Financial groups included on a blacklist of companies that Texas considers hostile to fossil fuels have attacked the process as politicised and arbitrary.
Texas comptroller Glenn Hegar is implementing a 2021 law that requires state pension and school funds to divest they hold in listed financial groups which, in the government’s view, “boycott energy companies”.
But critics complain that his office relied on a single ESG ranking to reduce the pool to 19 banks and asset managers. Meanwhile, targeted firms claim the state communicated with them so haphazardly that it was not clear that all companies knew that they were on the final list of 10which was announced last week. BlackRock was the sole US entity on the list, which also included Credit Suisse, UBS and BNP Paribas.
A parallel list of nearly 350 investment funds that Texas has also targeted for divestment drew similar complaints from sponsors who said some of the products were standard money market funds.
The state sent letters out in March asking companies about their corporate treatment of fossil fuel companies and whether they sponsor any funds that exclude energy companies.
Several recipients told the Financial Times that their letters were sent to out-of-date addresses or to retired executives, and several European groups in the final list of 10 never responded to the state’s inquiries.
“They sent it in a really bizarre way,” said one industry source. “We heard about it and were searching around for our letter. I wouldn’t be shocked if some of them missed it, especially if they are European.”
The initial process that selected 19 financial groups for potential inclusion on the “hostile” list came in for particular criticism. The state included companies that were in the top half of corporate ESG-risk ratings compiled by MSCI. That knocked out a number of very large banks and asset managers that have signed official commitments to reduce their carbon footprint, another criteria.
ESG risk ratings are not standardized and they measure the way a company is managing a range of issues. They are not “necessarily focused on climate change. It is not a good tool for what [Texas officials] are using it for,” said Simon MacMahon, global head of ESG research at Sustainalytics, which produces a similar screening tool.
Indeed, if Texas had used Sustainalytics’ version, its list might have been quite different. US fund managers Janus Henderson and Franklin Templeton come out with better scores than BlackRock on Sustainalytics’ ranking. Similarly, Citigroup and Bank of America come above Credit Suisse.
“MSCI is a reliable and trusted company but it’s not the only one,” said Andrew Poreda, senior ESG analyst at Sage Advisory Services. “Picking MSCI as the sole determinant of a company’s ESG score is arbitrary.”
Texas decided that if any of the 19 companies sponsored more than 10 funds on its “hostile to fossil fuel” list, it would be included in the final boycott list. BlackRock is the only company on the list that has more than 10 such funds.
“We do not believe this was a fact-based decision,” said Mark McCombe, head of BlackRock in the US. “We see this as the politicisation of pension funds.”
BNY Mellon said “we believe [our] funds were erroneously included.” It added that seven Dreyfus branded funds on the list are government money market funds and six more “regularly invest in the energy sector.”
Credit Suisse said “we are looking forward to engaging with the Texas Comptroller to resolve this matter. . . Credit Suisse is not boycotting the energy sector.” UBS said, “we firmly disagree with the Controller’s decision”.
Even one of the targeted companies that convinced Texas not to include them in the final 10 said they did not understand why their argument succeeded while others’ did not.
The Texas comptroller denied that the process was politicised or arbitrary.
“I wanted to make sure that the process that we follow in coming up with our list is one that is open, is transparent, and it is explainable to everybody,” Hegar told the Financial Times.
He said BlackRock had not been singled out. His office has given companies and fund sponsors 90 days to offer new information.
“It is demonstrably false to claim the law or our listing decisions are not fact-based,” he said. “The current global energy crisis is evidence that the free market is pricing in the dangers of artificially hindering American oil and gas production.”
The struggle over the role of ESG ratings and how they are calculated is intensifying. On Tuesday, Florida’s Republican governor Ron DeSantis led a state resolution to stop the state’s pension funds from considering ESG factors.
On Thursday, Republican state treasurers complained to Morningstar, which recently acquired Sustainalytics, that the company’s ESG ratings were fostering anti-Semitism because they allegedly support the boycott, divestment, sanctions (BDS) movement against Israel.
“Morningstar is foisting an anti-Semitic BDS movement on the many companies who are beholden to the ESG movement,” said Derek Kreifels, head of the State Financial Officers Foundation, a conservative non-profit that represents Republican state treasurers that sent the letter to Morningstar.
Illinois pension funds and some Jewish organizations made similar complaints earlier this year, leading Morningstar to apologise in June, saying its initial review was overly dismissive of the serious bias concerns.
A spokeswoman for Morningstar said the company “does not support the anti-Israel BDS campaign.”