BlackRock is the world’s largest asset manager with $8 trillion in assets, and its ESG investment ideology has come under scrutiny due to its impact on individuals and institutions. ESG stands for environmental, social, and governance, and it takes into consideration more than just company and shareholder profits. However, ESG investing has been criticized for ignoring basic economics of supply and demand. BlackRock’s CEO Larry Fink has told companies to conform with ESG ideology or risk funding loss, leading to pushback as it affects average people in the form of inflation and rising energy costs. Politicians have been calling in asset managers and mega banks to testify against ESG, and the SEC proposed an ESG-based climate disclosure rule that both parties have pushed back against.
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BlackRock and ESG: The Investment Ideology Being Called into Question
With around 8 trillion dollars in assets, BlackRock is the largest asset manager in the world. Over the last year or so, it has become infamous for using its massive wealth to influence the global economy and everyday society. However, people have started waking up and pushing back. This is mainly because of the effects BlackRock’s ESG investment ideology has had on both individuals and institutions. So, today, we’re going to explain what ESG is in simple terms, tell you why this investment ideology is being called into question, and examine whether this is the beginning of the end for BlackRock.
What Is ESG?
If you’re unfamiliar with ESG, here’s what you need to know. ESG stands for environmental, social, and governance. It’s an investment ideology that’s been pushed by asset managers like BlackRock and mega banks like Bank of America for years. ESG has its roots in an initiative by the United Nations from the early 2000s. This initiative saw thousands of the world’s largest financial institutions come together to promote what they touted as a new form of capitalism. This new form of capitalism takes environmental, social, and governance issues into consideration, not just company and shareholder profits.
Why Is ESG Being Called into Question?
This makes the ESG investment ideology synonymous with the stakeholder capitalism defined by Klaus Schwab, the founder and chairman of the world economic forum, or WEF. Klaus has noted in many interviews and presentations that the stakeholders in this new capitalist system are the thousands of individual institutions that are a part of the WEF. Naturally, this list includes BlackRock, Bank of America, and other institutions that have been pushing the ESG ideology.
Not surprisingly, the WEF is where these institutions have been working to standardize ESG criteria. This has been done with the help of the Big four accounting firms along with the UN. In fact, it looks like the end game is for the ESG criteria to be synonymous with the UN’s sustainable development goals or SDGs.
Now, you’d be forgiven for thinking that ESG is a good thing. Individuals and institutions taking environmental, social, and governance issues into consideration for their operations and investments sounds really good on paper. But it’s really bad in practice. For starters, ESG investing effectively requires the individual or institution to ignore the basic economics of supply and demand when they interfere with an environmental, social, or governance imperative. A simple example is hiring people based on their personal identity rather than their actual competence. Obviously, a company that hires its employees based on the former rather than the latter will have a very hard time competing against a company that hires its employees based on competence.
What Does This Mean for BlackRock?
This is why nobody took ESG seriously for the first decade or so after it was first defined. This all changed in January 2020, however, when BlackRock CEO Larry Fink published an open letter to the CEOs of all the companies BlackRock is invested in. He basically told them to conform with the asset manager’s ESG ideology or else. Google search trends confirm the term ESG went parabolic after Larry’s letter. That’s because “or else” means that BlackRock will pull funding from existing companies and refuses to fund any new companies that don’t comply with ESG.
It’s not just BlackRock pushing ESG. During a panel at this year’s WEF conference in Davos, Bank of America CEO Brian Moynahan said that institutions who score low on ESG will have a harder time getting access to financial services. It won’t be long before they do the same to individuals.
The worst part is that ESG criteria haven’t been clearly defined. This ambiguity has allowed asset managers and mega-banks to pick and choose which companies they invest in or divest from. Tesla is a textbook example; it was dropped from the S&P 500’s ESG index despite being objectively ESG friendly.
Why Is the Pushback Against BlackRock and ESG Just Beginning?
If you’re wondering why the pushback against BlackRock and ESG has only begun over the last year or so, the short answer is the economy. If you pull up the five-year charts for oil and gas prices, you’ll notice that both started to spike in almost every country in early 2021, long before the war in Ukraine. There are, of course, many reasons for this. These include pandemic stimulus, which increased the money supply, the shutdown of many energy operations due to the pandemic, which restricted oil and gas supplies, and the gradual reopening of many countries, which increased the demand for oil and gas. However, another reason is years of underinvestment in the energy sector, something that continues to this day.
ESG-obsessed investors have been reluctant to fund any new oil and gas operations. The ESG policies of some countries have also restricted existing operations, notably those in the European Union.
As with most issues, the average person didn’t really notice or care until it started affecting them personally in the form of inflation. The rising prices of fuel, groceries, cars, and houses eventually became impossible to ignore, and everyone started looking for someone to blame. As the world’s largest asset manager, BlackRock was automatically at the top of the naughty list. This resulted in dozens of articles about its investment activities, the most famous of which alleged that it was buying up thousands of single-family homes way above asking price. Many articles also examined BlackRock’s ESG investment ideology and correctly identified it as one of the primary reasons for the current energy crisis.
The hot button issue among politicians in the U.S. and elsewhere is ESG. This is simply because all the people these politicians represent are being squeezed from both sides. On one side, it’s high inflation because of rising energy costs, and on the other side, it’s high-interest rates on debt because central banks are raising interest rates to fight inflation. Both political parties are finally starting to push back against ESG. The catalyst for this seems to have been an ESG-based climate disclosure rule proposed by the SEC earlier this year.
