BlackRock, State Street and Vanguard: between a rock and a hard place

“Texas and Germany are great examples of what the energy transition looks like”, wrote Larry Fink in the BlackRock chairman’s 2024 annual letter to investors. Fink made the case that while 28% of Texas’ energy demand is serviced by renewables, natural gas could play a crucial supportive role. In February 2024, BlackRock even convened a summit in Houston in a bid to solve the Texas energy challenge.

Despite these efforts, Texas Republicans’ discontent with Larry Fink and his peers is rising. On November 27, Texas Attorney General Ken Paxton announced that Texas and 10 other states have filed a lawsuit suing BlackRock, State Street and Vanguard for “conspiring to artificially constrict the market for coal through anticompetitive trade practices”.

The trio – three of the largest asset managers in the world – are caught between a rock and a hard place. On the one hand, Republicans are convinced that their climate stewardship is illegal and detrimental. On the other hand, their asset owner clientele expects more.

Republican fears of how and why the 'big three' steer energy companies towards decarbonisation are misplaced on two counts – they underestimate asset owner demand for the trio’s climate stewardship and overestimate its success.

Political headwind

Addressing a room full of Australian asset owners in Melbourne on November 7 - the morning after Donald Trump’s victory in Washington - Nathan Fabian, chief sustainable systems officer at UN PRI, warned of a critical implication: “US managers will come under pressure”, he said.

Fabian was right. The lawsuit against America’s largest asset managers has a lot to do with the country’s change in political leadership.

At the core of the lawsuit against the trio is a trojan horse of antitrust complaints.

The concern being that after investing in nine large, publicly traded American coal companies, the three asset managers have weaponised their holdings to push for decarbonisation. In so doing, the lawsuit claims, the trio has individually and collectively contributed to an artificial reduction in competition and supply in coal markets. BlackRock and State Street have both called the allegations “baseless”.

To its credit, the lawsuit gets one thing right – the 'big three' have a degree of influence over corporate governance, the scale of which is unrivalled. “Defendants have immense influence over these companies on their own, but collectively defendants possess a power to coerce management that is all but irresistible”, the lawsuit reads.

It is what they do with that influence and why, that the lawsuit leaves either unexplained or subject to inconspicuous assumptions about the business of asset management.

Client demand

Complaints against climate stewardship by the trio make the case that these efforts are ideologically motivated and economically disastrous. In reality, they are the equivalent of asking BlackRock, State Street and Vanguard to apologise for seeking to act in their clients’ interest.

Asset owners are a vital clientele for all three companies. At State Street for instance, the list of largest clients by AUM includes DC and DB pension funds, public retirement plans, sovereign wealth funds and insurance companies.

In his letter to investors, Fink addressed why BlackRock simultaneously invests over $300 bn in fossil fuel companies and $138 bn in energy transition strategies: “That’s part of being an asset manager. We follow our clients’ mandates”, Fink wrote.

Greg Davis, Vanguard’s chief investment officer makes a similar case. “We’re focused on what’s in the best interest of our clients over time”, he says.

If Fink and Davis are right, client demand - not ideological convictions – primarily shapes the big three’s design of products and services. Stewardship, which is at the heart of the lawsuit, is no different. Client demand for climate stewardship is rising, as are the standards through which this service is judged.

When Aegon Master Trust reviewed the stewardship performance of its fund managers in 2023, BlackRock’s performance was deemed unsatisfactory. In all but one instance, BlackRock failed to meet the asset owner’s expectations. In the months that followed this review, Aegon UK contributed to a major redesign of BlackRock’s stewardship practices. As a result, in July 2024, BlackRock released a new set of climate stewardship guidelines.

The Aegon – BlackRock example highlights not only the commercial rationale behind climate stewardship but also the increasing demand for such services.

Unexplained outcomes

If the three asset managers were as motivated and successful in climate stewardship as the lawsuit claims they are, given the scale of their portfolios, decreasing support for climate resolutions seems surprising.

According to BlackRock’s latest stewardship report, the median level of support for environmental proposals in the US has dropped from 49% in 2021 to 18% in 2023. In 2023, BlackRock says it voted against 149 climate and natural capital related resolutions, compared to 10 votes in favour.

“BIS did not support shareholder proposals that were overly prescriptive or unduly constraining on management, that lacked economic merit, or made asks that the company already fulfils”, the company says in the report.

State Street’s stewardship report tells a similar story: “Our approach to voting on shareholder proposals has remained consistent, although we have also noted a decline in our support for such [environmental and social] proposals both in North America and globally”, the report reads.

Of the 400 environmental and social shareholder proposals that Vanguard reviewed this proxy season, the company did not support any.

Fink’s 2024 letter notes the rising political polarisation surrounding the energy transition: “I started writing about the transition in 2020. Since then, the issue has become more contentious in the U.S”, says Fink.

BlackRock, State Street and Vanguard are facing political headwinds that might well be temporary but asset owner demand for climate stewardship will outlast a presidency. To quote Fink’s letter once more: “outside the debate, much is still the same”.

Atharva Deshmukh, head of research at Net Zero Investor, was recently named Newcomer of the Year at the Aviva Investors Sustainability Media Awards 2024.