Indiana Secretary of State targets BlackRock for alleged fraud over ESG funds

Indiana Secretary of State Diego Morales sent a cease and desist letter to mega asset manager BlackRock on Thursday, Aug. 22, 2024, alleging fraud over ESG funds and allocations. (Spencer Platt/Getty Images)

Indiana Secretary of State Diego Morales sent a cease and desist letter on Thursday to BlackRock — the world’s largest asset manager — for alleged securities fraud, accusing the company of making “false and misleading statements” about their environmental, social or governance (ESG) funds and allocation focus.

Morales issued the letter via the Indiana Securities Division, an arm of the secretary of state’s office that’s tasked with regulating the securities industry. The letter is nearly identical to one issued by Mississippi Secretary of State Michael Watson in March.

The Indiana Securities Division alleges BlackRock, “through its assertions relating to ESG products and offerings, has repeatedly made false and misleading statements to Hoosier investors,” Morales said.

The company is accused by Morales of telling clients their financial prospects and outcomes would be better in the long run through ESG-backed funds. The secretary of state emphasized in his letter that there is “little to no evidence” to back that up, although Morales offers no evidence of his own to substantiate the allegations.

“Investment companies that engage in fraudulent activities not only betray the trust of their clients but undermine the integrity of our financial markets,” Morales said Thursday in a written statement. “My office is committed to rigorously enforcing the law and strengthening our regulatory frameworks to ensure Hoosier investors are protected and that those who exploit the system are held accountable.”

Morales alleges fraud

Morales said further that BlackRock, meanwhile, claims their funds that “are not marketed as ESG do not follow an ESG investment strategy.”

“However, BlackRock has issued several statements and actions in commitment of using all assets under its management to incorporate ESG considerations, including advancing the environmental goals of net zero carbon emissions,” Morales continued.

In a statement, a BlackRock representative told the Indiana Capital Chronicle Morales’ letter amounts to “a politically motivated attack that completely mischaracterizes BlackRock’s approach to investing.”

“We are only focused on helping hundreds of thousands of Hoosier clients achieve their investment goals.,” the statement continued. “We intend to defend ourselves and our clients against this arbitrary use of state power.”

The asset manager said in a report Wednesday that it has reduced support for shareholder proposals on environmental and social issues for a third straight year, arguing that many of the efforts lacked merit and harmed long-term financial interests while doing little to improve companies.

Indiana treasurer puts BlackRock on ESG watchlist

BlackRock backed 4% of 493 such proposals from July 2023 through June 2024, according to the report. That’s down from 7% a year earlier and more than 20% in the same period through mid-2022.

The firm said in January that its stewardship team was focused on the financial health of corporations and increased support for resolutions on corporate governance — the “G” in ESG investing. The Wednesday report indicated that BlackRock supported 21% of such proposals in the period, up from 11% a year earlier.

Heritage Action, a sister to conservative think tank The Heritage Foundation, applauded Morales on Thursday for “taking bold action” and “joining efforts across the country to protect consumers and combat harmful (ESG) investing practices at BlackRock.

“Asset managers have a duty to put investors’ financial interests ahead of the Left’s political agenda,” Heritage Action Director of State Advocacy Catherine Gunsalus said in a news release. “Heritage Action is thrilled to see Indiana join Mississippi and a growing number of states fighting to protect the savings of hardworking Americans. We commend Secretary Morales for leading the Hoosier charge to strengthen the nationwide movement against irresponsible ESG investing.”

Some Republicans targeting ESG

Numerous efforts underway in GOP-led states target ESG principles being employed as a metric for investments.

In March 2023, 21 Republican Attorneys General — including Indiana Attorney General Todd Rokita — issued a letter to asset managers, including BlackRock,  asserting breaches of their fiduciary duties and violations of antitrust law as a result of ESG investing, as well as the asset managers’ participation in efforts to increase public disclosure around the risks and impacts of climate change.

Hoosier lawmakers approved specific legislation shortly after, banning controversial ESG investment strategies. More than two dozen other states have enacted similar legislation, according to Heritage Action.

The Indiana law charges the state treasurer — who is supportive — with creating and publishing a list of investment managers who make “ESG commitments.”

That includes companies who promote greenhouse gas emission reductions and corporate governmental changes — including protected classes enshrined in Indiana’s civil rights code — as well as those who divest from companies in industries like weapons manufacturing, fossil fuel production or immigration enforcement.

The treasurer provides the asset manager’s name and evidence backing up its decision to the Indiana Public Retirement System’s board — of which the treasurer is a member. If the system can’t find a comparable alternative, it must make that decision and supporting evidence public.

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