Dive Brief:

• BlackRock and Tennessee Attorney General Jonathan Skrmetti reached a settlement last week on the state’s lawsuit alleging the investment management firm was misleading consumers about its ESG strategies.
• The suit was dismissed as part of the settlement announced Friday, and BlackRock was not found to have violated any laws. The settlement also carried no fines.
• “We’re pleased to resolve this matter,” a BlackRock spokesperson said in an emailed statement Wednesday. Under the settlement agreement, BlackRock will provide increased disclosures for its funds, investment strategies and proxy voting.

Dive Insight:

Skrmetti’s office first initiated the lawsuit in December 2023 under the state’s consumer protection laws. The suit alleged that BlackRock did not adequately disclose how it integrated environmental, social and governance considerations into its investment strategies. The suit also claimed the asset manager misled consumers about the scope and effects of its ESG activity and released conflicting statements regarding ESG’s influence over its business decisions. 

The settlement will require enhanced disclosure from BlackRock about its U.S. funds that fall within its scope of the settlement. BlackRock, which manages over $11 trillion in assets, will be required to disclose funds’ proxy votes and the rationale behind them; its membership in any climate-focused organizations; disclose to portfolio companies that it is not communicating on behalf of all of its shares; that certain clients or funds have different objectives; and it is “pursuing in whole or in part an objective other than seeking the best long-term financial returns for investors.”

“BlackRock has consistently acted in the best interests of our clients, and we welcome the opportunity to demonstrate that fact through even greater transparency about our practices,” the company spokesperson said.

The settlement will apply to any of BlackRock’s U.S. funds that do disclose in their prospectus’ investment objectives beyond financial performance, including sustainability goals or investment strategies with sustainability characteristics in the portfolio. The ruling also applies to funds that don’t disclose investment screens or criteria. Through the agreement, BlackRock will be required to remove ESG ratings from the main pages of such funds, granted it makes the data available to interested investors.

As part of the agreement, BlackRock will maintain records of why it declines to vote with management’s recommendations on any environmental or social shareholder proposals or against a director slate “based in whole or in part on any environmental or social factors.”

BlackRock’s support for environmental and social shareholder proposals plummeted to 4% in the most recent proxy season. That is down from around 7% in the 2022-2023 proxy season, and 21% support in 2021-22. 

“This resolution assures that the money Tennesseans invest with BlackRock is managed consistent with the funds’ disclosures,” Skrmetti said in the announcement. “While investors are always free to buy cause-oriented products instead of focusing on maximum return, this settlement ensures that only investors who make a knowing choice will see their assets directed toward these non-financial goals.”

For the next three proxy seasons, BlackRock and Tennessee will have a third-party audit of the investment manager’s compliance with the recordkeeping obligations laid out in the settlement. 

Skrmetti’s lawsuit was dismissed without prejudice, giving the state an opportunity to refile if it can prove that BlackRock ‘failed to substantially comply” with the settlement terms.

Amid increased scrutiny on its ESG communications, BlackRock scaled back related investment stewardship messaging in 2024 and acknowledged in its annual securities filing that mounting ESG scrutiny could affect the company’s revenues and reputation.

While the settlement will require BlackRock to disclose any of its climate-focused memberships, the number of groups and alliances that count the investment manager as a member is dwindling. 

Last year, the company transferred its membership in Climate Action 100+ to a smaller international arm as the group saw multiple waves of exits. As U.S. banks were fleeing the United Nations-backed Net-Zero Banking Alliance prior to Trump’s inauguration, BlackRock announced it would exit the related Net-Zero Asset Managers initiative. NZAM announced it would suspend operations and conduct a review shortly afterward.

BlackRock’s prior NZAM membership was cited in cease-and-desist orders issued by the states of Mississippi and Indiana last year.