Hell hath no fury like a comptroller scorned; just ask Larry Fink. The CEO of the world’s largest asset manager, BlackRock, is currently embroiled in an uncomfortable ménage à trois with Texas Comptroller Glenn Hegar and NYC Comptroller Brad Ladner. Embrace fossil fuels, says Texas. Denounce them, says New York. So far, BlackRock has inexplicably tried to do both, hoping that the promises whispered in the ears of certain states wouldn’t be heard by others. But these whispers have now become political rallying cries, and BlackRock is paying the price.
Two weeks ago, the Texas comptroller — who oversees the state’s finances, including regulations affecting its $300 billion pension funds — accused BlackRock of “doublespeak” by “engaging in anti-oil and gas rhetoric publicly yet present[ing] a much different story behind closed doors.” NYC’s Ladner largely agrees, though from the opposite side. He noted an “alarming” “contradiction between Blackrock’s statements and actions” and accused the financial titan of “backtracking on its climate commitments” in a letter the day before.
Mr. Fink’s reasons for backpedaling are clear: Environmental, Social, and Governance (ESG) investing now faces a dual crisis of public backlash and investment underperformance. But as BlackRock backs away from its ESG commitments, states like New York are saying you’d better make good on your promises or face the consequences, thus creating an inescapable bind.
Since 2018, Larry Fink has demanded corporate America embrace so-called “stakeholder capitalism” by considering the broader “societal impact” of its activities. He has called for companies to reduce emissions, increase diversity, and commit to other ESG goals. And the strategy has paid off: BlackRock’s ESG funds went from a niche investment category to over $500 billion in assets under management. “Sustainable assets” more than doubled in 2021 alone.
But in 2022, Russia invaded Ukraine, gas prices surged, inflation soared, and recession fears materialized. Because of this and a host of ill-conceived domestic energy policies, ESG funds underperformed, especially in sectors they had shunned, such as oil, gas, and coal. Clients missed out on those gains while watching their investments sharply decline.
So, as ESG-linked strategies underperform, Larry Fink tiptoes away. This past May, BlackRock announced it would “support fewer” climate proposals after Fink proclaimed that BlackRock “is not ‘woke.’” At the Chevron Corporation, BlackRock’s investment team opposed a carbon emissions cap it supported in 2021, citing the environmental progress Chevron had already made; Larry Fink pretended BlackRock had not supported the 2021 proposal at all and shockingly said that he had always been against Scope 3 emissions caps.
Behind closed doors, there’s another reason for the change: Republicans threaten to pull business. In the past year, red states have been incensed over BlackRock’s “net zero” strategy that harms the coal, oil, and gas sectors on which their state economies rely. Texas passed a law punishing fossil fuel boycotters and later barred new investments in BlackRock by name. West Virginia pulled its BlackRock investments entirely.
In response, BlackRock has been scrambling to assure red state pension fund managers that it never really meant what it said. One Texas official memorialized such a discussion, saying it was “nice to hear that BlackRock didn’t mean — or no longer believes — many of the disagreeable things the company and Mr. Fink have said.” Publicly, BlackRock’s retreat has been no less pronounced: “BlackRock does not boycott energy companies,” it now claims. Nor does it “dictate to companies what specific emission targets they should set or what type of political lobbying they should pursue.”
But washing one’s hands of ESG commitments is not so easy. New York, for one, has held BlackRock’s feet to the fire, threatening to pull its pension funds from BlackRock’s control. And the SEC has been equally clear that once ESG promises are made, firms must follow through, as recent investigations at Goldman Sachs and BNY Mellon have shown.
Large asset managers like BlackRock can manage investments for either socially minded clients or financially minded clients — but not both — especially if they push ESG principles in corporate boardrooms. BlackRock cast its die on the side of signaling virtue and profited handsomely.
Now it must own the consequences of that choice. If states like New York mandate BlackRock shun fossil fuels, while Texas demands otherwise, a bifurcated market becomes inevitable. That’s bad news for BlackRock but good news for society: Everyone loses when a single asset manager wields undue power over $10 trillion of capital representing diverse client interests.