The progressive left has managed to take their ideology and sweep it into every facet of society, including the world of capitalism and investing. The idea that big business is responsible for operating under the rules of climate change, sustainability, and social diversity measures has been the status quo for the business world for a few years in the hopes that real change would manifest.
Unfortunately, forcing unwarranted change in the name of virtue signaling has done little to advance “sustainability” and “diversity.” In fact, it’s proven to be downright nasty for business.
The investment Goliath BlackRock is feeling the heat from supporting left-wing ideology. It is doing what it can to separate itself from what was once a widely applauded concept that has become controversial.
The perception
BlackRock, the world’s largest money management firm, announced plans to lay off 3% of its global workforce. That amounts to about 600 employees that the investment firm claims are part of a typical right-sizing layoff cycle.
However, the timing of these layoffs after a considerable amount of ESG investment controversy is suspect.
So what is ESG? ESG stands for Environmental Social Governance investing.
The concept is that BlackRock and other firms direct investment dollars (their clients’ money) to public companies that use sustainable energy to reduce their carbon footprint or have processes to ensure boardroom diversity, as a few examples. However, ESG investing, particularly for BlackRock, has created a political firestorm and the beginnings of a litigation headache for the firm.
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The state of Tennessee has filed a lawsuit against BlackRock, for example, claiming that the firm downplayed the extent to which ESG is considered when the firm makes investment strategies. To prove that the firm makes investment decisions in the best interest of its shareholders to ensure the highest return, BlackRock has started showing signs of separating itself from the ESG dynamic.
In fact, U.S. portfolio managers are no longer required to consider ESG metrics when not using ESG-specific funds. So, what is all the uproar over ESG about?
Fiduciary Responsibility
Putting an emphasis and even rules related to climate change, sustainability, and diversity initiatives as a litmus test for investment many would argue goes against the fiduciary responsibility of investment firms. The concept of fiduciary responsibility states that an entity, often an investment firm, has an obligation to make financial decisions that are in the best interests of its customers.
When investing, the ideal goal is to put money into businesses that make more money. Unfortunately, for ESG last year, many “green” and “diversity” investments failed to produce positive returns.
Elon Musk, who has long been a critic of ESG, explained the dangerous game these firms have been playing with client funds – which includes retirements, 401(k)s, and more in BlackRock’s portfolio:
“The public is being lied to…And I’m naming names here: BlackRock, Fidelity…I know you guys, and you need to tell your customers that you’re not making the optimal decisions for shareholder value because that’s what’s going on.”
Mr. Musk touched on the exact argument the state of Tennessee claims in its lawsuit. To tell customers that you are making investment decisions based on their possible best option for return only to attach arbitrary untested ESG metrics against the investments is what normal people would call lying.
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Mr. Musk even warned that lawsuits were imminent:
“The big firms that you hear, BlackRock, you know, Vanguard, all them, they’re like, setting themselves up for the biggest class-action lawsuit in the history of class-action lawsuits by an order of magnitude, because they’re breaking the deal with their customers and they’re not maximizing shareholder value.”
Who are these customers that Elon warns are being duped by BlackRock in the name of ESG?
Forcing it
It would be easy to dismiss these large investment firms and their decisions as outside the realm of what affects the everyday American citizen. That is precisely what the firms would prefer we all think.
However, we are all the customers of these firms, as many of the accounts held at Vanguard, Fidelity, and BlackRock are the pension and retirement accounts of everyday Americans. That makes us all unwitting participants in an ideologically-driven investment strategy that doesn’t put the interests of our future front and center.
According to BlackRock CEO Larry Fink, sometimes that is just what is required. He said so himself at a New York Times-sponsored event:
“You have to force behaviors.”
Mr. Fink believes it is his responsibility and right as the CEO of BlackRock to force behaviors he deems appropriate. He did this through ESG metrics:
“If you don’t achieve these levels of impact, your compensation can be impacted.”
He went on to provide an example:
“If you don’t force behaviors whether its gender or race or just any way you want to say the composition of your team you’re going to be impacted.”
Sounds a little like investment blackmail using climate change and diversity as the requirements. Are the latest layoffs a sign that Mr. Fink understands that he has not been acting in his customers’ best interests, or is it just an attempt to put out the current political and litigation fires around his firm?
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