ESG factors when selecting investments and exercising shareholder rights. The rule was first proposed in October 2021 and is a reversal of two rules promulgated under the Trump administration.

CalSTRS' Ms. Jenkinson said that it is "unfortunate" that ESG has become so polarizing but the pension fund investment strategy has not been impacted by it.

CalSTRS officials have always thought of ESG as a framework to understand risk and opportunities for the pension fund, she said.

The $42.2 billion Connecticut Retirement Plans & Trust Funds, Hartford, an investor in BlackRock's $4.8 billion Global Renewable Power Fund III, has no plans to terminate its investment in the fund or its relationship with BlackRock, a pension fund spokesman said in an email.

Connecticut committed $100 million to the fund in April 2021.

"While some states appear to have taken a partisan view of the merits of BlackRock's focus on environmental, social and governance risks and how these factors impact long-term returns, the Connecticut Treasury is more interested in holding our managers accountable for delivering outperformance on our investments, " the spokesman said.

CalPERS CEO Marcie Frost said at the pension fund's Nov. 16 board meeting that "applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology."

Instead, for CalPERS, ESG is an investment framework that helps pension fund officials identify investment risks and opportunities.

"Those who say otherwise are actually advocating for investors like CalPERS to put on blinders," Ms. Frost added.

Political leaders are also pushing back against the anti-ESG sentiment. On Nov. 21, 17 Democratic attorneys general sent a letter to federal lawmakers supporting ESG investing and efforts to undermine it.

The letter referenced the Aug. 4 letter sent by 19 Republican attorneys general.

Instead, the Democratic attorney generals said that consideration of ESG factors "simply acknowledges that environmental, social, and governance issues are material factors that can affect returns."

When it comes to ESG, Vanguard Group is allowing investors to choose between excluding certain investments such as tobacco or firearms from their portfolios or an allocation model, said Matt Piro, Malvern, Penn.-based global head of ESG product.

Most recently, Vanguard released the Vanguard Global Environmental Opportunities Stock Fund, an actively managed equity fund subadvised by Ninety One North America Inc. to invest in companies involved in the process of decarbonization.

Indeed, the backlash against BlackRock as well as other large managers has not stopped progress toward recognizing ESG factors as a risk as well as an opportunity, said Billy Grayson, executive vice president for centers and initiatives at Urban Land Institute, Washington, D.C.

"I haven't seen it stop anyone," he said. "But they are getting smarter in how they communicate this investment philosophy to municipalities and pension funds."