13 Mar PUBLIC PENSION CORNER, #35: Larry Fink Speaks
NEWS:
I. South Korea Proposes Climate Reporting Standards
South Korea is the latest country to propose mandatory emissions reporting standards, hoping to impose the requirements on listed companies starting in 2028:
Korea’s Financial Services Commission announced the release of its draft roadmap for the implementation of mandatory sustainability disclosures, with a proposed start date for climate-related reporting for large companies of 2028, based on 2027 data, and expanding to smaller firms over time.
The draft roadmap was released alongside Korea’s Accounting Standards Boards’ finalized Sustainability Reporting Standards, which broadly align with those of the IFRS Foundation’s International Sustainability Standards Board (ISSB).
Under the new proposed roadmap, companies listed on Korea’s benchmark KOSPI Index with assets greater than KRW 30 trillion (USD$20.4 billion) will be required to begin sustainability reporting in line with the new standards in 2028, based on 2027 data. The roadmap envisions potentially expanding reporting requirements to KOSPI-listed companies with more than KRW 10 trillion in assets (USD$6.8 billion) one year later, with possible further expansion to smaller firms depending on readiness and international developments.
II. New Lawsuit Flips American Airlines Case on Its Head
A lawsuit has been filed against Cushman & Wakefield for not making ESG investments available in its retirement plan. This is a mirror of the suit in which American Airlines was sued and found guilty of violating its fiduciary duty of loyalty for allowing ESG factors to influence its retirement plan’s investment decision:
A former employee at commercial real estate services company Cushman & Wakefield filed a class action lawsuit Tuesday alleging that the firm failed to properly monitor and protect its employee 401(k) plan from “material climate-related financial risks,” according to a Wednesday press release from environmental legal nonprofit ClientEarth.
The complaint alleges that Cushman & Wakefield broke the Employee Retirement Income Security Act of 1974 by continuing to include a Westwood Quality SmallCap fund in its plan that is “openly indifferent to climate risk.” The fund’s managers do not model or manage climate risk in the fund’s portfolio, according to the complaint.
COMMENTARY
By Stephen R. Soukup, President and Publisher, The Political Forum
“Larry Fink Speaks”
The other day, Larry Fink, the CEO of BlackRock, the largest asset manager in the world, appeared on Fox News for a conversation with the network’s Bret Baier. The discussion was interesting, to say the least, and more than a little depressing. I’d like to say that the whole thing was a disaster for Fink – mostly because it was – but it doesn’t really matter, at least not in the near term. In a short, two-minute clip, Fink said sooooooo many things that should give anyone even remotely connected to the capital markets serious pause, yet come next quarter, BlackRock will announce a new all-time record for assets under management.
To start, as OJ Oleka, the CEO of the State Financial Officers Foundation (a sponsor of this newsletter) noted, Fink openly refers to the ESG/politicization of capital markets as a “pendulum.” What this means, Oleka continued, is that Fink sees the current move away from overtly political considerations in investment decisions as a “temporary phenomenon.” Fink fully expects the pendulum to swing back again at some point, at which he will be ready to move with it.
Another anti-ESG observer found it interesting that Fink appears to concede that his firm’s previous ESG leadership was not fiduciary. Fink says that he and BlackRock are more pragmatic today than they were five years ago, when the pendulum had swung “too far.” He says the reason they are more pragmatic today is that “I gotta be a fiduciary to everybody who gives us money.” That last bit is inarguably true, of course, but it was also true five years ago. So why were they leaders in the ESG movement? Why can he not make “sustainability” his firm’s primary investment objective today, when it was just five short years ago? In other words, if it’s not fiduciary now, it wasn’t fiduciary then.
To me, the most telling moment in the conversation comes at about the 1:14 mark in the video linked above. Fink says, “if one of our investors wants to invest 100% in hydrocarbons in Texas, I’m investing 100% of the money in Texas. But if another state fund wants us to invest in all green energy, we’re gonna do that. It’s their money.” Not to put too fine a point on it, but that’s…nuts.
Ironically, Fink says all of this immediately after saying that he is “a fiduciary to everybody who gives us money.” To paraphrase Inigo Montoya, Fink “keeps using that word – ‘fiduciary’ – but I do not think it means what he thinks it means.”
Put bluntly, a true fiduciary’s duty of care generally overrides simple client instruction-following. In this case, an asset manager isn’t just an order-taker. It has an independent legal and ethical obligation to act in the client’s best financial interest, which sometimes means pushing back against the client’s own stated wishes.
The “Prudent Investor Standard” requires a fiduciary to act as a reasonably prudent, knowledgeable investor would act, not merely as a compliant executor of instructions. This is basic stuff. If nothing else, concentrating everything in a single investment would almost certainly violate the diversification requirement that the underlying federal ERISA framework imposes on private pension investments and similar frameworks for public pension plans.
Likewise, Fink’s declaration likely runs afoul of basic suitability standards and, in terms of public pensions, of most state pension laws. All of this – for public and private investors –again falls under the asset managers’ fiduciary duty of care. Acting on a client’s whim would violate that duty.
Moreover, while it is the case that public pension plans are institutional and thus “sophisticated” investors, meaning that they’re entitled to more procedural leeway in making their own investment decisions than retail investors, they still have substantive suitability requirements, including liability structure, liquidity needs, return targets, and risk tolerance. These requirements are generally not negotiable. They are incorporated into a pension’s investment policy statement, which is not arbitrary but set by its trustees in accordance with state laws. Those laws – and the associated requirements – apply as well to contracted managers.
In other words, Larry Fink is either lying, trying to make a good impression on TV, or he has no idea what his and his firm’s fiduciary duties actually are. Either way, that’s as large and bright red a flag as likely exists, especially given that he’s just noted that he and BlackRock are “responsible for managing money for…everybody.”
I am generally an anomaly among the original anti-ESG activists in that I believe that ESG is “mostly dead” (to continue the Princess Bride analogies), at least in principle and at least in the United States. In this brief two-minute clip, however, Larry Fink – the 14 trillion dollar man – says four things that suggest that it doesn’t matter if ESG is dead. First, he admitted that he follows the pendulum on market politicization. Second, he as much as admitted that he is willing to violate his fiduciary duties to make a buck when the pendulum-swing allows him to. Third, he demonstrated that he really doesn’t know what those fiduciary duties are, in the first place. And fourth, he reminds us that he manages money for everybody.
The bottom line here – and a point I’ve been trying to make for the last year or more – is that ESG, as bad as it was, was only a symptom of the real issue, which is the concentration of capital in the hands of so few people. Larry Fink manages money for everybody. Vanguard, the second-largest asset manager in the world, manages more than half of all passive assets in the country, and passive assets now account for greater AUM than active assets. These two firms alone can do whatever they want, whenever they want. Add in State Street and the rest, and markets can be driven in specific directions by just a few firms. Given that the CEO of the biggest of those firms doesn’t appear to know and doesn’t appear to care what his fiduciary duties are, that’s a serious problem.
