‘ESG Evasion’ & the Anti-ESG Campaign: Tennessee’s Call for Clarity and Consumer Protection Against BlackRock, Inc., the World’s Largest Asset Manager

Blog Post | 112 KY. L. J. ONLINE | March 5, 2024

‘ESG Evasion’ & the Anti-ESG Campaign: Tennessee’s Call for Clarity and Consumer Protection Against BlackRock, Inc., the World’s Largest Asset Manager

By: Qwenton Briggs, Staff Editor, Vol. 112 

Environmental, Social, and Governance (“ESG”) principles were forged in the 2004 UN Global Compact Report titled “Who Cares Wins: Connecting Financial Markets to a Changing World.”[1] This report served as a promotional piece for the incorporation of ESG criteria into the investment process and identified various strategies for investors, fiduciaries, and market regulators. Within the report, a key assertion is:

“Both investors and asset managers should develop and communicate proxy voting strategies on ESG issues as this will support analysts and managers in producing relevant research and services.”[2]

ESG issues encompass a notably broad range of factors and include climate change, carbon emissions, labor standards, diversity, political contributions, and other ethical considerations. Throughout recent years, considerations of ESG have become mainstream in investing. However, its rise has also faced backlash from both conservative officials and corporate executives.

Advocates of ESG efforts generally argue that the practice of “social equity investing” and “impact investing” reflect our country’s democratic values and allows consumers and investors to hold companies accountable as a means of promoting corporate governance.[3] Conversely, critics contest the practice as “woke capitalism,” and fear poorly performing pension funds may be an outcome of prioritizing political agendas over economic considerations.[4]

The Department of Labor promulgated a rule which enables plan fiduciaries to weigh in aspects of ESG for selecting retirement investments and exertion of shareholders rights.[5] Republican legislators pushed for the U.S. Senate’s resolution adoption to overturn the rule and attorney generals countered by filing a federal lawsuit.[6] However, President Biden utilized his first veto to override the resolution, and the Fifth Circuit dismissed the suit.[7] Republican attorney generals, including those from Tennessee and Kentucky, continued their anti-ESG campaign by sending a 21-page letter, warning asset managers of potential state or federal violations, and by proposing statutory anti-ESG legislation.[8] Various AGs, representing Kentucky, Indiana, and Montana, have also issued subpoenas to request compliance with civil investigations.[9]

On December 18, 2023, Jonathan Skrmetti, Attorney General & Reporter, filed a consumer protection lawsuit against BlackRock, Inc. (BlackRock) on behalf of current and potential Tennessee consumers.[10] The claim alleges deceptive patterns of conduct and misstatements related to the firm’s investment strategies alongside ESG affiliations.[11] Tennessee asserts the following central arguments: (1) “BlackRock has falsely conveyed that certain of its funds do not incorporate ESG considerations;” and (2) “overstated the extent to which its ESG aims bear on companies’ financial positioning and performance.”[12]

On its face, this case more appropriately falls within the scope of the SEC and federal securities laws, but this claim is pursuant to the Tennessee Consumer Protection Act (“TCPA”) as an effort to bring “BlackRock’s rampant ESG evasion” to a halt.[13] Most notably, this lawsuit is the first to be initiated by a Republican Attorney General against an investment firm based on concerns of ESG integration. 

Public statements are a focal point of the contentions and appear indicative of the firm’s ESG commitments to promote sustainability efforts. Larry Fink, Chairman and CEO of BlackRock, has been an active participant and originally aimed to redefine ESG efforts as “Stakeholder capitalism.”[14] Larry Fink’s 2022 Letter to CEOS: The Power of Capitalism, emphasized the firm’s commitment to “empowering clients with choice on ESG votes”, through initiatives such as their Center for Stakeholder Capitalism and voluntary participation in the proxy voting process.[15] In 2023, Fink quickly stated a newfound position of being “ashamed” using the term ESG and for falling into the over politicized debate concerning the ESG investing trend.[16] Similar sentiments of correspondence and public disclosures are provided within the complaint through a chart for side-by-side comparison to support the alleged contradictions.[17]

Underlying the complaint is BlackRock’s continued alignment with climate change reduction groups, such as Climate Action 100+ and Net Zero Asset Managers Initiative (NZAM).[18] In 2020, BlackRock became a formal signatory to Climate Action 100+ alongside other global investors to advocate for the reduction of carbon emissions.[19] These affiliations are routinely drawn out within the complaint to insinuate that the firm’s commitments are applicable to “all assets under management.”[20] This guilty by association approach will likely be undercut by BlackRock’s recent decision to transfer membership interests to its international entity, known as BlackRock International Ltd., and withdraw $6.6 trillion or two-thirds of its total assets within the fund. State Street and JP Morgan Chase disassociated from the investor coalition as well, which expanded removal of an estimated $14 trillion of total assets. This move is a direct counter to the AG’s allegations that the firm was unwilling to remove its affiliation and will require Skrmetti to focus on BlackRock’s continued membership with NZAM.[21] However, it would be unsurprising for fellow AGs to shed light on this strategic removal from climate groups and further conduct following the case to support any pending antitrust scrutiny.

Within the 73-page complaint, Tennessee generally alleges that “BlackRock’s acts and practices…are deceptive to consumers and other persons in Tennessee” but fails to identify specific investors having a fiduciary relationship with BlackRock.[22] Further, financial performance and risk is addressed at surface level by mere reference to the absence of reliable correlations between financial performance of offered funds and ESG characteristics, which is primarily indicated based on academic literature.[23] Despite quoted statements and references to disclosure documents, Tennessee fails to provide any in-depth technical analysis or investment estimations in Tennessee that could assist the court with its determination of monetary relief. These flaws serve as an indication of the complexities regarding valuation alongside ESG considerations, imply unfamiliarity with sophisticated investment processes, and may pose a challenge to any intentionality requirements. In an indirect response to the lawsuit, BlackRock estimates that it has “invested approximately $40 billion on behalf of more than 600,000 Tennessee workers.”[24] Considering the extent of commitment involved, the investment firm should also highlight its position as the sole defendant in this case, which indicates that the firm remains a direct target to be set as an example for advancement of the anti-ESG campaign.

Activism through strategic exercises of proxy votes and shareholder rights is also at the forefront of the complaint. Tennessee lists specific instances in which BlackRock utilized proxy votes to promote its ESG agenda based on the firm’s 2022 10-K annual report. Further, the claim raises a concern that the investment firm is capable of numerous private or “closed-door engagements” that could influence companies to align with the investment firm’s views off the record.[25] These assertions will motivate the investment firm to contextualize their disclosures in a favorable light, while also using transparency to dismantle proposed hypotheticals of behind-the-scenes dealmaking.

BlackRock has yet to file a formalized response but has declared, through statements to reporters, its rejection of Tennessee’s allegations and intends to contest the complaint. Despite this lawsuit, the investment firm has stated “We are proud of our contribution and committed to the future in Tennessee.”[26] One could anticipate that the firm will also contemplate transferring its NZAM membership interest in the same manner of Climate 100+ interests. Further, it may be strategically sound for BlackRock and similar firms to form a separate entity to mitigate liability if electing to continue implementation of ESG investment strategies. Because Tennessee requests injunctive relief, disgorgement of profits, and imposition of civil penalties, this case places a spotlight on the need for transparency and clarity regarding ESG initiatives.

[1] United Nations Environment Programme Finance Initiative, Who Cares Wins: Connecting Financial Markets to a Changing World, (2004) https://www.unepfi.org/fileadmin/events/2004/stocks/who_cares_wins_global_compact_2004.pdf.

[2] Id. at p. iii.

[3] The Investopedia Team, What is Environmental, Social, and Governance (ESG) Investing?, Investopedia, (Feb. 06, 2024) https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp.

[4] James Surowiecki, The War on ‘Woke Capital’ Is Backfiring, The Atlantic (Jan. 31, 2024) https://www.theatlantic.com/ideas/archive/2024/01/republicans-woke-capital-esg-investment/677294/.

[5]See U.S. Dept. of Labor, Release No. 22-2202-NAT, US Department of Labor Announces Final Rule to Remove Barriers to Considering Environmental, Social, Governance Factors in Plan Investments, (November 22, 2022), https://www.dol.gov/newsroom/releases/ebsa/ebsa20221122.

[6] Daniel Wiessner, Republican-led US states appeal ruling allowing Biden ESG investing rule, Reuters (Oct 26, 2023, 5:27 PM) https://www.reuters.com/legal/republican-led-us-states-appeal-ruling-allowing-biden-esg-investing-rule-2023-10-26/#:~:text=Oct%2026%20(Reuters)%20%2D%20A,governance%20(ESG)%20issues%20in%20investment.

[7] Biden uses first veto to defund rule on ESG investing, Reuters (March 20, 2023, 3:12 PM) https://www.reuters.com/business/sustainable-business/biden-vetoes-resolution-block-labor-dept-rule-esg-investing-2023-03-20/.

[8] Clara Hudson, Republicans Press Asset Managers On ESG as Proxy Season Ramps Up, Bloomberg Law (March, 31, 2023, 4:00 PM) https://news.bloomberglaw.com/esg/republicans-press-asset-managers-on-esg-as-proxy-season-ramps-up;      Karin Rives, States’ anti-ESG push leaves patchwork of policies, unclear mandates, S&P Global, (Aug. 22, 2023), https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/states-anti-esg-push-leaves-patchwork-of-policies-unclear-mandates-77133331.

[9] Saijel Kishan, Money Managers Sent State AG Subpoenas Related to Climate Work, Bloomberg Law, (July 19, 2023), https://www.bloomberglaw.com/bloomberglawnews/antitrust/X56L6B94000000?bna_news_filter=antitrust#jcite.

[10] Tennessee Sues BlackRock in First-of-its-Kind Consumer Protection Suit over ESG Considerations, Office of the Tennessee Attorney General (Dec. 18, 2023, 12:35 PM), https://www.tn.gov/attorneygeneral/news/2023/12/18/pr23-59.html.

[11] Id.

[12] Civil Enforcement Complaint, Tennessee v. BlackRock, Inc., 23CV-618 at p. 5-9 (Tenn. Cir. filed Dec. 18 2023).    

[13] Id. at 1.

[14] Larry Fink, Larry Fink’s 2022 Letter to CEOS: The Power of Capitalism, Blackrock (2022     ), https://www.blackrock.com/corporate/investor-relations/larry-fink-ceo-letter.

[15] Id.

[16] Justin Worland, Larry Fink Takes on ESG Backlash, Time (June 29, 2023, 1:45 PM), https://time.com/6291317/larry-fink-esg-climate-action/.

[17] Civil Enforcement Complaint, supra note 10, at 31.

[18] Id at 4.

[19] Blackrock joins Climate Action 100+ to Ensure Largest Corporate Emitters Act on Climate Crisis, Climate Action 100+ (Jan. 9, 2020) https://www.climateaction100.org/news/blackrock-joins-climate-action-100-to-ensure-largest-corporate-emitters-act-on-climate-crisis/.

[20] Civil Enforcement Complaint, supra note 10, at 4.

[21] Blackrock, Signatory Disclosure, NetZero Asset Managers Initiative (May 01, 2022), https://www.netzeroassetmanagers.org/signatories/blackrock/

[22] Civil Enforcement Complaint, supra note 10 at 62.

[23] Id. at 7-8. 

[24] Michael Thrasher, Tennessee Attorney General Sues BlackRock for ‘Misleading’ Investors on ESG Practices, Institutional Investor, (Dec. 18, 2023), https://www.institutionalinvestor.com/article/2cllkin2zyu7mvywhfcw0/corner-office/tennessee-attorney-general-sues-blackrock-for-misleading-investors-on-esg-practices#:~:text=Contrary%20to%20the%20Attorney%20General's,to%20the%20future%20in%20Tennessee.%E2%80%9D.

[25] Civil Enforcement Complaint, supra note 10, at 14.

[26] supra note 21.