The Corner

Economy & Business

BlackRock and ESG

BlackRock CEO Larry Fink takes part in the Yahoo Finance All Markets Summit in New York in 2017. (Lucas Jackson/Reuters)

Say what you will about BlackRock’s Larry Fink, Wall Street’s most prominent player of the climate game, but he knows a thing or two about politics.

Bloomberg reports:

When the Federal Reserve needed Wall Street’s help with its pandemic rescue mission, it went straight to Larry Fink. The BlackRock Inc. co-founder, chairman, and chief executive officer has become one of the industry’s most important government whisperers. In contrast to other influential financiers who’ve built on ties to President Trump, Fink possesses a power that’s more technocratic. BlackRock, the world’s largest money manager, can do the things governments need right now.

The company’s new assignment is a much bigger version of one it took on after the 2008 financial crisis, when the Federal Reserve enlisted it to dispose of toxic mortgage securities from Bear Stearns & Co. and American International Group Inc. This time it will help the Fed prop up the entire corporate bond market by purchasing, on the central bank’s behalf, what could become a $750 billion portfolio of debt….

Fink was on the shortlist in 2012 to replace outgoing Treasury Secretary Tim Geithner. Now he’s widely viewed as a contender for that post in a possible Joe Biden administration….

[T]he money manager [has] built a powerful advocacy arm. Its sphere of influence reaches beyond the central bank to lawmakers, presidents, and government agency heads from both political parties, though its hiring leans Democratic. Bloomberg found only a handful of current BlackRock executives who came out of the George W. Bush administration, but more than a dozen Barack Obama alumni. These include Obama’s national security adviser, senior adviser for climate policy, the former Federal Reserve vice chairman he appointed, and numerous White House, Treasury, and Fed economists.

Meanwhile . . .

Already there are growing worries about the power of BlackRock, Vanguard Group Inc., and State Street, often called the Big Three because they hold about 80% of all indexed money. That raises concerns about how they wield their voting power as shareholders and has even drawn attention from antitrust officials.

And with BlackRock positioning itself as the enforcer of climate orthodoxy, the way it casts its votes is coming into increasingly sharp focus, both from the climate warriors and those who worry quite where shareholder return ranks among BlackRock’s priorities.

Writing for RealClearMarkets, Bernard Sharfman:

As a means to implement its new form of shareholder empowerment, BlackRock will be  requiring each public company that it invests in—virtually all public companies—to disclose data on “how each company serves its full set of stakeholders.” Moreover, noncompliance will not be tolerated. According to Fink, “we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.” This threat appears to be playing out in reality. During the first quarter of 2020, BlackRock was reported to have voted against one or more board recommendations at more than 30% of the 333 shareholder meetings it attended in North America, including approximately 120 board-nominated directors.

This approach is deficient on three counts. First, as I discussed in my recent op-ed BlackRock, Larry Fink, and a New Form of Shareholder Empowerment, BlackRock is extremely resource-constrained even to attempt getting involved in such an undertaking on a per-company basis. It will be Larry Fink and his approximately 20-member U.S. based investor stewardship team dictating required disclosures, business practices, and underlying strategies for the thousands of public companies that exist in the United States.

Second, the BlackRock desire for an increased management role in our public companies must be based on an assumption that public companies as a whole are not paying enough attention to stakeholder relationships in order to maximize the long-term returns of shareholders. This is definitely a flawed starting point. Efficiently and innovatively dealing with these critical relationships is what the work of corporate management is all about. Moreover, these relationships can change on a daily basis: consumers who have ever-changing tastes or are becoming increasingly sensitive to the negative externalities that the company may create; competitors that introduce new products; changing technologies; threats to global and domestic supply chains for key components and raw materials; credit and equity markets that require ever-changing terms; and competitive labor markets for skilled talent. A failure to deal with these stakeholder relationship issues in an integrated manner can lead a company to report mediocre financial results and eventual failure….

In sum, BlackRock’s scheme of interfering in the management of a public company’s stakeholder relationships will lead to lower, not higher, shareholder returns by undermining the critical work done in this area by people with the knowledge and expertise to manage these relationships: the company’s management.

Central to BlackRock’s approach is the importance that it attaches to the companies in which it invests living up to the standards often by the acronym ESG, E for ‘environmental’, S for ‘social’ and G for ‘governance.’ The ‘G,’ which can include issues such as insisting that the roles of CEO and chairman should be separate, is relatively and rightly uncontroversial. That is not the case when it comes to the ‘S’ and, in particular, the ‘E.’

Writing for the IFC Review a month ago, Julian Morris:

A 2016 paper from group of researchers from the European Parliament and Bournemouth Business School sought to look more deeply at the relationship, using disaggregated data from Bloomberg’s ESG Disclosure form for the S&P 500 for the period 2007 to 2011. The researchers found that the relationship between ESG and financial performance in general was indeed U-shaped. However, they found that the environmental and social components were linearly negatively related to performance. It was only the governance component that drove the U-shape relationship. This governance-dominated U-shape relationship between ESG and financial performance has since been confirmed in other studies.

Oh.

To return to something I wrote the other day:

As a shareholder, BlackRock has every right to insist that the managements of the companies in which it invests comply with its diktats. Equally, other shareholders are free to insist that BlackRock be told to take a hike, at which point the whole thing can be thrashed out at a general meeting. But many of the other shareholders will also be institutional investors. Even if they do not agree with BlackRock’s agenda, they may feel compelled by commercial pressures of the type that I have mentioned above to go along.

In effect, therefore, many companies — and not just those that are publicly listed — will be forced to change the way they do business as they try to keep up with ever-more-stringent rules set not by democratically elected legislators but by the unaccountable, the ambitious, the greedy, and the fanatical. Milton Friedman would have been appalled (if not altogether surprised) that activists such as these ESG vigilantes could exercise such a power through their ownership of shares. Today’s small investors, pensioners, and, for that matter, anyone else who depends on a robustly growing economy ought to be angrier still.

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