European Ombudsman calls on EU to update its conflict of interest guidelines for procurement contracts following its decision to hire a business division of world's leading fossil fuel financier to develop ESG banking regulation study
The European Union's watchdog has ruled the European Commission failed to adequately consider conflicts of interest when it appointed BlackRock Investment Management, the world's second largest investor in fossil fuels, to advise on environmental regulations for the banking sector.
The European Ombudsman Emily O'Reilly has called on the bloc's executive arm to tighten up its guidelines for public contracts after ruling the decision to award the contract to the investment giant "did not provide sufficient guarantees to exclude any legitimate doubt as to the risk of conflicts of interest that could negatively impact the performance of the contract".
The contract, awarded to the firm from a pool of nine bidders in March, sparked widespread criticism from green groups and MEPs, who argued that a company that manages $87.3bn of shares in fossil fuel companies and owns shares in the overwhelming majority of European banks should not be influencing policy making.
The €280,000 contract, awarded to BlackRock's Financial Markets Advisory (FMA) arm, was for a study advising how the EU should integrate environmental, social, and governance (ESG) factors into European banking rules.
The EU Ombudsman launched a case in May after receiving complaints from two MEPs and civil society group Change Finance that alleged the firm's extensive fossil fuel and banking interests meant it was ill-suited to provide advice on EU environmental regulations.
In the report published this week, O'Reilly concluded the Commission needed to better police conflict of interests when awarding public contracts, concluding it was "questionable for the Commission to conclude that there were not legal grounds to exclude BlackRock Investment Management from the procurement procedure".
"If a bidder has a direct or indirect financial interest in developments in a market, because it invests in that market, or manages investments in that market, there is a clear risk that its work may be influenced by those interests," the decision reads.
The Ombudsman also pointed out that the "exceptionally low financial offer" provided by BlackRock during the tendering process "could be perceived as an attempt to assert influence over an investment area of relevance to its clients". The European Commission's suggested fee was €550,000, yet the investment manager offered to complete the study at the apparently bargain price of €280,000.
While stopping short of declaring the appointment of BlackRock maladministration, O'Reilly called on the Commission to update its guidelines for public tenders for policy-related contracts to give greater clarity to staff about when to exclude bidders due to conflicts of interest.
She also recommended the Commission consider revising all rules that relate to conflicts of interest when procuring work from the private sector, noting that the EU was entering into a period of "unprecedented levels of spending and investment" that would involve working closely with business and financial institutions.
Green groups behind the complaint have called on the European Commission to cancel the contract altogether in light of the Ombudsman's decision. "By choosing BlackRock, the Commission basically handed Big Finance the steering wheel for the implementation phase of its action plan on sustainable finance," said campaigner Kenneth Haar from Corporate Europe Observatory, 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."
A BlackRock spokesperson countered that the company had consulted a wide range of stakeholder in the report at the centre of the furore, and stressed that it had been awarded the contract due to its technical merit. "The European Commission has already publicly stated that the technical quality of FMA's proposal was the basis for their decision in awarding the mandate," they said. "FMA has taken a wide-ranging and inclusive approach, including academia, civil society, banks, supervisors and market practitioners, and looks forward to completing its work and delivering its final report to the Commission."
Following years of criticism for bankrolling fossil fuel companies and financiers while frequently using its shareholder votes to thwart climate-related resolutions at its portfolio companies, the asset manager has recently stepped up efforts to support climate action. In January, chief executive Larry Fink pledged BlackRock would divest from firms that generated more than a quarter of their revenues from coal and use its voting power to force companies to better disclose climate risks.
However, a report published this week by Corporate Europe Observatory and Change Finance points out that the firm remains a members of a number industry-driven groups currently lobbying EU lawmakers against the integration of ESG factors into prudential banking regulations.