ESG Can’t Square With Fiduciary Duty
State attorneys general issue a strong warning to investment managers and retirement fund trustees.
By Jed Rubenfeld and William P. Barr, Sept. 6, 2022
Nineteen state attorneys general wrote a letter last month to BlackRock CEO Laurence D. Fink. They warned that BlackRock’s environmental, social and governance investment policies appear to involve “rampant violations” of the sole interest rule, a well-established legal principle. The sole interest rule requires investment fiduciaries to act to maximize financial returns, not to promote social or political objectives. Last week Attorneys General Jeff Landry and Todd Rokita of Louisiana and Indiana, respectively, went further. Each issued a letter warning his state pension board that ESG investing is likely a violation of fiduciary duty.
The Louisiana and Indiana opinions didn’t make headlines but have seismic implications: They suggest that state pension-fund board members, investment staff and investment advisers may be liable if they continue allocating funds to ESG-promoting asset managers such as BlackRock.
Mr. Landry’s and Mr. Rokita’s warnings are salvos in a fight numerous states are waging against the ESG policies promoted by the Big Three asset managers—BlackRock, Vanguard and State Street. But they go significantly further in two major respects.
First, Mr. Landry’s guidance spotlights potentially explosive, undisclosed conflicts of interest in the Big Three’s “selective” promotion of ESG criteria against U.S. companies but not Chinese companies. According to Mr. Landry, in 2021 BlackRock exercised its proxy voting rights as Exxon’s second-largest shareholder to lead “an activist campaign that forced Exxon to cut oil production,” without disclosing that many of the “oil fields dropped by Exxon” are “poised to be acquired by PetroChina” and that BlackRock is “one of PetroChina’s largest investors.”
Mr. Landry has a point. BlackRock has an enormous stake in PetroChina, reporting holdings of between one trillion and two trillion shares, representing between 5% and 10% ownership, from 2018-22. If Mr. Landry’s allegations are correct, BlackRock’s ESG-based promotion of oil production cutbacks at Exxon might have been a staggering conflict of interest.