Major Wall Street firms such as BlackRock were grilled before the Texas legislature Thursday about their ESG investment practices with state pensions, marking a rare opportunity for Republicans to publicly interrogate some of the world’s largest financial institutions that they accuse of being “woke.”
BlackRock, which has become the poster child for environmental, social and governance (ESG) corporate investment strategies, faced a barrage of questions from a Texas Senate committee about whether it’s subverting its fiduciary obligation to clients by incorporating long-term climate risks when managing public pensions.
The tense hearing was part of a broader political effort by red states across the country to combat investment firms’ ESG policies that they say are anti-fossil fuel amid a pitch toward more clean energy.
“Many of these firms are not just boycotting oil and gas. Rather, they’re buying shares in oil and gas companies and then voting those shares against the development of oil and gas at a time when we need it more than ever before,” said Sen. Bryan Hughes, the Republican chair of the Texas Senate panel hosting the hearing. “The shares they are buying is not with their money, but with your money, with our money, with money entrusted to them by retired teachers, by folks trying to save to provide for their families, to provide a nest egg for their future.”
BlackRock offered some of its strongest public pushback to date, which comes after several states have cumulatively divested billions of dollars in pension funds from the investment behemoth.
Although a few billion is a drop in the bucket for the $8 trillion it oversees globally, the pressure campaign has forced the company to respond.
“Climate risks — and other environmental risks, depending on the industry — have been material risks for companies to consider since the 1970s,” Dalia Blass, head of BlackRock’s external affairs, told the panel. “In the reshaping of finance when it comes to the transition to a low carbon economy, this is the reshaping: looking at the unpriced risks, looking at opportunities in the transition. We believe that, if managed in an orderly fashion, that could actually produce better risk-adjusted returns for our clients’ portfolios.”
Ms. Blass rejected the assertion that BlackRock is advancing a political agenda and placing investors in a worse financial position, citing an internal study that she said found ESG indices outperformed their non-ESG counterparts 76% of the time over three years. She said the firm’s ESG funds account for a fraction of its global assets — roughly 5% — and that they offer 66 ESG funds out of more than 600 “because our investors are demanding these funds.”
“We appreciate people have different views about this. We appreciate it’s their money, not ours, which is why we offer choice, not just in investment products, but proud to also offer in voting,” Ms. Blass said.
Republicans zeroed in on BlackRock’s membership in Climate Action 100+, an investor-led endeavor to combat climate change and reduce emissions by shifting away from fossil fuel projects.
“You’re saying there’s absolutely no bias for an energy project in the Permian Basin versus a solar project?” asked GOP Sen. Paul Bettencourt, referring to the vast amounts of oil in West Texas. “You have absolutely no bias at all, and [Climate Action 100+] has no effect on your recommendations to either your retail clients or your corporate clients?”
Ms. Blass responded: “We have one bias, and that’s to get the best risk-adjusted returns for our clients. That is our bias.”
Investment giant Vanguard Group was spared from the hearing after its decision last week to drop out of the Net Zero Asset Managers initiative, another global green alliance group. Still, BlackRock has given no indication it plans to vacate climate initiatives.
As an example of how ESG impacts its strategies outside of investments in public energy companies vs renewables, Ms. Blass cited how two identical real estate projects along the Florida coastline would be considered.
“One is two feet above sea level, one is 20 feet above sea level. That is climate risk,” she said. “This is how you think about it, and one would have more unpriced risks than the other.”
The asset manager State Street Global Advisors also testified before the committee. Lori Heinel, its global chief investment officer, said that she, too, shared lawmakers’ concerns — but not for the same reasons — that ESG “has become such a highly-charged, politicized set of letters.”
“There is certainly evidence that suggests that these climate change issues are becoming more acute for us as global citizens,” Ms. Heinel said. “We’re trying to understand how these various risks are becoming as important as traditional financial risks.”