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Europe’s Eminence Grise, BlackRock, Is Helping to Write Europe’s Sustainable Banking Rules. What Could Go Wrong?

Summary:
Despite facing accusations of rampant greenwashing, BlackRock is once again in the driving seat of public policy in Europe. But its potential conflicts of interest are at least finally attracting a little attention.    When things get serious in Europe and new financial rules, regulations or bailouts are needed, the first phone number to call is invariably that of BlackRock, the world’s largest asset manager. That is exactly what the European Commission did when it needed to create new environmental standards for Euro-Area banks: it called BlackRock’s Financial Markets Advisory (FMA) unit. Which means that at the same time that BlackRock is launching some of the world’s biggest environmental, social and governance (ESG) investing funds for its clients — many of the world’s passive

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Despite facing accusations of rampant greenwashing, BlackRock is once again in the driving seat of public policy in Europe. But its potential conflicts of interest are at least finally attracting a little attention.   

When things get serious in Europe and new financial rules, regulations or bailouts are needed, the first phone number to call is invariably that of BlackRock, the world’s largest asset manager. That is exactly what the European Commission did when it needed to create new environmental standards for Euro-Area banks: it called BlackRock’s Financial Markets Advisory (FMA) unit. Which means that at the same time that BlackRock is launching some of the world’s biggest environmental, social and governance (ESG) investing funds for its clients — many of the world’s passive investors — it is also helping to create the new ESG investing rules by which Europe’s biggest banks and energy companies, many of whose shares it manages, will have to operate.

Much like Goldman Sachs did in the noughties and to a certain extent continues to do today, BlackRock has spread its tentacles across Europe’s political landscape, by spending lavishly on lobbying efforts and snapping up well-connected retired politicians and central bank officials. They include the former Chairman of the Swiss National Bank’s governing board, Philipp Hildebrand, and former U.K. Treasury head George Osborne.

But the Commission’s latest decision to hire BlackRock has drawn disapproval from EU Ombudsman Emily O’Reilly. Green banking is an “area of financial and regulatory interest” to BlackRock, O’Reilly pointed out in a statement on Monday. And BlackRock’s paper on green banking rules “is meant to feed into policy that will regulate that company’s business interests.”

O’Reilly also recommended that the Commission strengthen its conflict of interest rules. That, as O’Reilly presumably knows, is not going to happen any time soon. In a response published on Monday, the Commission said it will “consider” proposing amendments to EU law to require companies and organisations to disclose conflicting interests when they bid for EU-funded contracts. It will also “consider” providing further guidance to assist staff dealing with public procurement. Emphasis, if you hadn’t noticed, on the word “consider”.

Katrin Ganswindt, a finance campaigner at Urgewald, had the following to say:

“It is good that the EU commission is considering providing clearer guidelines on possible conflict of interest. This should be a given. In the case of BlackRock, the world’s largest investor in fossil fuels, it is unfortunately already too late. The fact that the asset manager is also a leading shareholder in the banks for which it is advising environmental social and governance regulation, shows how we would have needed these guidelines before BlackRock was awarded the tender.”

BlackRock declined to comment on O’Reilly’s remarks. It had previously said its bid for the banking rules work was accepted because the commission found it offered the best quality for the lowest price. It also said it would ensure “physical segregation” of FMA to guarantee  information did not flow to other parts of its business, which is comforting to know.

Greenwashing the World, BlackRock-style

BlackRock has faced repeated criticism for not walking the walk on green issues. In January 2020, the company’s Chairman Larry Fink said it would put sustainability at the core of its investment process. He also averred that climate change could lead to a “fundamental reshaping of finance”. Yet months later, BlackRock refused to back resolutions calling for two big Australian oil companies, Woodside Energy and Santos, to set targets in line with the Paris agreement and to disclose their lobbying.

In January this year, it still held investments worth $85 billion in coal companies, including in companies planning to expand coal production such as Japan’s Sumitomo and Korea’s Kepco, a whole year after it promised to sell most of its shares in producers of the fossil fuel. It has also faced criticism for its investments in companies that are driving deforestation in the Amazon basin. The company has $408 million invested, via various funds, in Brazil’s top three meatpackers operating in the Amazon — JBS, Marfrig and Minerva — which rank first. fifth and tenth, respectively, on Imazon’s ranking of deforestation risk.

“BlackRock is the global leader in asset management, so its actions have significant effect on the entire sector,” says Moira Birss, director of climate and finance at Amazon Watch. “Yet it appears that the company hopes people don’t look closely at investment data and only look at the headlines, which look great.”

BlackRock is even facing allegations of greenwashing from within its own ranks. A month ago, BlackRock’s former CIO of sustainable investing, Tariq Fancy, penned a blistering op-ed in USA Today, titled “Financial world greenwashing the public with deadly distraction in sustainable investing practices”. In it Fancy denounced the financial services industry for duping investors when it comes to ESG.

“This multi-trillion dollar arena of socially conscious investing is being presented as something it’s not. In essence, Wall Street is greenwashing the economic system and, in the process, creating a deadly distraction. I should know; I was at the heart of it.”

Fancy served as chief investment officer of sustainable investing at BlackRock for almost two years, from January 2018 to September 2019. In his op-ed, Fancy claims that many mutual funds that get rebranded as “green” make no discernible change to their underlying strategies. The change in name or branding is all for the sake of virtue signaling, he says. Unfortunately, that virtue signaling appears to be more than enough to satisfy many policy makers, including the European Commission. As a result, the EU’s newfangled sustainability rules for banks are likely to have little in the way of actual substance. The biggest beneficiaries will probably be BlackRock itself and the companies whose shares it manages. 

Helping to Make Policy at the Fed and ECB

But the conflicts of interests don’t end there. As I reported in a 2018 WOLF STREET article, BlackRock’s tentacles stretch right into the beating heart of monetary policy, both in Europe and the U.S.

In 2014, the European Central Bank hired BlackRock Solutions, an advisory unit of BlackRock, to provide advice on the design and implementation of the central bank’s upcoming purchase of asset-backed securities. In other words, just before the ECB embarked on one of the biggest QE programs in world history, it sought the advice of the world’s largest asset manager – i.e. the company most invested in the assets it intended to buy.
BlackRock Solutions already had expertise in this area, having formerly advised the Federal Reserve on its first QE program. Since then, the firm has become a vital strategic partner to major central banks engaging in complex asset purchases, resolution mechanisms and strategic asset allocations. The firm is particularly adept at mapping out large numbers of different, often complex asset classes across myriad markets.
To ensure there were no conflicts of interest in its dealings with the ECB, BlackRock’s contract stipulated that there must be an effective separation between the project team working for the ECB and its staff involved in any other ABS-related activities. If that wasn’t enough to set concerned minds at ease, “all external audits related to the management of conflicts of interest would be made available to the ECB,” an institution that is hardly famed for its transparency and accountability.
In 2016, the ECB hired BlackRock Solutions again, this time to help it conduct its stress tests for that year. [In 2018] the firm was awarded an extension of that contract. Although there has been no disclosure of just how much BlackRock Solutions would be charging for its services this year, Danièle Nouy, the Chair of the Supervisory Board at the ECB, has revealed that in 2016 Frankfurt allocated €8.2 million to pay the firm’s consultants.
This is, of course, chicken feed for a company the size of BlackRock… But the advisory services BlackRock provides to the ECB, as well as the national central banks of the Netherlands, Spain, Ireland, Cyprus and Greece, have a much more enticing perk than petty cash: information.
Through the contracts awarded to BlackRock Solutions, BlackRock, the parent company has potential access to privileged information that can help it make highly profitable investment decisions. On behalf of its clients, BlackRock holds huge blocks of shares in many, if not all, of the banks that its consulting arm is helping to audit. Few, if any, market players have such intimate knowledge of the true state of European banks’ balance sheets.
This inherent conflict of interest was first highlighted by U.S. Senator Charles E. Grassley in 2009, when BlackRock was helping the Federal Reserve out with its QE program and the U.S. government with the complex rescues of Bear Stearns, AIG, and Citigroup. “They have access to information when the Federal Reserve will try to sell securities, and what price they will accept. And they have intricate financial relations with people across the globe,” Grassley said. “The potential for a conflict of interest is great and it is just very difficult to police.”

2020: Another Good Year for BlackRock

All things considered, BlackRock had a pretty good year in 2020. Its total revenue for the twelve months ending March 31, 2021 was $16.89 billion, a 13.35% increase year-over-year. Its assets under management rose to a record $9 trillion, up from $7 trillion a year earlier, as financial markets surged to new records on the back of government and central bank stimulus programs that it helped design.

There is a risk of overstating the scale of BlackRock’s influence through its management of such a vast pile of securities. After all, $9 trillion is a fantastically large amount of money, even by today’s standards. But it’s worth bearing in mind that: 1) BlackRock is a passive manager and as such has little discretion over what it owns; and 2) it doesn’t come close to owning controlling stakes in companies. But it’s the glaring conflicts of interest it that should give pause.

As markets were crashing in March 2020 the Federal Reserve hired BlackRock to “go direct” and buy up $750 billion in both primary and secondary corporate bonds and bond ETFs (Exchange Traded Funds), a product of which BlackRock is one of the largest purveyors in the world. The BlackRock-run program included trillions of dollars of helicopter money for Wall Street, which helped to stabilize the companies whose shares BlackRock owns, and hundreds of billions of dollars of helicopter money — the so-called stimulus checks — for the masses.

This was all laid out in the document “Dealing with the Next Downturn: From Unconventional Monetary Policy to Unprecedented Policy Coordination“, drawn up in August 2019 by four senior BlackRock executives — Stanley Fischer (formerly of the NY Fed), Philipp Hildebrand (former chairman of the Governing Board of the Swiss National Bank), Jean Boivin (former deputy governor of the Bank of Canada) and Elga Bartsch — for the 2019 Jackson Hole meeting of senior central bankers.

The plan was a blueprint for dealing with the next crisis, which arrived half a year later. Many of its recommendations — from the co-mingling of monetary and fiscal policy to the purchase of ETFs, to the mobilisation of “so-called helicopter money — have already been enacted. One proposal that thankfully hasn’t is the direct purchase by central banks of equities.* This would massively expand and accelerate wealth and income inequality in the US, given that 85% percent of the stock market is owned by the richest 10% of Americans. It would also have provide support for the assets BlackRock is most in the habit of buying: stocks and ETFs.*

BlackRock has always claimed that it carefully manages its potential conflicts of interest through a “Chinese Wall” that separates the company’s advisory business from its asset-management business. However, as the advocacy group BlackRock Transparency points out, an analysis of BlackRock statements, marketing materials, and executive profiles suggest that the company’s assurances may have little weight in practice.

As early as 2006, BlackRock Solutions aggressively touted its “close ties between our investment and non-investment activities” as an “important driver of our long-term success” (page 6). Marketing materials boast of the company’s “One BlackRock culture, which emphasizes partnership across functions, communications, transparency, consistent standards and teamwork.”

As BlackRock goes from strength to strength by playing an ever larger role in public policy, it’s probably safe to assume that its interests are not fully aligned with the general public’s. And given that public policy is undergoing a huge shift in most places right now, that should be a major cause for concern. _____________________

*The Swiss National Bank, the central bank of Switzerland, where Philipp Hildebrand previously worked, already has massive holdings of individual stocks, including $94 billion in publicly traded stocks in the U.S. according to its March 31, 2020 report that was filed with the Securities and Exchange Commission.

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