When the European Commission announced in April that it had hired BlackRock to produce a report on integrating environmental, social and governance (ESG) considerations into banking regulation in the European Union, it prompted an immediate and predictable storm of criticism.
Those for whom the US firm is the new global capitalist bogeyman were horrified at the idea of it being given access to the inner workings of European policymaking.
Civil society groups and members of the European parliament cited BlackRock’s ownership – through its investment funds – of large holdings in fossil fuel producers, as well as most of Europe’s biggest banks, as proof that the company could not be trusted to be objective on ESG issues.
BlackRock’s claims that the entity undertaking the work – a consultancy division known as Financial Markets Advisory (FMA) – was separated by an “information barrier” from the rest of the firm also received short shrift from opponents of the contract.
They noted that when the Federal Reserve signed up the FMA unit to manage its Covid emergency corporate bond-buying programme in March, the contract specifically acknowledged that some BlackRock executives would “sit atop” the barrier.
Pay cut
Even more worrying, for those suspicious of BlackRock’s motives, was the fact that the firm effectively took a €250,000 pay cut for the work. Not only was its bid well below those of the other eight contenders, it was barely half what the Commission had been prepared to pay.
Commission staff vigorously defended their decision, prompting the critics to take their complaints to the European Ombudsman, Emily O’Reilly, who published a report at the end of November.
It was hailed as a vindication by the complainants. O’Reilly agreed that the Commission should have been “more vigilant” in assessing conflicts of interest when awarding the contract and should potentially have excluded BlackRock.
The answer provided … should have given cause for concern
Emily O’Reilly, European Ombudsman
She also dismissed claims by the Commission that the technical and analytical nature of the report meant there was little risk of any bias on BlackRock’s part having negative impact on the study.
For many, however, the crucial take-away from the report was that BlackRock had exposed a weakness in the Commission’s procurement procedures. On the issue of price, for example, Commission staff had indeed requested an explanation of the US firm’s low-ball bid three times.
The key for the Commission was that BlackRock had to demonstrate that its bid was “consistent with others it had offered to other public-sector clients” – which it apparently did to their satisfaction.
O’Reilly gave this very short shrift. “It is not clear how the answer… to this question could have reassured the Commission as to whether the abnormally low price… was motivated by the strategic interest of the company to assert influence on developments in the markets in question,” she said.
“On the contrary, the answer provided… should have given cause for concern.”
The Ombudsman concluded by recommending the Commission to provide clearer guidelines for staff on potential conflicts of interest for policy-related service contracts and to consider a regulatory update to strengthen provisions in this area.
This seems pretty damning. The Commission effectively stands accused of failing to protect the integrity of EU policymaking, while BlackRock is cast as a capitalist villain trying to buy its way a position of influence that would allow it to move regulation in its favour.
Yet the Ombudsman’s report raises as many questions as it answers.
Take, first, the conflict of interest issue. Clearly, there is potential for this with BlackRock. As O’Reilly rightly noted, if there weren’t, there would be no need for the firm to erect an information barrier.
But what about the other eight bidders for the contract? Their identities have obviously not been released, but it’s fair to assume that most were from the consultancy community.
Do the likes of EY or PwC, which derive substantial revenues from the banking sector, really have less interest in its financial health than the world’s largest investment management firm, which manages holdings across every industry, region and asset class?
And what about that low-ball bid? Does BlackRock’s willingness to forego revenue prove that it is eager to be involved in, and seen to be involved in, senior policy circles?
To which the answer is well yes, obviously – but this is hardly news. For years BlackRock has made no secret of the fact that this is part of its business model.
Policy ambitions
Indeed, in the EU the firm has been registered under “in-house lobbyists and business associations” since 2010, where its stated organizational goals include “distinguish our firm as a trusted resource that policymakers can turn to” and “demonstrate thought leadership that adds to the European policy debate”.
For further evidence of its policy ambitions, one only has to look at the roll call of senior policymakers who have joined BlackRock after leaving office, from the UK’s former chancellor, George Osborne, to FMA chairman Philipp Hildebrand, who previously headed up the Swiss central bank.
(And it’s not just one-way traffic. At the start of December, US president-elect Joe Biden named two senior BlackRock executives, including its head of sustainable investing, as part of his economic team.)
In this context, BlackRock’s minimalist bid makes perfect sense. For less than the price of the first year’s salary for the ex-finance minister of a small European country, the firm gets an excellent opportunity to advertise its ESG credentials on the continent. In return, the Commission gets a high-quality piece of work to add to the ever-growing pile of perspectives it is accumulating on ESG and sustainable finance from dozens of different public and private-sector bodies.
And, in turn, these should surely provide a sufficient counterweight to any bias, conscious or unconscious, that might slip into BlackRock’s study.
