Florida has officially announced that $2 billion in state investments currently under management by BlackRock will be divested due to the firm’s strict adherence to Environmental, Social, and Governance (ESG) standards.
According to Florida Chief Financial Officer Jimmy Patronis, “it’s undemocratic of major asset managers to use their power to influence societal outcomes.”
First coined in 2006 in the United Nation’s Principles for Responsible Investment (PRI) report, ESG has become increasingly polarizing as its profile has risen in the investment management landscape. In essence, it is a framework for assessing investments to ensure they adhere to specific standards, like particular working conditions.
ESG has grown in prominence as more companies include the factors within their investment strategies and announce them within their financial reporting and public disclosures.
According to a September 2022 survey from CNBC, companies are more enthusiastic publicly about ESG than they are behind the scenes. Executives working at large U.S. corporations are reportedly frustrated with ESG’s momentum, which they say is driving over-regulation. Only one-quarter of CFOs surveyed by CNBC support a climate disclosure proposed by the Securities and Exchange Commission, for example.
In August, Florida Gov. Ron DeSantis and the trustees of the State Board of Administration passed a resolution requiring that state investment decisions “must be based only on pecuniary factors [which] do not include the consideration of the furtherance of social, political, or ideological interests”
The resolution came after Larry Fink, CEO of BlackRock, wrote of the investment management firm’s increasing support for “stakeholder capitalism,” focusing on serving the interests of all stakeholders, including customers and employees, and not just shareholders.
In the letter, Fink stressed that “[s]takeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’”
Florida is expected to complete its ESG divestment by the beginning of 2023. In the meantime, the state’s custodian is freezing $1.4 billion in long-term securities managed by BlackRock and moving another $600 million in assets into the state’s short-term Treasury Investment Pool. The fixed-income investment pool is “managed using conservative investment principles to provide liquidity and generate incremental returns for the State and other government-related organizations,” according to the Florida Department of Financial Services.
Patronis reiterated that Florida is most concerned with ensuring its portfolio performs well. Amid a struggling economy, he wants fund managers to focus on improving returns on the state’s assets.
ESG can prompt investment decisions that are less than optimal from a performance perspective since it may require adhering to, for example, specific environmental requirements.
“As major banking institutions and economists predict a recession in the coming year, and as the Fed increases interest rates to combat the inflation crisis, I need partners within the financial services industry who are as committed to the bottom line as we are,” he said.
“BlackRock’s social-engineering project isn’t something Florida ever signed up for,” Patronis claimed. The state’s CFO further suggested that Florida can no longer “trust BlackRock’s ability to deliver.”