Utah’s state treasurer, Marlo Oaks, has moved about $100 million in state money previously managed by the investment firm BlackRock to different asset managers. BlackRock, he said, has been pushing an environmental and social agenda instead of bringing the best financial return to state taxpayers.
“The key asset that any investment manager has is trust. It’s hard to trust an investment manager who has adopted more than one goal. When a manager is trying to achieve a dual purpose, there is the potential for returns to suffer or volatility to increase,” said Oaks, noting that the BlackRock funds were a small portion of Utah’s $30 billion Public Treasurers Investment Fund.
Oaks went so far as to say BlackRock, the world’s largest asset manager with $10 trillion in stocks, bonds and other assets under management, is a threat to national security. “BlackRock is rewarded in China. They’re making a boatload of money in China, and it’s undermining national security.”
A BlackRock representative declined to comment on Oaks’ assertions, as per company policy. But BlackRock has faced similar complaints in other GOP-dominated states, and the company has said its efforts are driven by clients who want a long-term investment outlook. More than half of the assets BlackRock manages are held by pension funds that have long-term investment goals.
“We focus on sustainability not because we’re environmentalists, but because we are capitalists and fiduciaries to our clients,” BlackRock founder and CEO Larry Fink said in his annual letter to CEOs in January.
Retirement funds not changed
The Public Treasurers Investment Fund is where the state, cities, counties and other public entities can park their money to earn investment income until it’s needed. It is separate from the $45.1 billion held by the Utah Retirement Systems, which funds pensions for public employees across the state.
As state treasurer, Oaks sits on the Utah Retirement Systems board, but investment decisions are made by a full-time investment team working under a Chief Investment Officer, not by the seven-member board. Utah Retirement Systems spokesman Brian Holland said URS has about $6.8 billion under BlackRock management, and it has made no changes in its portfolio or asset managers related to ESG.
“However, the Utah State Retirement Board continually monitors the performance of our investment managers and makes changes as necessary,” Holland said. “We consider all material risk and return factors.”
Oaks’ decision flows from an effort by Republican state treasurers who are challenging so-called Environmental, Social and Governance policies that have caught on with large corporations and investment firms. The treasurers say the policies are distorting capital markets and denying funding to fossil fuel industries.
But ESG’s defenders say the financial firms and credit rating agencies are answering a demand from the market to shift away from those industries. Advisers at the global management consulting firm McKinsey wrote in a quarterly report last month that companies raise their risk if they don’t consider ESG. “Although valid questions have been raised about ESG, the need for companies to understand and address their externalities is likely to become essential to maintaining their social license.”
Oaks detailed his views in a Wall Street Journal opinion piece in May that focused on Standard & Poor’s move to provide ESG ratings for each of the 50 states. He said the ratings are driven by subjective beliefs of S&P rather than objective financial metrics.
“It’s easy to see that those beliefs are left-wing,” Oaks said. “S&P assigns a lower ESG score to states that have both “physical risks” like earthquakes and natural disasters and a larger percentage of their economy tied to natural resource extraction, such as Texas, Alaska and Louisiana.”
He noted that he and other Utah political leaders have written a letter to S&P objecting to the ESG ratings it has assigned to Utah and calling for the company to withdraw them.
The op-ed drew a response from Utahn Drew Maggelet, who wrote a letter to the editor to the Wall Street Journal saying, “There is no clear evidence of carbon-free favoritism in S&P’s state credit ratings. Texas still has the best rating possible and Alaska’s rating has gone up in the past 3 months. The ESG ratings show no evidence of cultural or economic left-wing bias, either. Deeply conservative states such as Alabama, Idaho and South Carolina scored top marks. California has the worst combined score.”
In an interview, Maggelet, a multifamily housing analyst with significant family ties to the oil and gas industry, noted that the risks associated with ESG issues have been incorporated in the broader credit ratings that S&P and other rating agencies have published for years. The only difference is that S&P is now putting out separate ESG reports.
“ESG emerged from a demand in the market for more transparency about climate, social, and governance risks corporations face going forward. The analysis has also been applied to state bonds, but major ratings agencies have yet to penalize any state bond ratings for perceived ESG shortcomings. I have not seen any indication that ‘woke ideology’ is forcing ESG ratings on a market that does not want them.”
Drought drives Utah rating
S&P’s current ESG rating for Utah puts it in the middle with most states. In the description accompanying the ratings, there is no mention of fossil fuels. Instead the focus is on the same issue every Utah leader has brought to the forefront: drought.
“We believe the state faces elevated natural capital risk due to long-term challenges regarding water supply, which could remain a constraint for its economy and demographic profile as resources are projected to remain suppressed,” the description states.
Still, S&P’s rating also recognized the state’s history of careful planning, a seemingly subjective conclusion that state leaders probably are just fine with: “We believe Utah’s ongoing demonstration and commitment to planning for long-term water challenges helps alleviate additional pressure within our credit rating analysis.”
In an interview, Oaks didn’t offer any objections to S&P’s current Utah rating, but he thinks it’s still improper for S&P to produce separate ratings on ESG. “The problem isn’t necessarily with today’s rating. The problem is that we’re creating a separate system. … ESG is moving political issues into the financial markets. Then it’s a matter of whoever has the most money wins.”
If Oaks and his fellow treasurers really want to kill ESG, it’s probably too late. As the McKinsey report notes, “More than 90 percent of S&P 500 companies now publish ESG reports in some form, as do approximately 70 percent of Russell 1000 companies.”
Other states have gone further
Oaks’ efforts parallel other attempts to reel in ESG in Republican states. Kentucky, Texas, West Virginia and Oklahoma have passed laws empowering their state treasurers to stop doing business with financial institutions they deem to be boycotting fossil fuel investments. Utah Rep. Rex Shipp, R-Cedar City, ran a similar bill, House Bill 312, in the last legislative session, but it never made it out of the House.
The West Virginia state treasurer and Texas comptroller have sent letters to BlackRock and other large investment firms warning them they may be denied state contracts if they cannot demonstrate they are not boycotting fossil fuels. One of the firms targeted by West Virginia is Goldman Sachs, which has a large employee base in Utah. The companies generally have responded to say they don’t boycott fossil fuels and have the oil and gas holdings to prove it.
And the idea of “boycotting the boycotters” has brought its own critics who point out that eliminating potential contractors from the market only makes it less competitive, which ultimately hurts taxpayers. They also point out it is substituting the subjective opinions of politicians for the subjective opinions of investment firms
“What they’ve created is an opaque system in which politicians have discretion,” Witold Henisz, vice dean of the University of Pennsylvania’s Wharton School, told E&E News.
Correction: Utah Retirement Systems’s specific investment decisions are made by a full-time investment team under a Chief Investment Officer, not by its seven-member board.
Drew Maggelet is a member of The Salt Lake Tribune’s Innovation Lab advisory committee.
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