NEW YORK, March 19 (Reuters) - A Texas school fund told

BlackRock ( BLK ) on Tuesday it was terminating its contract to

manage around $8.5 billion of state money, accusing the

investment giant of boycotting fossil fuel energy producers, who

represent a large part of the state's industry.

BlackRock ( BLK ) has denied it is engaged in any boycott, saying

the money pulled is a tiny sliver of the $10 trillion in assets

that it manages.

The move by the Texas Permanent School Fund, however,

highlights how BlackRock ( BLK ) and other asset managers continue to

attract controversy in some Republican-run states over

environmental, social and corporate governance (ESG) investing.

Texas State Board of Education Chair Aaron Kinsey, who

administers the fund, said its relationship with BlackRock ( BLK )

breached state law against investing with companies accused of

boycotting energy companies.

Kinsey told Reuters that the fund was complying with a 2021

Texas law obliging state agencies to divest from fund managers

like BlackRock ( BLK ) that shed investments to reduce greenhouse gas

emissions.

He added the fund receives about $1 billion a year from

Texas's General Land Office, which manages 13 million

acres-worth of rights to land and minerals.

"That money originates from the oil and gas industry

primarily... if there's no income, no billion dollars a year

from oil and gas, that's a problem for our fund, obviously an

existential long-term risk," he said.

A few illiquid investments with BlackRock ( BLK ) remain in the

schools fund's portfolio, but these will roll off over time,

Kinsey added.

BlackRock ( BLK ) called the move arbitrary and said it ignores

the private equity firm's $120 billion investment in Texas

public energy companies. "The decision jeopardizes Texas schools

and the families who have benefited from BlackRock's ( BLK ) consistent

long-term outperformance," BlackRock ( BLK ) said.

CEO Larry Fink said last year BlackRock ( BLK ) had lost around $4

billion as a result of the political backlash, and this was

dwarfed by net inflows to BlackRock ( BLK ).

Fink has since said he would stop using the term "ESG", and

hosted a summit with state officials in Houston last month

focused on investing in the state's infrastructure.