The heat that BlackRock has come under in the US for taking account of environmental, social and governance issues when investing should be a red line in the culture wars. The financial industry must push back, or risk worse consequences.
Earlier this month a Federal judge in Texas ruled that American Airlines had failed in one aspect of its fiduciary duty to pilots in its pension fund. The complaint centred on the fund having employed as an asset manager BlackRock — whose name is synonymous with 'woke capitalism' for ESG-haters in the US.
Ironically, environmentalists deplore BlackRock for the weakness of its ESG policies.
The short version is that American Airlines failed in its fiduciary duty by employing BlackRock, an ESG fund manager.
The reality is much more complicated. The pension scheme's money was invested in BlackRock passive funds which do not take ESG into account when making investment choices.
The only way ESG tinged the investments was through the shareholder voting carried out by BlackRock.
Long derided by greens for the supine nature of its voting, a few years ago BlackRock upped its stewardship game and started, quite cautiously, to use its enormous influence to improve ESG behaviour at companies — usually supporting mild motions such as requests for more information, rather than demanding any actual change in activity.
The American Airlines case turned on whether American had exercised adequate oversight over how BlackRock was voting on its behalf.
As US news service ESG Dive explained, the judge decided American had been "prudent" in its fiduciary duty because its oversight was at least as good as peers'.
But the airline had not been "loyal" to savers by "failing to keep American’s own corporate interests separate from their fiduciary responsibilities, resulting in impermissible cross-pollination of interests and influence on the management of the plan.”
The ruling hardly appears to depend on BlackRock's actions at all. There is plenty in it that has baffled and frustrated legal experts.
Nevertheless, often the headline is all that matters. A company got sued for using BlackRock... no company wants to be sued... other companies will be reluctant to use BlackRock or will demand it changes.
No surprise to BlackRock's progressive critics: it already has changed.
Three weeks ago it pulled out of the Net Zero Asset Managers' Initiative, prompting the association to suspend its activities pending a review.
As IPE reported, BlackRock has drastically watered down its engagement and voting at companies on climate issues, and now no longer seeks to influence them towards a faster transition to low carbon.
For all the talk about freedom that comes from the new US administration, this is a political witch hunt, one of whose main motivations is to protect the profits of fossil fuel exploiters.
The basic reality that all pension savers are going to have a miserable retirement due to worsening climate change is denied. Not only that: investors are being gradually forbidden even to think about the risks environmental and social harms pose to their own investments.
The concept of fiduciary duty has been turned on its head — courts are forcing investors to ignore it. That can only mean damage and risk for savers.
Politics reflects society, and business — especially in the US — is a big voice in society. BlackRock and other investment firms are not neutral observers, they are players in this game. It's time they stopped running away from the ball.