Caught Between a BlackRock and a Hard Place

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As anyone working with asset management would tell you, two major investment trends have been stealing the show in recent years: the steady flow of money into passively managed funds and the rise in sustainable investing. Whether these megatrends are mutually compatible, however, is yet to be determined.

There are those who argue that ‘passive sustainable investing’ is an oxymoron. Passive investing is ultimately a quantitative strategy, thus heavily reliant on data. And, given the current state of sustainability data and the multiple ways it can be evaluated and aggregated, ESG scores and ratings are riddled by judgement calls, unavoidably introducing an active element. No wonder ESG data providers are notoriously divergent in their ratings[1].

- Promotion -

Another obvious challenge is the issue of active ownership. Responsible investors are expected not only to choose wisely what to invest in but also to engage with the entities they help finance and nudge them towards sustainability. And if their power of persuasion fails, they should not hesitate to pull their money back. A passive investor might not be quite free to do this, though.

So, what should a poor passive manager (possibly a double oxymoron) do to enjoy riding the tidal wave of sustainability anyway?

Well, you can go big, like Larry Fink, chairman and CEO of BlackRock, the world’s largest asset manager. Emerging as the foremost advocate of passive ESG investing, he has lately taken any opportunity to proclaim BlackRock’s ambitious commitment to environmental, social and governance standards. According to Fink, a “tectonic shift” in passive investing is imminent, facilitated by customized sustainable indexes that would strip out companies that do not align with investors’ values.

As much as these promises and proclamations do feature in the headlines of financial publications, BlackRock has lately made the news in somewhat different contexts as well.

Recently, the Financial Times ran an article highlighting the complex ESG challenges that the giant asset manager faces. It turns out that while supporting a shareholder protest against Procter & Gamble’s sourcing of palm oil from Indonesian company Astra Agro Lestari, BlackRock itself is Astra’s third-largest investor.

“It’s incoherent that BlackRock is pushing P&G to clean up its value chain while simultaneously continuing to profit from this same value chain,” Lara Cuvelier, at Reclaim Finance, tells FT. Even if it does seem a bit confusing on the surface, though, it makes perfect sense. As a passive investor, BlackRock cannot easily sell its holdings of a company across its index and exchange-traded funds, even if they believe there are problems with the business.

Then last week, it was Danish financial daily Børsen’s turn to give voice to BlackRock critics, perturbed over the asset manager’s new exchange-traded fund, US Carbon Transition Readiness. Danish investors appear somewhat sceptical of the new ETF’s green claims as it holds companies like Chevron and Exxon Mobile, working with coal, oil, and gas. Reportedly the biggest ETF launch ever, the new and sustainable-sounding product has been dubbed by NGOs an example of serious greenwashing.

As Mr Fink is probably well-aware of, the problem with attracting that beautiful limelight is that it unavoidably tends to shine also upon some of the wrinkles and pimples that might otherwise have gone unnoticed. Let’s hope BlackRock will rise to the occasion and use its enormous resources to resolve the issues as they emerge in the light.

Both passive funds and sustainable investing are trends that are driving forward the asset management industry and both are here to stay. Ideally, all passive investing should be sustainable too. Now, that is a ‘tectonic change’ truly worth rooting for.

[1] An MIT study found that the correlation of ESG ratings among a group of six different providers is on average 0.54, ranging from 0.38 to 0.71. As a comparison, the same study shows a correlation for credit ratings at 0.99 between two providers.

Image by Pexels from Pixabay

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The coronavirus epidemic has further accelerated the rise of ESG into the investment mainstream. As deficits skyrocket, bond investors have an opportunity to engage with governments on climate change, argues Thomas Dillon, Senior Macro ESG Analyst at Aviva Investors.

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