Time to block BlackRock

On 8 April 2020 the European Commission announced it had selected BlackRock as paid advisor on ‘sustainable finance’. The US$7 trillion-strong asset management fund – a major investor in fossil fuels and deforestation – will provide crucial analysis on how to create a banking sector that supports the transition to a green economy, not least to mitigate climate change. This advice could set the agenda on ‘sustainable finance’. Yet not only does BlackRock have major investment interests that run counter to these goals; it is a member of industry associations that have actively lobbied against them.

The decision sparked an immediate backlash. Soon after the decision was made public, dozens of members of the European Parliament (MEPs) collectively asked critical questions of the Commission on the issue, and some weeks later some of them chose to file a formal complaint with the European Ombudsman. Later in April, 92 civil society organisations sent an open letter to the Commission, arguing the contract must be terminated. This was followed by another complaint to the Ombudsman, filed by the Change Finance coalition.

There is a legal basis to do so. If a ‘tenderer’ can be shown to have a conflict of interest that could negatively impact the product or service provided, they should be excluded. The Commission claims it considered the issue carefully and found no problem. But documents obtained by Corporate Europe Observatory appear to belie this claim.

The next big step on climate and finance

BlackRock won the tender to produce a report for the Commission to investigate and analyse ways of integrating environmental, social, and governance objectives (so-called ‘ESG factors’) into banking regulation. Despite the dry and technical label, this step on the road to a financial system that facilitates a transition to a sustainable economy is potentially a very important one. It touches directly on banks’ investment strategies, and it could lead to measures that would dissuade investments in fossil fuels.

Since the Commission launched its ‘Action plan on sustainable finance’ in 2018, the main achievement has been the ‘taxonomy’, a mandatory approach to the ‘labelling’ of investments. It is set up to stop ‘greenwashing’, ie to stop financial institutions from presenting certain investments as ‘sustainable’ that are really not. For instance, the regulation adopted a soft approach on gas (for more on the lobby battle on taxonomy, see ‘Tainted love’ from CEO). The remaining elements of the strategy are a mixed bag with many small reforms on transparency of financial institutions and rules on how advice is provided to investors. They are steps that could facilitate sustainable investments, but their effect is indirect.

The proposal to include ESG factors in banking regulation is of a different calibre: if an ambitious version is adopted and implemented, it could prevent banks from investing in projects that deepen the climate emergency. The thinking behind the idea is that so far, banks have to ensure they have a financial buffer at hand, the size of which depends on how risky an investment is. But currently, the social risks and environmental risks in general, and climate related risks in particular, are not sufficiently included in the equation when it comes to private banks. It is significant that the Commission has raised the question of how that can be addressed. But it bodes ill that it has let BlackRock kick off the debate.

Not just any report

While the Commission has opened a public consultation on the same dossier as BlackRock will now be investigating on the Commission’s behalf, the report from BlackRock could easily set the agenda and end up forming the backbone of the proposal the Commission will eventually produce. BlackRock’s will be the most substantial contribution in the first phase, and it will include investigations and surveys beyond the reach of any other stakeholder.

Given the complexity of the matter, it is understandable that the Commission sought expert advice. But in doing so, it is required to take some precautions. The Commission is supposed to look for ‘conflicts of interest’ – conflicts between say, the economic interests of a tenderer, and the need for useful analysis and information. Available evidence suggests that it has not done so.

The risks of failing to do so are that vested interests capture the debate by setting the agenda at the very outset of policy development. It is not impossible to turn things around further on, but it can prove difficult, and urgent initiatives can be seriously delayed. In this case, it is difficult to understand the Commission’s lack of concern.

BlackRock – the fossil fund

There is no way around the fact that BlackRock has a major stake in fossil fuels. For a start, it has investments in the biggest coal companies in the world – a fact that has not changed despite a small downscaling of its coal investments earlier this year. Additionally, it owns about US$2.5 billion worth of shares in the companies responsible for deforestation of the Amazon rainforest, and it has US$87.3 billion in oil and gas companies. Its holdings amount to emissions at 9.5 gigatons carbon dioxide.

It could be argued that Blackrock is not a bank, and hence that being an advisor to climate related banking regulation does not represent a conflict of interest. But ESG criteria have been suggested in the investment fund area as well, and the distance between a new type of risk assessment for banks to a new type for investment funds, is not so big. Moreover, BlackRock is a major investor in most big European banks, and as such has a direct economic interest in how this all plays out. To mention just a few:

- It is the second largest shareholder in Deutsche Bank, a bank with US$69 billion in fossil fuels.

- It is the second largest shareholder in BNP Paribas with US$74 billion in fossil fuels.

- It is the second largest shareholder in ING with US$37 billion in fossil fuels.

Should this process end with mandatory rules that would dissuade banks from investing in coal, gas, or oil infrastructure, it would be hugely costly for the banks in question, and hence for BlackRock.

The finance lobby sounds the alarm

The prospect of facing regulatory action that would directly affect their business strategies has not been well received by global banks. In fact, the finance lobby has waged battle against binding standards on sustainable finance for years. BlackRock itself is quite active – with a lobbying budget at about €1,5 million. Though it lists ‘sustainable finance’ as one area of interest in its lobbying efforts, so far BlackRock has not been vocal about its positions on the EU agenda for sustainable finance in public. In Brussels the lobby groups that speak out most clearly against ESG factors are the ones that include the biggest global banks and investment funds – including BlackRock – as members.

The European Fund and Asset Management Association (EFAMA) stated in a contribution to a recent EU consultation that it sees no “need or appropriateness for any more specific or prescriptive rules for the integration of sustainability risks”. 

The Association for Financial Markets in Europe (AFME) is just as lukewarm in its initial response. In a dispatch on the status of “European regulatory developments on sustainable finance”, AFME claims to have been supportive of a wide range of measures proposed or adopted, including disclosure of information, standards on advisory work, benchmarks and more. Yet research group InfluenceMap identified AFME as one of the main critics, if not opponents, of the taxonomy regulation. In any case, for AFME, the suggestion that ESG risks should be a mandatory part of risk assessments is a step too far. It argues that “all measures to incorporate ESG risks in the prudential framework should be aligned with risk and, at this stage, there is insufficient data to justify this”.

Evasive replies

The positions of BlackRock’s own lobbying groups should have called into question whether the firm was the right choice for the Commission. With a financial industry lining up to push back, and the risk of BlackRock exploiting this opportunity to protect its own economic interests, there are plenty of pitfalls just waiting to happen. To have a company with a direct stake in the matter under investigation do what looks like the key investigation to set the agenda for the debate, is quite stark.

BlackRock’s own response to the critical voices was to claim that the BlackRock branch in question is really its consultancy arm, and so not necessarily linked to its commercial operation: “We are honoured that BlackRock Financial Markets Advisory has been selected to perform an analysis to inform the European commission’s action plan on sustainable finance, deploying our expertise and capabilities in advising public-sector clients on structural trends, including the transition to a low-carbon future,” a BlackRock spokesperson told the Guardian.

However, the official announcement clearly shows that the winning bidder was BlackRock Investment Management (UK), not the consultancy arm. As the analysis BlackRock has been contracted to conduct requires it to access commercially sensitive information from a plethora of banks, the fact that BlackRock is itself a commercial operator in the field could spark concerns among competitors. The Commission’s response to those concerns was that BlackRock had promised in its bid a “physical segregation of the project activities from BlackRock’s Investments group and that information related to the study does not flow to other parts of BlackRock’s business”. On this point, a former French mayor told Corporate Europe Observatory that had such promises been part of a tender procedure in a municipality they would not have been taken seriously, even for a moment. A contract that entails this risk of market distortion would never be allowed to fly. So why didn’t it ring alarm bells at the Commission?

A cheap offer in the short term

Even the low tender price BlackRock offered seems like it should have been a red flag, but the Commission’s response failed to check for conflicts of interest. BlackRock’s abnormally low offer was there for everyone to see when the award was announced: a mere €280,000 in a contest with as much as €550,000 on the table. Compare this to the offers from the other bidders: one bid was at €400,000, the remaining seven bids were between €500,000 and €545,000 euros, and in every single case significantly higher than the BlackRock offer.

This might indicate that BlackRock had other reasons to embark on the analysis than just winning some minor income for consultancy work. But for the Commission, the only potential problem with the low bid seems to have been a concern over delivery. They asked BlackRock for additional information “to make sure that the low price would not result in BlackRock not being able to deliver the technical quality of the service that it had offered in its tender”. In other words, the problem was handled as if it were a tender on a highway, a railway tunnel, or on waste disposal, and not a politically sensitive research project. The thought that BlackRock could have offered a low price to secure a contract which it could use as a platform to advance its own economic interests, does not seem to have been part of the Commission’s thinking at all.  

Conflicts of interest

Judging by the available documents on the Commission’s tendering procedure, it appears as if considerations on how economic interests could lead to a conflict of interest were not discussed, nor investigated in this case – and seemingly it is not part of the procedure in the Commission at all. A statement by the tenderer on things like skills, professional misconduct, corruption, money laundering, and child labour is part of standard procedure, but there is practically no mention of conflicts of interest.

This is a real oversight. In the Financial Regulation that forms part of the legal basis of the tender, article 167 (1) c posits that a contract can only be awarded if the contractor (in this case the Commission), has verified that the tenderer (in this case BlackRock) “is not subject to conflicts of interest which may negatively affect the performance of the contract”.

In its reply to the Change Finance coalition’s query about this situation, the Commission explained this clause applies to these types of examples: “a company should not evaluate a project in which it has participated or an auditor should not be in a position to audit accounts it has previously certified”. Both examples make sense. But so does this: a company should not be paid by the Commission to inform the debate on political measures that relate directly to its own investments.

No sign of sensitivity

In its reply, the Commission also claims it was “particularly sensitive to possible conflicts of interest in this case and has scrupulously applied the relevant provisions of the Financial Regulation (in particular, Article 167 (1) c of the Financial Regulation).”

Corporate Europe Observatory wanted to know what this “scrupulous application” of the Financial Regulation looked like, and how this ‘sensitivity’ played out in practice. We asked the Commission for “any assessment” of BlackRock’s conflicts of interest which had been written before the contract was awarded. Only one document matched the description: the report from the Commission’s evaluation committee which showed the considerations made before the contract was awarded to BlackRock. Contrary to the claim from the Commission, that they are “very vigilant in relation to conflicts of interest”, there is no mention of conflicts of interest anywhere in the document, except for a reference to assurances given by BlackRock. In the report it is remarked that “the offer contains a dedicated chapter in relation to the avoidance of conflicting interests. The offer is rated as very good with regard to this criterion.”

In other words, the Commission regards BlackRock’s assurance that there will not be a flow of information to its commercial arms, as fully sufficient to remove any concerns over conflicts of interest. As for the impact BlackRock’s economic interests may have on the outcome, the Commission is silent and uninterested.

For the climate, terminate the contract

The BlackRock case is a sad reminder that the Commission often regards representatives from financial corporations as mere technical experts whose insights are neutral and can be allowed to set the political agenda. If BlackRock is allowed to continue in this role, it could derail an important political initiative that has the potential to change investment patterns and help provide funding for the transition to a sustainable economy. The demand to have the Commission terminate the contract is coming from many quarters, not least from a group of MEPs who have challenged the Commission on this matter since April. In response, the Commission claims that the Financial Regulation offers no legal basis for the Commission to terminate the contract. But a copy of the draft contract is enclosed in the tender material, and chapter II.18 regarding “Termination of the contract” states that the Commission may do so if BlackRock “is in a situation that could constitute a conflict of interest or a professional conflict of interest” (Article II.18 (1) h).

This may refer to new information that supports suspicions of conflicts of interest, but given that the Commission never really looked into these in the first place, it could be argued, that pointing to the obvious economic interest BlackRock has in keeping regulation at bay should suffice.