UBS downgrades BlackRock as it faces increased scrutiny over ESG move

(Alliance News) - BlackRock Inc, the world's largest asset manager, will report quarterly figures on Thursday, as the firm comes under increased pressure to walk a tightrope as it looks to better align its portfolio to be more environmentally friendly.

As a result, UBS has downgraded BlackRock on Monday to 'neutral' from 'buy', and lowered its price target to USD585 from USD700. It is trading at USD530.00 in New York on Tuesday, down 2.9% on the day and down a mammoth 42% in 2022.

"We are downgrading BlackRock to 'neutral' based on environmental pressure to earnings and risk from the firm's ESG positioning," UBS explained.

"BlackRock's early and energetic adoption of ESG principles in its fund management and shareholder proxy activities have positioned the firm as an ESG leader in our view. However, as performance deteriorates and political risk from ESG has increased, we believe the potential for lost fund mandates and regulatory scrutiny has recently increased."

UBS pointed to the New York-based investment manager losing an USD800 million Louisiana pension fund mandate due to its inability to appease the US state that its ESG push would not leave Louisiana's large oil and gas industry behind.

In a story reported by S&P Global Market Intelligence, Louisiana joined Texas and West Virginia in booting BlackRock from its public investment funds, saying the asset manager's "blatantly anti-fossil fuel policies would destroy Louisiana's economy".

S&P Global noted that fossil fuel investments make up only 5.6% of BlackRock's portfolio, as of early October, but this has nearly doubled from 2.9% in early 2021.

UBS also noted that the firm is facing similar heat from a coalition of 19 US states - led by Republican Arizona Attorney General Mark Brnovich - suggesting a possible breach of fiduciary duty by BlackRock's ESG policies.

In an interview for Fox Business in late September, Brnovich accused the money manager of putting its political agenda ahead of clients' best interests by pushing "comprehensive efforts to retire fossil fuels" and possibly violating "multiple state laws" through its "actions on a variety of governance objectives."

In response, BlackRock said: "Given our commitment to those saving for retirement, we are disturbed by the emerging trend of political initiatives that sacrifice pension plans' access to high-quality investments - and thereby jeopardize pensioners' financial returns."

New York City Comptroller Brad Lander, however, wrote to BlackRock to express dissatisfaction with insufficient ESG action.

UBS added: "The combination of potentially unclear or inconsistent ESG criteria, adverse effects to specific states or regions, and potential headwinds to fund returns has begun to generate ESG scepticism among some politically influenced public pensions, which could result in lost mandates and slower AuM growth for fund sponsors such as BlackRock who emphasize ESG."

The Swiss bank is also uneasy with BlackRock's ability to manoeuvre through a difficult market backdrop. UBS pointed to "notably" weak bond markets as a real headwind, with 61% of active AuM for BlackRock in fixed income.

"BlackRock's concentration in fixed income and underperformance in higher fee active strategies dampens the outlook for organic growth," UBS added.

In the second quarter, BlackRock reported a drop in assets under management and lower profit, noting a turbulent market backdrop. Assets under management stood at USD8.487 trillion at the end of June, down 12% from USD9.496 trillion year-on-year.

Total net flows for the quarter amounted to USD89.57 billion, up from USD80.96 billion year-on-year.

By Paul McGowan; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.