Texas Fund’s BlackRock Pullout Marks Latest Anti-ESG Broadside

The Texas Permanent School Fund’s move to pull $8.5 billion from BlackRock Inc. is the latest eruption in an ongoing red-state backlash against asset managers’ environmental, social and governance investing. As a result, Wall Street managers are continuing to move away from the ESG label.

Last Tuesday, the Texas Board of Education’s chairman, Aaron Kinsey, announced that BlackRock’s “destructive approach” toward the state’s large oil and gas industry prompted the PSF divestment.

Texas is among several Republican-controlled states that bar asset managers and banks they believe boycott energy companies. Oklahoma, Kentucky and West Virginia, all fossil fuel producers, are among those enacting anti-ESG measures centered on the alleged boycotts. Oklahoma Treasurer Todd Russ said in a statement sent to CIO that “the spirit and intention of the law is to protect Oklahomans and the economic base of the state.”

According to Pleiades Strategy, a policy research group, 38 laws targeting ESG principles have been passed in 17 states, as of the end of January. Opposition from both environmentalist and business groups has been intense, and Pleides stated that most of the 38 laws have been “watered down.”

In Texas, which passed Senate Bill 13 in 2021 requiring state agencies to divest from financial companies deemed “to boycott energy companies,” the BlackRock divestments were the result of a 5-1 vote last month by the PSF board to eliminate two of the asset manager’s funds, in international equity and emerging markets equity. The PSF’s CEO termed BlackRock’s EM stocks strategy “very risky.” The state also has barred financial firms with ESG ties from working with state agencies and local governments, such as by underwriting municipal bonds.

BlackRock Vice Chairman Mark McCombe fired back against the divesting decision on Thursday, citing his firm’s “consistent, long-term investment outperformance” that benefited Texas schools and families. In a letter to Kinsey, the Texas Board of Ed chair, McCombe urged that the decision be reversed.

Meanwhile, there is some evidence that the anti-ESG push has gained headway. Last year, investors removed $13 billion from ESG mutual funds, Morningstar research found. And this came even though large ESG funds rose 24.4% for the year, slightly behind the S&P 500 (by two percentage points), but still a good showing.

BlackRock CEO Larry Fink, a staunch ESG backer, last year announced he would stop using the term, as it had become too politicized. BlackRock has denied boycotting oil and gas investing, insisting it maintains investments in Texas-based energy firms, including ExxonMobil Corp. and Occidental Petroleum Corp.

In February, BlackRock, State Street and JPMorgan Chase & Co. scaled back their involvement or withdrew from Climate Action 100+, a global consortium of asset managers that had been pushing companies to end fossil fuels use.

Nonetheless, some business groups have been less willing to roll over in the face of the anti-ESG pressure from Republican officials. One week before the PSF’s BlackRock decision, the Texas Association of Business and Chamber of Commerce Foundation, the nonprofit research arm of the Texas Association of Business, issued a statement saying the prohibition on select financial institutions working for public entities would cost Texas: losing the state $668.7 million in economic activity, its companies $180.7 million in earnings and state and local governments $37.1 million in tax revenue.

The organization’s statement warned: “In simple terms, when government attempts to mandate values (no matter what kind) to business, the market loses, and taxpayers bear the consequences.”