Brussels has been reprimanded for awarding prestigious consulting work to BlackRock to advise on the EU’s sustainable finance regulation and told to tighten up its rules on potential conflicts of interest.
Emily O’Reilly, the EU’s independent ombudsman, on Wednesday said the European Commission’s decision to give the world’s largest fund manager a contract worth €280,000 had exposed the weakness of Brussels procedures on conflicts of interest when hiring from the private sector to advise on major policy areas.
The decision to take on BlackRock Investment Management to write a study on how to integrate sustainability into EU banking regulation sparked complaints from MEPs and campaigners. They questioned the fund giant’s ability to act as an impartial adviser in the light of its holdings in European banks and fossil fuel companies. The ombudsman, the EU’s ethics watchdog, said in July it would look into the decision to award the contract.
In her findings, Ms O’Reilly said the commission should have carried out “significantly more critical scrutiny” of BlackRock’s suitability, given that the EU’s green financial regulation would also have an impact on BlackRock’s own business interests.
Ms O’Reilly also found that BlackRock had “optimised its chances of getting the contract by making an exceptionally low financial offer, which could be perceived as an attempt to assert influence over an investment area of relevance to its clients”.
“Questions should have been asked about motivation, pricing strategy and whether internal measures taken by the company to prevent conflicts of interest were really adequate,” her report states.
The controversy comes as Brussels has sought to position itself as the world’s foremost regulator for sustainable finance, beginning with its project to create a landmark standard for green investment known as the “taxonomy”.
The ombudsman cannot force the cancellation of the contract, but the criticism will pile pressure on Brussels, which has faced multiple calls from MEPs to justify the appointment since it was announced.
Marisa Matias, one of the two MEPs who filed the complaint, said the commission had “failed miserably” in judging the risk of a conflict of interest. “The commission is not only bound by legality, but it has an obligation to manage taxpayers’ money and the interests of the union properly”, said Ms Matias.
Civil society group Change Finance, which also bought the complaint, urged the commission to drop the BlackRock contract
“The commission has basically handed Big Finance the steering wheel for the implementation phase of its action plan on sustainable finance,” said Kenneth Haar of Corporate Europe Observatory, which is a member of Change Finance.
“If the contract with BlackRock is not withdrawn, that means the final nail in the coffin of a true Green Deal that is aligned with the climate ambitions of the Paris Agreement.”
BlackRock said that it looked forward to completing its work on behalf of the commission. It noted that the commission has publicly pointed to the technical quality of BlackRock’s offer as the basis for awarding the mandate.
BlackRock is the world’s largest asset manager, with a vast passive investing business. Its funds own large stakes in most of the world’s listed companies, including large oil and gas groups.
According to Corporate Europe Observatory, BlackRock is either the largest or second-largest shareholder in 12 of the top 15 European banks, which it says are heavily invested in fossil fuels.
Even though its chief executive Larry Fink in January pledged to put sustainability at the heart of BlackRock’s investment strategy, the asset manager has attracted criticism for failing to match its green rhetoric with action.
Valdis Dombrovskis, the EU’s then-financial commissioner, this year denied a conflict of interest, pointing to BlackRock’s physical segregation of its financial markets advisory unit, which holds the mandate, from the rest of its business. He said Brussels had not considered BlackRock’s price to be “abnormally low”.
While Ms O’Reilly did not find maladministration on the part of the commission, she said this was because of the rules on conflicts of interest being too vague to understand and she called for them to be toughened up.
“The risk of conflicts of interest when it comes to awarding contracts related to EU policy needs to be considered much more robustly both in EU law and among officials who take these decisions,” she said.
The European Commission said in a statement that it “welcomed” the verdict that there was no evidence of maladministration and will reply to the ombudsman’s concerns by March next year.
“It confirms what we have said throughout this process: we applied the rules fully and fairly. The commission will now study all the suggestions made by the ombudsman in detail.
“The commission is committed to transparency. It is in this spirit that the commission will shortly publish BlackRock’s interim report, once submitted by the contractor.”