Economy and Society, October 25, 2022: Missouri latest state to divest BlackRock funds over ESG

Economy and Society is Ballotpedia’s weekly review of the developments in corporate activism; corporate political engagement; and the Environmental, Social, and Corporate Governance (ESG) trends and events that characterize the growing intersection between business and politics.

ESG Developments This Week

In Washington, D.C.

Proposed SEC ESG regulations could strain resources, argues inspector general report 

According to a new inspector general’s report, ESG regulations that the Securities and Exchange Commission proposed could potentially strain the agency’s resources, “[limit] the time available for staff research and analysis, and [increase] litigation risk.” According to the Wall Street Journal:

“The Securities and Exchange Commission’s fast-paced rule-making agenda under Chairman Gary Gensler has stretched staff resources, and some officials worry it could increase the risk of lawsuits, the agency’s internal watchdog said in a recent report.

In meetings with the SEC’s inspector general, managers at the agency expressed concerns about short deadlines for staff to draft proposed rules and for public stakeholders to submit comments on them, according to the Oct. 13 report. Mr. Gensler’s rule-making teams have borrowed staff from across the agency, making it difficult to complete other parts of the SEC’s mission, managers reported.

While no one identified concrete errors in rule proposals, some managers told the inspector general that “the more aggressive agenda…potentially limits the time available for staff research and analysis, and increases litigation risk.”…

A Biden administration appointee, Mr. Gensler is pushing an ambitious list of regulatory changes through the SEC. He has proposed to require significant disclosures from public companies about climate change and greenhouse-gas emissions, has asked for greater transparency from private-equity and hedge funds, and is planning to overhaul the rules that govern stock trading.

In the first eight months of this year, the SEC proposed 26 rules—more than in each of the previous five years, the inspector general noted.”

In the States

Missouri latest state to divest BlackRock funds over ESG

Last week, Missouri Treasurer Scott Fitzpatrick (R) became the latest state financial officer to announce that he would be pulling his state’s funds from BlackRock, Inc.’s asset management in response to the firm’s ESG commitments and what the fund calls sustainability investing practices:

“Missouri State Treasurer Scott Fitzpatrick announced Tuesday morning in a statement first provided to FOX Business that the Missouri State Employees’ Retirement System (MOSERS), of which he is a member, sold all public equities managed by BlackRock. With the announcement, Missouri joins a growing list of Republican-led states who have quit BlackRock and other banks over their environmental, social and governance (ESG) initiatives.

“This is the right thing to do for Missouri state employees who rely on the assets managed by MOSERS for their retirement,” Fitzpatrick told FOX Business. “Fiduciary duty must remain the top priority for investment managers—a duty some of them have abdicated in favor of forcing a left wing social and political agenda that has failed to succeed legislatively, on publicly traded companies.” 

“We should not allow asset managers such as BlackRock, who have demonstrated that they will prioritize advancing a woke political agenda above the financial interests of their customers, to continue speaking on behalf of the state of Missouri,” he continued. “It is past time that all investors recognize the massive fiduciary breach that is taking place before our eyes, and do something about it.”…

BlackRock and other major financial institutions like State Street and Vanguard have spearheaded an effort to promote ESG standards over the last several years. The ESG movement broadly seeks to promote a green energy transition and left-wing social priorities through the financial sector.

Republican states and groups like the State Financial Officers Foundation (SFOF), though, have waged a war against the ESG movement, arguing it is anti-democratic and harms taxpayers by pushing investments that don’t result in maximum earnings for consumers….

The SFOF has successfully organized a coalition of state treasurers over the last several months to leverage their pension plans and state investments to block banks from pursuing an ESG agenda. West Virginia, Louisiana, Texas, Kentucky, Oklahoma, Florida, South Carolina, Arizona, Idaho, Utah, Wyoming, Arkansas and North Dakota have all pushed back against the ESG movement.”

19 state attorneys general announce investigation into ESG investing practices of six banks

Last week, attorneys general from 19 states announced that they were launching an investigation into the involvement of six large American banks with the United Nations’ Net-Zero Banking Alliance. Missouri Attorney General Eric Schmitt (R) said, “We are leading a coalition investigating banks for ceding authority to the U.N., which will only result in the killing of American companies that don’t subscribe to the woke, climate agenda.”

“Nineteen Republican-led states are launching an investigation into six large U.S. banks that will examine their involvement in the United Nations’ “Net-Zero Banking Alliance,” which they say is “killing” American companies.

The states, led by Missouri Attorney General Eric Schmitt, oppose the UN’s environmental, social, governance (ESG) policies that require banks in the alliance to set carbon dioxide emission reduction targets in their lending and investment portfolios, and reach net-zero emissions by 2050.

Many of America’s largest banks, investment managers like BlackRock and Big Tech companies such as Microsoft have pledged to use ESG scores to help transform society to remain in line with numerous left-wing goals, including those of the Biden administration, especially those related to climate change.

Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase, Morgan Stanley and Wells Fargo were served Wednesday by the states with civil investigative demands, which acts as a subpoena, for the requested information.

These civil investigative demands include identifying which Global Climate Initiatives each bank is affiliated with, which groups or divisions within the banks are responsible for ESG implementation, and to what extent the banks’ CEOs have been involved, among others.

“The Net-Zero Banking Alliance is a massive worldwide agreement by major banking institutions, overseen by the U.N., to starve companies engaged in fossil fuel-related activities of credit on national and international markets. Missouri farmers, oil leasing companies, and other businesses that are vital to Missouri’s and America’s economy will be unable to get a loan because of this alliance,” Schmitt told FOX Business.

“We are leading a coalition investigating banks for ceding authority to the U.N., which will only result in the killing of American companies that don’t subscribe to the woke, climate agenda. These banks are accountable to American laws – we don’t let international bodies set the standards for our businesses,” Schmitt said.

Missouri, Arizona, Kentucky and Texas are states taking the lead in the investigation. Other participating states include Arkansas, Indiana, Kansas, Louisiana, Mississippi, Montana, Nebraska, Oklahoma, Tennessee, Virginia and five other states who cannot be named due to confidentiality requirements.”

On Wall Street and in the private sector 

BlackRock and Vanguard say they will not divest fossil fuel investments from portfolios

On October 18, The Financial Times reported that BlackRock and Vanguard said they would not divest from fossil fuels and did not believe that doing so was necessary for ESG investing in response to a British government inquiry:

“The world’s two biggest asset managers BlackRock and Vanguard are among the financial institutions that have told a UK inquiry they will continue to invest in fossil fuels and do not subscribe to the view that climate change plans require an end to new coal, oil and gas investment.

BlackRock is among the asset managers attempting to take a neutral investment stance after Republican attorneys-general and state governors in the US accused the institutions of staging a “boycott” on the fossil fuel sector. Missouri on Tuesday became the latest state to punish the $8tn asset manager, as Treasurer Scott Fitzpatrick announced that the state’s retirement system had pulled out $500mn from BlackRock funds.

BlackRock and Vanguard’s statements on Tuesday were in response to a request by the UK’s Environmental Audit Committee. The committee wrote in August to members of the Glasgow Financial Alliance for Net Zero, an umbrella climate finance group, asking how they would balance retiring fossil fuel assets with assuring the UK’s energy security, given the “pivotal” role of the finance sector in reaching the UK’s environmental goals.

“BlackRock’s role in the transition is as a fiduciary to our clients — it is not to engineer a specific decarbonisation outcome in the real economy,” BlackRock wrote in its response. It expected to remain a long-term investor in carbon intensive companies because of their crucial role in the economy….

Brookfield Asset Management was also among the asset managers to have told the UK committee that it had no exclusion policies for fossil fuels. It said it instead encouraged the companies it invested in to reduce their emissions.

Brookfield vice-chair and head of transition investing Mark Carney is one of the founders of the Glasgow alliance and is due to appear before the inquiry on Monday.”

One-quarter of companies with net-zero pledges are not reporting on emissions progress, according to study

According to The Independent, a new study by the climate change group South Pole shows that as many as one-quarter of companies that set net-zero carbon emission targets are not reporting on their progress towards that goal:

“A quarter of companies that set targets to meet their net-zero commitments are quietly shelving reports about their progress in a process known as ‘green-hushing’, according to a study.

A report by climate analysts South Pole found that an increasing number of climate-aware companies are supporting their net-zero commitments with science-based targets, yet one in four does not plan to talk about them.

Doing so makes corporate climate targets harder to scrutinise and limits knowledge-sharing on decarbonisation, researchers claim, potentially leading to less ambitious targets being set and missed opportunities for industries to collaborate.

“We see that sustainability-minded businesses are increasingly backing up their targets with science-based emissions reduction milestones, which is absolutely the right approach.

“But if a quarter today aren’t coming forward with details on what makes their target credible, could corporate green-hushing be spreading?…

South Pole’s findings suggest companies are continuing to set net-zero targets and increasing budgets to support them, yet this reluctance to publicise science-aligned climate targets raises questions.

Dan Botterill, founder and CEO of sustainability platform Rio, described the green-hushing phenomenon as “just as duplicitous and cynical as greenwashing”.”

In the spotlight

George Soros backing fund that will invest in ESG-related litigation

A report from Funds Europe indicates that the Soros Economic Development Fund is investing in a fund that “aims to maximise proceeds for claimants and provide a return for investors and generate resources for more [ESG-related] litigation.”

“Aristata Capital, whose investment clients include the Soros Economic Development Fund (SEDF), aims to show that litigation finance in ESG-related cases can be a profitable investment. In July, the firm had the first close for its Aristata Impact Litigation Fund I, which focuses on social impact litigation. CEO Rob Ryan, previously a director at the ClientEarth environmental charity, says Aristata has an “impact-first mentality”. 

Experience taught him that corporations were much less likely than governments to change their behaviour on climate issues in response to litigation. The not-for-profit sector has not proved itself as an effective player in commercial litigation, he says. “Traditional philanthropic approaches are not enough. Private capital is needed to solve public problems.”

The fund aims to maximise proceeds for claimants and provide a return for investors and generate resources for more litigation. Ryan says the vehicle will work in a similar way to a closed-end private equity fund. The first fundraising, for which law firm Reed Smith acted as adviser, reached an initial close at £40 million (€46 million) at the start of July. The firm aims to increase that to at least £50 million with a hard cap of £100 million. The final close is planned for June 2023, with the fund targeting an internal rate of return of 20%….

The SEDF, part of the Open Society Foundations (OSF) set up by George Soros in 1997, is also backing the fund.”