The recent decision by the Texas State Board of Education to sever ties with BlackRock has reignited the ongoing debate surrounding Environmental, Social, and Governance (ESG) investing in the United States. With a substantial $8.5 billion withdrawn from the investment behemoth, this move highlights the widening gap between political ideologies and investment strategies.
At the heart of this controversy lies BlackRock, the world’s largest asset manager and a prominent proponent of ESG principles. While BlackRock’s advocacy for sustainability and climate action has earned accolades from many investors and stakeholders, it has also faced sharp criticism from certain Republican officials in states like Texas. These politicians allege that BlackRock is pushing a left-leaning agenda and undermining traditional energy sectors.
ESG investing, an acronym for Environmental, Social, and Governance investing, involves evaluating companies based on their performance across various responsibility metrics and standards to determine their suitability for investment. By utilizing these criteria, investors can pinpoint businesses that demonstrate robust environmental stewardship, social impact, and effective governance practices. ESG investing is also known as sustainable investing, impact investing, and socially responsible investing. Many ESG investors prioritize environmental considerations and exclude companies associated with environmental harm from their portfolios, opting instead to invest in firms committed to reducing reliance on fossil fuels.
Texas has emerged as a battleground in the anti-ESG movement, with state officials taking decisive actions against companies and investors perceived to prioritize social and environmental concerns over economic interests. For instance, Texas recently barred UK bank Barclays from participating in the municipal bond market due to its ESG policies. The state has also mulled over divesting from asset managers accused of boycotting energy companies. Texas is not alone in its resistance to ESG investing, as evidenced by the enactment of at least 25 anti-ESG bills in states with Republican-controlled legislatures in 2023, with Utah passing five such bills.
Despite these legislative victories, several bills are still awaiting approval, as reported on a website maintained by Lichtenstein’s team, dedicated to monitoring such legislation. While Texas’s anti-ESG stance may resonate with certain constituents, it could come at a significant cost to investors and the state’s economy. A study by the Texas County & District Retirement System projected potential losses exceeding $6 billion over ten years by prohibiting ESG investing in public retirement systems, underscoring the intricate trade-offs involved in balancing financial returns with social and environmental objectives.
Additionally, MSCI’s report revealed that the top 20 ESG funds experienced enhanced return contributions due to superior ESG performance. In defending its decision to sever ties with BlackRock, the Texas State Board of Education cited legislation prohibiting investment in companies that boycott specific energy firms. Board Chairman Aaron Kinsey expressed apprehensions about BlackRock’s impact on Texas’s oil and gas industry, which contributes revenue to the Texas Permanent School Fund (PSF).
In a statement posted on X, Aaron Kinsey, PSF Chair, voiced concerns, stating, “BlackRock’s dominant and persistent leadership in the ESG movement immeasurably damages our state’s oil and gas economy and the very companies that generate revenues for our PSF… The PSF will not stand idle as our financial future is attacked by Wall Street.” This sentiment reflects mounting worries among certain Texas stakeholders regarding the influence of ESG considerations on investment decisions and potential repercussions for the state’s energy sector.
According to the state BOE’s website, Kinsey serves as the CEO of American Patrols, an aviation oilfield services company in Midland. Critics argue that this dual role may jeopardize the long-term financial health of PSF and restrict its ability to achieve investment objectives. BlackRock has come under increasing scrutiny from Republican politicians and activists who accuse the company of advancing a leftist agenda. Last year, BlackRock sealed a deal to invest $550 million in Occidental Petroleum’s Direct Air Capture (DAC) plant in Ector County, Texas.
In response to the state’s decision, BlackRock’s CEO Larry Fink defended the company’s engagement with the energy industry, emphasizing their significant investments in U.S. energy companies. Fink stated in an email, “The decision ignores our $120 billion investment in Texas public energy companies and defies expert advice. As a fiduciary, politics should never outweigh performance, especially for taxpayers.” Despite facing criticisms, BlackRock highlighted its substantial investments in Texas-based companies, infrastructure, and municipalities, with a notable portion directed towards the energy sector.
Last week, the investment giant published a report outlining key developments that will impact low-carbon transition investment opportunities and risks in 2024. As the discourse surrounding ESG investing continues to evolve, investors and policymakers must carefully evaluate the potential benefits and drawbacks of integrating environmental, social, and governance considerations into investment decisions.
