The Texas Permanent School Fund (TPSF), a major source of funding for public schools in the state, has severed its $8.5 billion investment relationship with BlackRock, the world's largest asset manager. This decision comes after a period of apparent reconciliation between Texas and BlackRock, and highlights the ongoing tension surrounding Environmental, Social, and Governance (ESG) investing.

The Texas State Board of Education, which oversees the TPSF, cited BlackRock's ESG focus as the primary reason for the divestment. ESG investing considers environmental, social, and governance factors alongside traditional financial metrics when making investment decisions. Texas officials believe BlackRock's commitment to ESG principles harms the state's oil and gas industry, a crucial economic driver.

A Reversal of Course

This move marks a reversal from earlier signs of detente. In February 2023, there were indications that tensions between Texas and BlackRock might be easing. However, the TPSF's recent decision suggests that the disagreement over ESG investing remains a sticking point.

BlackRock Fires Back

BlackRock has strongly criticized the TPSF's decision. The company argues that its ESG focus does not equate to boycotting the oil and gas industry. BlackRock points to its significant investments in Texas energy companies, valued at $120 billion, as evidence of its continued commitment to the state's economic well-being. Additionally, BlackRock argues that its past management of the TPSF funds has yielded strong returns, and that the divestment could potentially harm the financial interests of Texas schools.

The ESG Debate

The Texas-BlackRock conflict highlights the ongoing debate surrounding ESG investing. Proponents argue that ESG factors can identify long-term risks and opportunities that traditional financial analysis might miss. Opponents, like Texas in this case, worry that ESG considerations prioritize political agendas over economic growth, particularly in industries like oil and gas.

The Road Ahead

The impact of the TPSF's decision remains to be seen. It will be interesting to observe how the divestment affects the financial performance of the school fund and whether it discourages other states from taking similar actions against asset managers with strong ESG principles. The broader debate over ESG investing is likely to continue, with both sides seeking to demonstrate the merits of their approach.