Montana Attorney General Austin Knudsen and 14 other state attorneys general are demanding answers from Blackrock-linked mutual fund directors as to potential conflicts of interest between the mutual funds they are managing. They are questioning whether BlackRock should continue as an investment adviser to the mutual funds in a letter sent last week. The attorneys general also raised concerns over the company’s Environmental, Social, and Governance (“ESG”) investments.

“Six of the nine Mutual Fund directors have a relationship with BlackRock as either a BlackRock employee or a board member of a company where BlackRock owns more than 5% and in many cases is the first or second largest shareholder,” Attorney General Knudsen wrote. “That financial entanglement between the Mutual Fund directors and BlackRock undermines the principles of independence undergirding the Investment Company Act of 1940, as well as state law principles of independence.”

The letter raises a number of concerns including financial relationships that could undermine director independence and over-boarding; whether there has been sufficient disclosure, oversight, and investigation into potential conflicts of interest by BlackRock as investment adviser to the mutual funds; and the actions of the directors related to BlackRock’s public commitments to use client assets for the purpose of advancing ESG goals rather than for the sole purpose of maximizing shareholder value.

BlackRock’s ESG commitments to push the political goals of programs like Climate Action 100+ and the Net Zero Asset Managers raise serious concerns over BlackRock’s duty to act exclusively for the financial benefit of its shareholders and may have cost mutual funds returns. For example, Attorney General Knudsen questions about BlackRock’s decision to divest from coal when the seven largest coal companies in the United States have averaged a share price increase of 981 percent since July 2020.

“BlackRock’s activist commitment to divest from coal may have adversely affected these funds and others like them. At the very least, BlackRock’s failure to increase its investments in coal may have caused these funds to forgo substantial growth. We seek to understand whether BlackRock disclosed material information and whether you analyzed that information,” Attorney General Knudsen wrote.

In addition to the concerns raised in the letter, Attorney General Knudsen is requesting written responses to seven questions listed in the letter to use to determine “the future course of our actions”:

1. What percentage of your annual income comes from serving as a director of the boards of BlackRock Mutual Funds? Related to this, what percentage of your professional time do you presently devote to serving on the boards of these mutual funds?

2. If you are a director of a public company in which BlackRock owns more than 5% of the shares, please describe your interactions with BlackRock in your role at these other companies, including whether BlackRock Investment Stewardship has had any engagement with you and specifically what issues they have brought up in those engagements?

3. What has BlackRock disclosed to you regarding any potential conflict of interest stemming from the ESG preferences of its large institutional investors? What systems have you established, information have you considered, and actions have you taken to ensure that BlackRock is not favoring the ESG preferences of these investors at the expense of its smaller retail investors who do not support ESG investing and who simply want the best return on their investments?

4. Has BlackRock disclosed to you what it is doing to overcome the “constraints” that hinder its ability to advance its NZAM climate commitment? What have you done to ensure that BlackRock’s ESG commitments (such as its NZAM and CA100+ commitments) are not adversely affecting assets belonging to the many clients who do not support those commitments and who simply want the best return on their investments?

5. In light of BlackRock’s statements regarding the use of client funds to advance the ESG agenda, have you considered whether BlackRock should be your funds’ investment adviser moving forward? What actions have you taken to warn investors about these potential misrepresentations?

6. Did BlackRock disclose to you its 2020 pledge to divest from coal and all other material information regarding its coal policies and actions? Did you analyze this pledge’s financial implications on your respective funds? To the best of your knowledge, has there been any analysis and has anyone been held accountable for the substantial loss of profits that may have resulted from the decision to divest from coal, or at least to refrain from increasing investments in coal? Were these decisions disclosed to the many investors who have placed their money into your funds for the sole purpose of maximizing their financial returns?

7. In assessing the compensation that you pay BlackRock for its advisory services, have you considered the value that BlackRock receives, including fall-out benefits in addition to direct financial benefits, from promoting its use of all assets under management to achieve ESG policy goals such as net zero? Have you investigated the financial impact that these practices have on BlackRock’s non-ESG funds?

States joining Attorney General Knudsen were Alabama, Arkansas, Georgia, Iowa, Indiana, Kansas, Louisiana, Missouri, Mississippi, New Hampshire, South Carolina, South Dakota, Utah, and Virginia.

In March, Attorney General Knudsen wrote a letter with 20 other attorneys general warning asset managers about ESG investments being made with Americans’ hard-earned money. In October 2022, he joined 18 other attorneys general in launching an investigation into six major banks over potentially deceptive trade practices tied to ESG-related actions.