Over the past year, BlackRock, the world’s largest asset manager, has come under pressure in the US with state funds pulling out investments due to concerns that its fiduciary duty has been compromised in favour of environmental, social and governance (ESG) commitments. States that have pulled out investments or have indicated divestments include Florida, Louisiana, South Carolina, Utah, and Arkansas. These divestments are estimated to amount to about $3 billion, collectively.
So, why is the world’s largest asset manager facing fund outflows over ESG?
Read Also: What Exactly Is ESG Investing And How Does Greenwashing Come Into Play
The Fiduciary Duty Of Asset Managers
In life, expecting others to help us altruistically earn better returns may be naïve or overly optimistically. Fortunately, in the financial world, there is regulation to ensure that financial institutions and advisors act in the best interest of their clients; this is known as fiduciary duty. When we entrust a bank or asset manager to help us manage our assets, we are relying on their vested interest to help us maximise financial return.
In the United States, the fiduciary duty of financial advisors and institutions is primarily regulated by the Securities and Exchange Commission (SEC) with rules and guidance related to the fiduciary duty of investment advisers under the Advisers Act, which requires registered investment advisers to act in the best interest of their clients.
Additionally, according to the U.S. Department of Labor, the Employee Retirement Income Security Act (ERISA) also imposes a fiduciary duty on plan fiduciaries, including plan sponsors, trustees, and investment advisers, to act in the “interest of plan participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses.”
Blackrock Is The World’s Largest Asset Manager
As the world’s largest asset manager, BlackRock undertakes the same fiduciary duties as other financial institutions and advisors. However, what is different is the scale of BlackRock.
BlackRock manages about $8.6 trillion in assets as of 4Q2022. Together with Vanguard and State Street, they form the Big Three asset managers that collectively manage about $20 trillion. According to a tweet by Bernie Sanders, they are major shareholders in more than 96 percent of S&P 500 companies. One research paper estimated that they held 25% of the votes at S&P 500 companies in 2017, with a projection of 40% of the votes in S&P 500 companies within two decades.
This dominance has also resulted in tangible changes. According to a National Bureau of Economic Research (NBER) report, the Big Three were responsible for between a third and two-thirds of the 50% increase in women on US company boards between 2016 and 2019.
Thus, as the world’s largest asset manager, BlackRock has significant influence in the investment sphere. This means that accusations of fiduciary duty failure will have to be taken seriously.
Growing Influence of Environmental, Social and Governance (ESG) Concerns
Increasingly, the financial world is increasingly looking beyond pure monetary gains as evidenced by the growing influence of ESG concerns. As climate risks increasingly present economic risks, investors cannot afford to ignore how their investments affect climate change. In an economic system that tends to undervalue the non-financial costs such as negative externalities, ESG investing helps ESG investors ensure that the companies they fund are responsible stewards of the environment.
To this end, BlackRock has stood out as a vocal advocate for ESG investing, with its oft-cited statement of “climate risk is investment risk”. Today, BlackRock manages seven of the 10 largest ESG funds, including the top two, iShares ESG Aware MSCI USA ETF (ESGU) and iShares ESG Aware MSCI EAFE ETF (ESGD).
Source: ETF.com
In their 2020 letter to clients, BlackRock also stated their intention to “make sustainable funds the standard building blocks in these solutions wherever possible, consistent with client preferences and any applicable regulations such as ERISA.”
Political Backlash In The US Is Leading To Fund Outflows
Balancing between fiduciary duty and ESG commitments is something that asset managers have to continuously navigate. Unfortunately for BlackRock, its sheer size and ESG advocacy have led to pushback from conservative politicians in the US who charged that its ESG commitments have compromised its fiduciary.
In December 2022, BlackRock was subpoenaed by a Texas Senate committee that requested specific documents related to the company’s ESG practices and for its executives to testify. By the end of 2022, about 6 states have divested or intend to divest about $3 billion in total from BlackRock.
Image Credit: Bloomberg
Balancing Fiduciary Duty And ESG
While fund outflows may be small compared to BlackRock’s total AUM, the political outcry has highlighted its delicate position.
As an asset manager, BlackRock has to balance both its fiduciary duty as well as its market position. Failure to expand into the growing field of ESG investments would be irresponsible to its shareholders, even if we disregard the social responsibility aspect of ESG investing. Equally, BlackRock also has a fiduciary responsibility to manage the assets it holds, on behalf of its clients. BlackRock has maintained that its commitment to ESG is not in conflict with its fiduciary duty, but rather a way to fulfill it by taking into account the long-term risks and opportunities. This also highlights the lack of consensus on ESG metrics today.
Investors really looking to make a difference through their investments may wish to consider more active forms of impact investing, instead of ESG funds that are constrained by fiduciary responsibilities.
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