BlackRock, the Former Champion of ESG, Shifts to Impact Investing

After years of putting pressure on investment funds and companies to put ESG (Environmental, Social, Governance) criteria at the center of their strategy, Larry Fink, the boss of BlackRock, decided in 2024 to remove definitively use this term in his written communications and public interventions.

This is not a minor adjustment in the sense that BlackRock, the world’s largest asset manager with $10,000 billion in assets under management, announced in 2020 that it would use its voting rights against the management and boards of administration of companies that do not make progress in terms of practices related to sustainable development.

In 2021, Larry Fink reinforced this positioning by affirming that BlackRock would focus on racial equity and social justice in its investment and management activities. It was thus part of a wave of ESG commitments made by all the leaders of large multinationals, eager for certified recognition of their supposedly virtuous behavior.

Over the years, this acronym has grown, with no consensus on a consistent definition and unbiased measurement. Thus, an electric vehicle producer like Tesla received worse ESG assessments from some funds than an oil and gas producer like TotalEnergie.

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BlackRock: Make money and make the world a better place

BlackRock’s initial proposition was that it was possible to both make money and make the world a better place. Ultimately, ESG funds failed to outperform the market or show that they had a measurable beneficial impact for the planet.

As a result of its turnaround, in 2023, BlackRock only voted “yes” on 9% of shareholder resolutions relating to environmental or social issues, compared to 40% in 2021. BlackRock will no longer exert pressure on shareholders. companies so that they change their behavior in the sense that BlackRock previously defined as virtuous and will no longer mention social issues. On the other hand, the fund manager will focus on transition investing, with measurable impact and safe and regular returns.

BlackRock will focus on what it knows how to do: collecting and directing capital towards renewable energy infrastructure projects such as solar, towards the production of biogas from the recycling of waste and animal waste and towards the capture of carbon. More specifically, BlackRock has already invested $550 million in the large direct carbon capture project in the air led by Occidental Petroleum.

This development by BlackRock is part of a broader shift away from investment flows towards ESG funds and a general reorientation towards infrastructure investments directly linked to the energy transition. Indeed, according to Morningstar figures, $13 billion was withdrawn from listed ESG funds in 2023 compared to an increase of $75 billion in renewable energy investment funds. These funds raised more than $500 billion between 2018 and 2023.

Larry Fink justified his change of heart by highlighting the aspect that has become politicized and divisive in the United States of the term ESG. He also highlighted the lack of consensus on ESG criteria due to the fact that ESG means different things to everyone. On the other hand, decarbonization is concrete and measurable and it has the advantage of being good for the environment and good for investors, and therefore for BlackRock shareholders.

Optimal allocation of capital towards decarbonization technologies

By fulfilling its function of allocating capital, the financial market makes it possible to implement projects with high societal value, while remunerating investors at market rates. It is not up to investors to comment on notions as vague as the merits of this or that project.

On the other hand, with the Paris climate objectives set and countries having committed to net-zero, the optimal allocation of capital towards promising decarbonization technologies and towards the deployment of the infrastructures necessary for the transition are by themselves virtuous and bearers of collective well-being.

It is fortunate that positions on impact investing and social progress in all environmental, social and governance areas are becoming calmer and more rigorous in terms of measurements. The ECB would also be inspired to relax in this area following the example of Larry Fink and to no longer seek to “reprogram” its collaborators who are not in line with ESG orthodoxy.

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First published in LA TRIBUNE. A third-party contributor translated and adapted the article from the original. In case of discrepancy, the original will prevail.

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