The Corner

Markets

ESG and Its Contradictions

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

From the New York Times:

Laurence D. Fink presents himself as the vanguard of a progressive form of capitalism in which profits are not everything: The enlightened money is supposed to press for environmental and social protection.

As the chief executive of BlackRock, the world’s largest investment management company, Mr. Fink oversees more than $7 trillion. He has steered some of that fortune to the crisis-wracked nation of Argentina, purchasing government bonds.

But as Argentina — in default since May — seeks forgiveness on $66 billion worth of bonds, Mr. Fink’s oft-espoused faith in “stakeholder capitalism” is colliding with traditional bottom line imperatives. Though poverty is soaring in Argentina as the pandemic worsens a punishing economic downturn, BlackRock is opposing a settlement proposed by the government and rallying other creditors to reject it, while holding out for a marginally improved deal. . . .

Two years ago, Mr. Fink — who has been mentioned in news reports as a potential Treasury secretary in a Biden administration — wrote an open letter to the chief executives of major corporations urging them to focus on social, labor and environmental concerns.

“To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society,” he wrote.

Last year, Mr. Fink signed the Statement on the Purpose of a Corporation crafted by the Business Roundtable, an association of American chief executives. It pledged “a fundamental commitment to all of our stakeholders.”

In January, Mr. Fink wrote another letter to C.E.O.s warning that companies that fail to address climate change would be punished in the marketplace. . . .

In a statement, BlackRock said it has been working diligently to achieve a settlement, while recouping as much as possible for its clients. Roughly two-thirds of the investments it manages comprise the retirement savings of workers around the world.

“In this restructuring process, our fund managers are balancing a fiduciary obligation to make decisions in the best interest of these savers, while at the same time recognizing the difficult circumstances facing the Argentine government, including the challenges posed by Covid-19,” the statement said.

BlackRock’s statement on the Argentine situation is reasonable enough, and the company is quite right to stress the importance that it attaches to its fiduciary obligation to its clients.

At the same time, it is not hard to detect the outline of a potential conflict of interest. On the one hand, BlackRock is marketing itself as “making a positive contribution to society,” an image which is now very much part of its brand. On the other, holding out for the best financial deal with Argentina that it can for its clients could see the company attacked, fairly or unfairly, for hypocrisy, something that could damage its reputation even if this is a matter of utter indifference to those of its clients with exposure to Argentinian bonds.

International investing — and not just when it comes to Argentina — can, under certain circumstances, be tricky for those marketing the ethical approach baked into their investment process.

Here’s a report from Bloomberg from just six weeks ago:

BlackRock Inc. Chief Executive Officer Larry Fink said China remains one of the firm’s top regions for growth despite uncertainties brought on by trade tensions with the U.S. and the virus outbreak.

“We are here to work with China,” Fink said via video conference at the Lujiazui Forum in Shanghai on Thursday. “We firmly believe China will be one of the biggest opportunities for BlackRock.”

The world’s biggest money manager is expanding in China to tap one of the fastest-growing markets. China’s trillion dollar wealth industry opened further in April, luring investment from companies including BlackRock, Vanguard Group Inc. and JPMorgan Chase & Co. While the further liberalization of the sector in China has been overshadowed by the coronavirus crisis, firms are nonetheless laying out plans for a market in which retail funds alone could reach $3.4 trillion in three years, says Deloitte LLP.

To put this in context, this concerns BlackRock looking to establish itself as an asset manager in China.

But the company also invests its clients’ money in the stock of Chinese companies.

It may be unfair, but I cannot help wondering how those companies measure up against the ESG (environmental, social, governance) criteria that are an increasing part of BlackRock’s investment process.

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