BlackRock's ESG Mandates Could Bring On Business Ruin

BlackRock's ESG Mandates Could Bring On Business Ruin
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The world is facing a crisis the likes of which has not been seen for generations. Businesses across the economy are grappling with extraordinary pressures brought about by stay-at-home orders and other government responses to coronavirus pandemic. 

While every sector of the economy is impacted, it is particularly true for the oil and natural gas sector. The WTI crude oil benchmark recently hit negative prices for the first time in its history. We are a long way beyond business as usual and may be facing a wave of bankruptcies and consolidations before normalcy returns to the industry.

In addition to the unprecedented nature of the COVID-19 crisis, the oil and gas industry is under increasing pressure to meet corporate social responsibility requirements of asset managers like Blackrock. 

Last month, BlackRock announced it would penalize companies that fail to meet its expanding disclosure requirements for a raft of social and political issues at shareholder meetings, irrespective of the difficulties firms are facing from the global pandemic and economic shutdowns.

Blackrock, the world’s largest asset management firm, has steadily ratcheted up pressure on companies to meet social responsibility goals, requiring them to divert resources from their core operations to address activists’ policy demands.

Continually changing the disclosure requirements that corporations must achieve may provide Blackrock’s asset managers an opportunity to charge new fees, but it increases uncertainty and costs for business leaders at a time when many are just trying to maintain their workforce and supply chains.

The U.S. Securities and Exchange Commission has recognized the extraordinary strain companies are under given the pandemic. Commissioner Allison Lee recently noted that the SEC “should proceed with great caution in considering whether to take regulatory action outside of that called for by the current dire and pressing public health crisis.”

Blackrock CEO Larry Fink acknowledged this point as well in his most recent letter to shareholders, noting that “the outbreak has impacted financial markets with a swiftness and ferocity normally seen only in a classic financial crisis.”

In fact, BlackRock has benefitted from the crisis. The firm was awarded the prize job of managing the Fed’s bond-buying program

In addition to a boost in share price, Blackrock’s contract with the Fed may provide an opportunity for it to offload junk-rated exchange-traded funds to the Fed. The agreement has been criticized by a number of activist groups, including ESG Transparency Initiative, Greenpeace USA, and Public Citizen – all of which have argued that resilience to climate shock must be part of the Fed’s response to COVID-19.

The response is indicative of the pressure BlackRock finds itself under from progressive activists. Could this be why it is also suddenly requiring higher disclosure accounting during a crisis? Putting the screws to the oil and gas sector – an industry critical to national security – comes across as profoundly tone-deaf and self-serving. 

The oil and gas sector supports roughly 10 million American jobs. That is nearly 6 percent of total U.S. employment at a time when unemployment is reaching levels not seen since the 2008 financial crisis.  

Some 4.4 million Americans filed initial unemployment claims in the week ending April 18, marking the fifth consecutive week over 3 million new claims, according to the U.S. Department of Labor. The oil industry is especially vulnerable since it faces the double whammy of drastically reduced demand for oil due to the pandemic and an oversupplied market

The U.S. rig count fell by 60 rigs for the third week in a row on April 24. There are now 526 fewer oil rigs actively drilling new wells than last year – a roughly 50 percent decrease. All those sidelined rigs mean their crews are at risk of being laid off as companies cut expenses and try to stay alive.  

BlackRock’s insistence that companies serve a social purpose beyond creating jobs, affordable energy and economic productivity is shockingly out of touch given the current situation. Millions of Americans are facing economic ruin as their jobs and the companies that created them disappear. 

Oil companies are also retooling their facilities to produce medical supplies to help battle the pandemic, but these social benefits do not count because they do not affect Blackrock’s bottom line.

Companies can either choose to give into BlackRock’s demands or ignore them. Those that choose the latter will likely face negative recommendations on key resolutions from one of their largest shareholders at their next general meeting.

The alternative is even less palatable. Businesses that decide to dedicate their limited resources to meeting Blackrock's requirements could face an increased chance of failure.   

Given the stakes, BlackRock should reconsider its position. A significant proportion of the energy sector faces bankruptcy at this moment. Demanding it to do any more than protect its employees and supply chain would be nothing short of predatory.

Dan K. Eberhart is CEO of Canary oilfield services and Managing Director and founder of Eberhart Capital.

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