NZ tested as world’s biggest asset manager back-pedals on environment

This article originally featured on Newsroom and was written by Rod Oram. 

BlackRock’s abdication of its self-proclaimed role as a champion of enlightened change could encourage other investors and incumbent managers to ease up on a wide range of environment, social and governance principles for sustainable investing.

Opinion: BlackRock, the world’s largest manager of financial assets, has finally shown its true colours. It tilts towards managers not owners of the companies it invests in. That’s an insult and injury to good corporate governance, and it reaches right here to New Zealand where BlackRock is used by many of our fund managers.

This abnegation of investor responsibility is revealed in BlackRock’s latest missive explaining why it will vote against many shareholder motions in the upcoming United States AGM season – particularly on climate.

This is not the story of enlightened capitalism Larry Fink, BlackRock’s chief executive, has been selling to the world in recent years. His annual letters, addressed to the companies his firm invests in but meant for a global audience, urged businesses to embrace purpose over blind pursuit of profit, to consider a wide range of shareholders, and to respond to the growing risks of the climate crisis.

“Without exception, our decisions are guided by our role as a fiduciary to act in our clients’ long-term economic interests.”
– BlackRock

Yet, BlackRock never lived up to those bold words. In last year’s AGM season it only supported 47 percent of environmental and social motions. For example, it supported BHP’s management on two of four such motions at its AGM. This pattern of voting raised questions from some other investors, activist shareholders and NGOs about how committed BlackRock really was to good governance, particularly on climate action.

Now it has finally explained its rationale in a document released this week by its “investment stewardship team”. Commenting on the 20 percent increase in motions expected in this US AGM season, it said many of them would impinge on managers’ ability to manage. The team highlighted, for example, resolutions requiring banks to align their lending to the economic scenarios required to meet the 1.5C temperature goal.

A large number of such proposals across many sectors were unduly “prescriptive and constraining on management.” Thus it would oppose motions intended to “micromanage companies”, or those that would not promote shareholder value.

“Without exception, our decisions are guided by our role as a fiduciary to act in our clients’ long-term economic interests,” BlackRock said. But its view of long-term interest is now clearly more aligned with incumbent businesses than those investing in their future.

For example, it sees gains in continuing to invest in fossil fuels at the expense of renewables. It noted, for example, that Russia’s invasion of Ukraine required a ramping up of fossil fuels to replace imports from Russia. In contrast, other investors are using the war as a spur to accelerate investment in renewables.

In the imminent US AGM season, one fifth of the motions relate to climate, with a strong focus on achieving net zero greenhouse gas emissions by 2050. Crucially, almost all of those are proposed by mainstream institutional investors. Last season, climate activists and other NGOs only accounted for 1 percent of the 165,000 individual issues BlackRock voted on in AGMs, the Financial Times reported this week. So, BlackRock is not railing against activists, it’s pushing back against increasingly mainstream shareholders.

“The way BlackRock is backing off weakens corporate governance and ESG. It’s saying that ‘even though our analysis shows we need to take such action, we aren’t going to’."
– Barry Coates, Mindful Money

As I reported in this column last year, Tariq Fancy delivered a withering critique of BlackRock's Environment, Social and Governance investing practices. He was BlackRock’s first Chief Investment Officer for Sustainable Investing for a year before he quit the company in 2019 because he was deeply disillusioned by its ESG performance.

ESG “is a dangerous placebo,” Fancy wrote in his essay entitled The Secret Diary of a ‘Sustainable Investor’. His full version is free on Medium and his short version is free on USA Today’s website. In the latter, he wrote: “In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.”

BlackRock’s abdication of its self-proclaimed role as a champion of enlightened change could encourage other investors and incumbent managers to ease up on a wide range of environment, social and governance issues – the bedrock of ESG principles for sustainable investing.

“The whole theory of corporate governance, and by extension ESG, requires those who have the finance to vote for the actions they think companies should take,” says Barry Coates, founder and chief executive of Mindful Money, the leading ethical investment researcher in New Zealand.

“Not voting, or voting with management, is often an abandonment of that corporate governance responsibility. The way BlackRock is backing off weakens corporate governance and ESG. It’s saying that ‘even though our analysis shows we need to take such action, we aren’t going to’."

We’re far behind on these issues here in New Zealand, Coates says. No NZX50 company has faced a shareholder motion on its environmental or social performance, as far as Mindful Money can ascertain.

But it is developing plans to identify where such motions are warranted at some companies’ AGMs and to build shareholder voting support for them.

Just as worrying as BlackRock’s back-pedalling is a broader push by conservative politicians in the US against essential investment disclosure and action. The latest trigger was the release in March of the Securities and Exchange Commission’s draft climate reporting regulations. These are modelled on the work of the Task Force on Climate-Related Financial Disclosure, which was established by the G20’s Financial Stability Board in 2015.

“Weaponising the financial system ... through capricious new ESG regulations that allow left-wing radicals to destroy American energy producers from within.”
– Mike Pence, former Vice President

The TCFD mandatory reporting framework was released in 2017, and New Zealand is one of eight jurisdictions including the EU which have adopted it so far. Voluntary reporting is already very well established through the CDP (formerly the Carbon Disclosure Project). More than 13,000 companies representing more than 64 percent of global stock market capitalisation are reporting.

This week, for example, Mike Pence, Trump’s Vice President, delivered a withering attack on ESG investment to an audience in Houston, the US oil capital. He said it would “allow left-wing radicals to destroy American energy producers”.

He accused President Biden of waging a “war on American energy”, and “weaponising” the SEC and other agencies to undermine fossil fuel companies through “capricious new ESG regulations”.

He said liberal activist investors were forcing companies to elevate ESG investing principles over the interests of the business and its employees. He cited the climate-focused directors elected at ExxonMobil last year, saying they were working “to undermine the company from the inside.”

Yet, however small an investor you are, you too can be an activist. Call up your fund manager and ask them what they think of BlackRock in particular and ESG in general. And check out the credentials of your KiwiSaver or other investment funds on the Mindful Money website.

If you find your fund manager has invested in companies you consider undesirable, let them know. If you are unhappy with their answers, you can put your money to work in a fund that better matches your goals.