Originally published as Larry Fink: Here’s Your Answer to the Despicable Letter from the GOP Attorneys General on Medium. The article is republished here with Nell Minow’s permission. James McRitchie, CorpGov.net’s publisher, added the photo above and probably made some unintentional formatting errors.
I’m sure Blackrock CEO Larry Fink’s response to the obnoxious, accusatory, misleading, letter he received from 19 Republican state attorneys general will be measured, diplomatic, and thoroughly lawyered over. He will hope to mollify them to continue to be able to do business with the government pension funds. That is only right for someone who is in business, with employees, clients, and his own shareholders to consider.
I operate under no such restrictions, and therefore, like Keegan-Michael Key playing the part of Luther, President Obama’s anger translator, I have drafted the letter I wish Mr. Fink could send.
Draft Fink Letter
To the Attorneys General:
The letter bearing your signatures but apparently drafted by the corporate donors to the Republican State Attorneys General Fund is such an appalling mixture of political theater and disinformation that I question whether the signers actually read it. I will respond to some of its allegations but I will begin with one key point: it takes a lot of chutzpah for a bunch of elected officials to claim — without any substantiation — that the decisions made by financial professionals are based on politics rather than financial returns when it is you who are urging us to bend our criteria based on your political pandering. We operate under extensive regulatory requirements, including fiduciary obligation, the duties of care and loyalty you refer to, the strictest standard of our legal system. We are also governed by the unforgiving, stringent pressures of competition in the market.
So let me be clear about the answer to all of your charges: Every single decision made by us at BlackRock, from investment criteria to economic forecasts to incentive compensation to the purchase of office supplies is exclusively based on our best assessment of risk and return. That includes doing whatever it takes to create sustainable growth and continue to attract and retain clients.
That is how markets work, and it is my understanding that our economic system and the government that supports it and is sustained by it is based on the idea that, absent externalities and collective choice problems, the best way to maintain robust growth is to allow the market to remain as unfettered as possible from political interference.
That does not mean that all financial firms will agree on investments. Indeed, by definition, any stock transaction represents two different views of the future value of the security being purchased and sold. It may also represent two different priorities; a growth fund may be selling a stock that is an attractive purchase for a dividend fund. This is why we make a wide variety of investment opportunities available, to provide products tailored to the needs and priorities of every investor.
But in all of them, our decisions, whether buying, selling, holding, voting proxies, or engagement initiatives, are based entirely on the underlying indicators of future value. To do otherwise at your direction would be to subsidize un-economic enterprises. That is politics, not finance. It is certainly not capitalism, and it is contrary to the interests of the state employees who entrust you with their retirement income security.
It is also contrary to market economics because it prevents private enterprises from making the decisions they must to stay in business. Your letter implies the kind of political decision-making that, a hundred years ago, would have directed us to keep investing in buggy whips because they are an important part of the state economy, instead of investing in the automobile technology of the future. As each of you is included among the state pension plan beneficiaries, I suggest you consider the consequences of this re-direction of investment funds to riskier, lower-performing companies.
The assumptions of your letter are contrary to our data and forecasts. The “conflicts” you allege are only inconsistent if you assume that fossil fuel is a sustainable long-term growth industry. With all respect, I believe that the assessments of financial professionals who are experts in securities analysis and economics are a more reliable indicator than those of politicians, especially those whose campaign fund-raising and appeal to voters may depend on support for that industry. While it is true that fossil fuel companies are experiencing temporary windfall profits unconnected to their strategy, we remain convinced that the best way to protect investors is to reflect our concerns about their prospects over the long term. That can include engagement, proxy votes, or reducing our positions.
Your letter says, “BlackRock has already committed to accelerate net zero emissions across all of its assets, regardless of client wishes.” This fundamentally misunderstands the basic principle of managed funds and index funds, which now take up the majority of the market because clients, including individuals and intermediaries like pension managers, recognize, since you like sports examples, that a non-professional making investment decisions is like a non-professional playing one-on-one with Steph Curry — with your entire bank account on the line. You claim without any substantiation that asking corporate executives to align their incentive compensation, actual results, and political contributions with their public statements are not connected to financial returns. We have concluded the contrary and would be glad to hear your calculus to support that statement. The same applies to your claims about current and future legislative and regulatory standards. Your use of the term “couched in language” is revealing because it shows that you have no substantive counter-argument to make.
As you know, there are very restrictive state and federal rules governing coordination by investors, and we are careful to abide by them. Our lawyers are very good about keeping us within those rules and the antitrust rules as well.
You also fundamentally misstate the role of investors when you accuse us of trying to be a player, rather than a spectator. Investors are not spectators. Like our Constitutional system of checks and balances, the capitalistic system addresses the inherent problem of agency costs by providing checks and balances as well. Investors, especially fiduciary investors, play a key role. We stay well within that role, pertaining to corporate governance issues like proxy votes (CEO compensation, election of directors). Investors do not have the right to tell corporate executives and board members what color the widgets should be painted but they do have the right and the obligation, to make buy/sell/hold decisions and exercise ownership rights based on long-term, sustainable growth. This is particularly important for index funds, which do not have the option of buying and selling to make effective market responses. Share ownership rights are thus a vital alternative to sitting by and watching companies sink off the market, as we have seen so often in the past when the country’s largest and most prosperous companies failed to adjust to changing market conditions. Making investment decisions is not “penalizing” portfolio companies. It is protecting the interests of investors.
It is not BlackRock that is setting standards for carbon emissions; it is global governments. And when portfolio companies fail to respond appropriately, it would be a dereliction of our duty as fiduciaries and our commitment to our clients to be “spectators.”
Your letter suggests that you may disagree with some of our investment indicators. And yet, you fail to provide a single example of an investment decision that does not meet financial criteria. I am not sure under what legal authority you are presenting us with these questions or what your intention is, but if your letter is pursuant to some sort of formal investigation or potential charge, you need to do better than these pre-packaged, unsupported accusations. To the extent that your office plays a role in advising the fiduciaries who use our services to help manage the state’s public pension plans, you should direct your attention to the scrupulous attention and extensive expertise of the state officials and employees who make those decisions.
Climate change is real. So are legislative and regulatory changes including the recent IRA legislation creating a wide range of new investment opportunities and business incentives and the potential new California legislation on fossil fuel-powered vehicles. We would be negligent to the point of malpractice if we failed to respond to these realities as we assess investment decisions. We would lose our customers to our competition, deservedly so. And companies are negligent to the point of malpractice if they ignore these realities and shovel their spending toward political contributions to encourage market-distorting initiatives like your letter instead of responding to market forces and making more innovative products in more innovative ways.
If we have learned anything from the market upheavals of the last 40 years, from the dot.com implosion to the Enron-era accounting failures to the financial meltdown caused by wildly inaccurate ratings of bundled sub-prime derivatives, it is that GAAP is inadequate to give us the information we need to assess risk and return, particularly over the long term. ESG is still in its earliest stages, but it is already a vital element that enhances our understanding of value as we make our investment decisions.
Another reality is the dissolving borders of the global markets. The restrictions your letter suggests will put American investors, financial firms, and corporations at a significant disadvantage, weakening our markets so that we risk losing our position as the world’s dominant economy. That would be a drastic failure of our obligation to our clients.
I trust that this helps to clarify our position, and I invite you or your representatives to visit us at any time for a presentation of our extensive, data-based resources.