19 Jul BlackRock and Aramco: Nice Work If You Can Get It
One of my duties as a new senior fellow at Consumers Research is to compile a weekly ESG newsletter for public pension fund managers, the most significant portion of which is my related commentary.
The following is the commentary section for this week’s newsletter – which I thought many of you would find useful as well.
Steve, Senior Fellow Consumers Research
Larry Fink, the CEO of the largest asset management firm in the world, has spent much of the last few years trying to explain to his theoretical allies in the environmental movement that ESG is very different from traditional SRI (Socially Responsible Investment). Whereas a socially responsible investment strategy might deem fossil fuel companies “sin stocks” and consequently avoid or divest from them, ESG strategies are different, preferring to eschew divestment wherever possible. ESG focuses on engagement and, through engagement, the “correction” of bad behaviors by corporate actors. The catch, of course, is that in order to engage and affect behavior one must have leverage – which, in the investment business, means that one must hold an equity stake in the corporation whose behavior he wishes to alter.
The classic example of how this engagement strategy works is the case of Exxon-Mobil. On May 26, 2021, Engine No. 1, a small, environmentally friendly hedge fund, pulled off one of the greatest stunts in the history of public capital markets, winning three board seats at the Exxon annual meeting, replacing existing directors with hand-picked “sustainability” advocates. While holding only $50 million in Exxon stock – roughly .02% of the outstanding shares – Engine No. 1 nevertheless triumphed over Exxon’s management specifically because its principals harnessed the power of ESG engagement. Engine No 1’s plans succeeded only because it convinced the massive passive asset managers – BlackRock, State Street, and Vanguard – that Exxon’s executives would not change their behavior unless they were forced to do so. And with their massive stakes backing Engine No. 1’s candidates, Exxon’s management never stood a chance.
Note the irony here: If the Big Three had divested from oil stocks, as environmentalists would have wished, they would have had no leverage at Exxon-Mobile, and the oil giant would easily have repelled the hedge fund’s attempted palace coup and its behavior would, as a result, remain UNchanged.
In short, then, engagement works.
Or at least it does with American companies, regulated by American federal agencies.
There is a large and glaring issue with Larry Fink’s insistence that he and his company hold fossil fuel companies specifically because they can, thereby, engage with those companies and correct their behavior. And this issue, in turn, exposes the folly of the ESG endeavor more broadly. You see, as it turns out, BlackRock also holds massive stakes in companies – fossil fuel companies, in particular – that are largely “un-engageable.” This has always been the case, and it’s only getting worse.
Consider, for example, PetroChina. As you know, PetroChina is the listed arm of the Chinese National Petroleum Company (CNP). A decade or so ago, PetroChina was not only the biggest fossil fuel company on earth (by market cap.), but it was also the largest company in the world. And for much of those last ten years, the largest single shareholder of PetroChina has been Larry Fink’s BlackRock. At present (or at least as of its latest disclosure), BlackRock owns more than 7% of the company, the vast majority of which it has purchased on the Hong Kong Exchange.
How, one might wonder, does BlackRock “engage” with PetroChina? How does Fink hold its feet to the proverbial fire and change its behavior?
The short answer is that they don’t – on either count. Decisions about PetroChina’s plans, strategies, and behaviors are not made at open, transparent shareholder or board meetings. Rather, those decisions are largely made at CNP – the ‘N’ in which, recall, stands for “National.” Or to put it more bluntly, decisions about the behavior in which PetroChina engages are made by executives and directors hand-picked by and, therefore, loyal to the Chinese Communist Party. Fink couldn’t engage the managers of PetroChina if he wanted to, and given his long-term fondness for the company, one doubts that he wants to.
What this means in practice is that ESG places American companies at a competitive disadvantage to Chinese and other foreign companies. Not only are American companies subjected to more thorough, more transparent, and more honest accounting and governance standards, but they also have to deal with and “engage” with politically activist shareholders whose engagement positions may not reflect the best interests of the company. And in the case of BlackRock and the other index and mutual fund companies, their engagement positions may also not reflect the best interests of the underlying owners of their funds – the individuals whose wealth the companies utilize as leverage and whose shareholder rights they usurp. For American companies, ESG compounds compliance costs, increases the likelihood of behavior directed at non-material ends, and reinforces the old adage that too many cooks spoil the broth.
But, as we said, it gets worse.
This past Monday, Fink and BlackRock announced that they have named the CEO of Aramco, Amin Nasser, to their board of directors. BlackRock claims that the move does not contradict its ESG commitments, but in many ways, that’s beside the point. As of today, BlackRock’s behavior is officially aligned with (and at least nominally under the direction of) the Saudi national petroleum company – the largest petroleum on earth and the largest competitor to petroleum companies whose own behavior BlackRock wishes to change or – as in the case of Exxon – has already changed. Not only does BlackRock endeavor to give Aramco a competitive advantage through ESG engagement, but it is now officially partnered with the petroleum giant in actively undermining its American competition.
And still, it gets worse.
Even before Nasser was named to the BlackRock board, Aramco was an unexpected but more than willing beneficiary of the ESG-regime’s assault on American competitiveness, as reported last week by Bloomberg:
Saudi Aramco, the world’s largest oil company, has become an unlikely beneficiary of funds earmarked for sustainable investments thanks to a complex web of financial structures it used to raise money from its pipelines.
Aramco doesn’t appear to have set out to tap cash originally intended for environmental, social and good governance goals when it started a process to raise $28 billion in 2021. But the fact that ESG investors ended up playing a role in the capital raise of a fossil-fuel behemoth raises questions about a playbook that’s increasingly being used in the Gulf.
The unlikely tie-up between Aramco and ESG began with the creation of two subsidiaries — the Aramco Oil Pipelines Company and the Aramco Gas Pipelines Company. Aramco sold 49% of the shares in each unit to consortiums led by EIG Global Energy Partners LLC and BlackRock Inc., respectively. These investors used bridge loans from banks to fund those transactions.
In order to generate cash to repay the bank loans, the EIG and BlackRock consortiums created two special purpose vehicles: EIG Pearl Holdings and GreenSaif Pipelines Bidco, both registered at the same Luxembourg address. These SPVs then sold bonds, which, since they had no direct links to the fossil-fuel industry, ended up getting an above-average score in a widely-used JPMorgan Chase & Co. sustainability screening based on third-party ESG scores.
From there, the bonds made their way into JPMorgan’s ESG indexes, which are cumulatively tracked by about $40 billion of assets under management. Investors in the SPV bonds include funds managed by UBS Group AG, Legal & General Investment Management and the investment arm of HSBC Holdings Plc.
Unsurprisingly, “Spokespeople for EIG, BlackRock, JPMorgan, LGIM and UBS declined to comment.”
Nice work if you can get it. Unfortunately, because of BlackRock’s efforts and ESG’s inherent stifling of capital accumulation, American companies can’t get it.
And that’s the real issue here. Commentators and observers have suggested that BlackRock’s new partnership with Amin Nasser makes it appear that Larry Fink is “swinging like a pendulum” on ESG and sustainability. Again, that misses the point. ESG was ALWAYS a marketing gimmick more than anything else, a way to appear earnest and engaged with social issues while continuing to make a mint off of investors’ inherent decency and unfortunate naivete. The BlackRock-Aramco relationship is merely another example of how the “stakeholder capitalism” shtick is intended for domestic audiences only. Whether its Nike’s use of forced labor in Jinjiang Province, Disney’s fawning over and capitulation to the CCP, Apple’s deep and abiding partnership with the CCP, or BlackRock’s ongoing relationships with PetroChina and now Aramco, a pattern is clear among the most vocal stakeholder advocates: social justice at home; anything goes abroad.
The Aramco/Nasser business does NOT tell us anything new about Fink, BlackRock, or ESG. It merely reinforces the dubious nature of the entire effort and confirms what we skeptics have long insisted. ESG is not a serious investment strategy. It is not the means by which long-term risks are assessed. It is the superficial placation of conscience, at the expense of American corporations and investors, and nothing more.