Tennessee Attorney General Jonathan Skrmetti is suing BlackRock, claiming the world’s biggest asset manager misled investors about the level of influence environmental, social, and governance factors have on some of its investments.
The attorney general’s office filed the complaint Thursday morning. The AG is seeking injunctive relief, civil penalties, disgorgement, restitution for consumers, and recoupment of the state’s costs under the Tennessee Consumer Protection Act, a novel use of those laws, attorneys said.
“We allege that BlackRock’s inconsistent statements about its investment strategies deprived consumers of the ability to make an informed choice. Some public statements show a company that focuses exclusively on return on investment, others show a company that gives special consideration to environmental factors. Ultimately, I want to make certain that corporations, no matter their size, treat Tennessee consumers fairly and honestly,” Skrmetti said in a statement about the lawsuit.
BlackRock, which said it has invested approximately $40 billion on behalf of more than 600,000 Tennessee workers, denies the claims.
“We reject the Attorney General’s claims and will vigorously contest any accusations that BlackRock violated Tennessee’s consumer protection laws. Contrary to the Attorney General’s claims, BlackRock fully and accurately discloses our investment practices and our approach to proxy voting,” BlackRock said in a statement. “We are proud of our contribution and committed to the future in Tennessee.”
The state of Tennessee claims that a shift in public opinion and politics on ESG has “left BlackRock in a bind.” To continue its success and growth, the asset manager must cater to a broad base of customers who don’t want ESG factors to play a role in their investment portfolios, according to the state. It argues that BlackRock has illegally used ESG in its decision making without properly communicating that to Tennesseans. “Coming clean to consumers about the extent to which ESG commitments permeate its investment and engagement strategies would thus risk BlackRock’s business success,” the complaint says.
BlackRock Chairman and CEO Larry Fink expressed regret in the summer for using the term “ESG” because of how politicized it has become. However, BlackRock and Fink continued to publicly defend the use of sustainability and other practices when evaluating businesses, and have more aggressively combated misinformation about the firm. Earlier this month, Fink addressed what he said were lies told about BlackRock during a Republican presidential debate.
The backlash to the use of ESG factors when investing has faced its own backlash and the “anti-woke” campaigns are failing to have their desired impact on proxy voting. (Institutional investors expect their ESG-related investments to become more prevalent in portfolios.) Nonetheless, the lawsuit against BlackRock is the latest example of the anti-ESG efforts directed toward the asset manager — this time in a legal and potentially more threatening way.
Drew Ketterer, partner of law firm Ketterer and Ketterer and the former attorney general of Maine, said bringing a case like the one against BlackRock under a state’s consumer protection laws was novel. Financial services companies are highly regulated and their disclosures about what they are doing with customer money are usually meticulously considered by both firms and regulators. (Ketterer is not representing BlackRock.)
“I don’t think this is a slam dunk for the government,” said Ketterer, who is not representing BlackRock. It will be a challenge to show that BlackRock intentionally meant to deceive investors in Tennessee when it made its disclosures, he added. “You really have to have facts to support that.”
Ketterer, who years ago successfully sued multiple big tobacco companies when he was attorney general, also thought it was unusual that the consumer protection case against BlackRock didn’t list more than one defendant.
Lance Dial, a partner at K&L Gates, said the case is a first of its kind but the fact that BlackRock was the only defendant didn’t raise his eyebrows. If other massive investment firms are operating similarly in Tennessee, the largest asset manager in the world is a good industry proxy and the attorney general might have been smart not to divide its resources dedicated to the case across multiple defendants.
Dial is not representing BlackRock and, as of Monday afternoon, had not spent enough time with the complaint to determine what level of merit it has. However, it is clear that significant energy and resources were dedicated to it and the attorney general is seriously pursuing the asset manager.
“It’s a large, well-written complaint that makes the anti ESG points. I don’t know that it’s necessarily built on a full solid understanding of the investment process, but in many ways, that’s what the trial process is for. We think you’re doing something wrong. We aren’t. Let’s go to court,” Dial said. “It’ll be interesting to watch this case develop. I’m certain I’ll be going through a lot of popcorn as I watch the proceedings unfold.”
