BlackRock Gets Legal Warning Over ESG Funds From Mississippi

(Bloomberg) -- BlackRock Inc. faces the prospect of being barred from offering securities in Mississippi after state officials accused the investment firm of making “fraudulent” statements regarding its climate strategy.

This marks at least the second time BlackRock has faced legal action from a Republican-led state over environmental, social and governance factors, joining Tennessee. 

Mississippi Secretary of State Michael Watson issued an administrative “cease and desist” order released on Wednesday to the world’s largest money manager. In a 33-page document, Watson alleges that BlackRock is misleading investors in its funds about the firm’s climate-related efforts.

“Many of BlackRock’s acts, practices and courses of business operate or would operate as a fraud or deceit upon investors and potential investors in Mississippi,” Watson said in the order.

In response, BlackRock said it operates “in one of the most highly regulated industries in the country and is committed to following the law in every respect.” The company added that “our only agenda is maximizing risk-adjusted returns for the funds our clients choose to invest in.”

BlackRock manages about $10 trillion of stocks, bonds and other assets around the world. For the past three years, the New York-based firm has found itself in the middle of a political and reputational conundrum, with some Republican politicians in the US deciding to pull money from the company.

BlackRock has 30 days to respond to the Mississippi complaint. It’s possible the firm could be banned from doing business in Mississippi where it’s registered as an investment adviser and broker-dealer, according to the secretary of state’s order.

Specifically, Watson said BlackRock has claimed that ESG factors provide a financial benefit, when there’s no proof that ESG-related metrics result in improved investment returns.

The order comes three months after Tennessee filed a lawsuit against BlackRock, claiming the firm breached consumer protection laws by making “misleading” statements about its ESG strategy. Chief Executive Officer Larry Fink has said he no longer uses the ESG label because it’s become too politicized. He does still refer to the transition to clean energy, a key tenet of ESG investing.

Just last week, the Texas State Board of Education announced plans to pull about $8.5 billion from BlackRock, the largest amount withdrawn from the money manager tied to the political backlash. The firm said the decision “ignores our $120 billion investment in Texas public energy companies and defies expert advice.”

Watson’s complaint focuses on BlackRock investments, including exchange-traded funds. He alleges that the firm’s statement that it doesn’t follow a “sustainable, impact or ESG investment strategy” for such products is “untrue or misleading” because BlackRock does press companies to decarbonize through its engagement policies, shareholder voting and lobbying efforts.

On its website, BlackRock says climate risk is an investment risk. The firm adds that while it helps clients navigate these risks, it doesn’t “engineer a specific decarbonization outcome.”

Watson also cited BlackRock’s participation in groups such as the Net Zero Asset Managers initiative, which aim to push companies to reduce their corporate emissions.

According to NZAM, asset managers committing to the international initiative ultimately invest in line with their clients’ desires and mandates and are subject to government regulation.

(Adds BlackRock response to Texas in 10th paragraph and comment from the firm’s website in 12th.)

©2024 Bloomberg L.P.