Climate change is front and centre

When BlackRock chief executive Larry Fink speaks, the investment world listens. His annual letter to listed companies is the equivalent of Warren Buffet’s annual address to shareholders, as if wrapped in royal majesty.

That’s because BlackRock, with almost $9 trillion (close to R138 trillion) entrusted to it, is the world’s largest asset manager.

In his most recent letter, Fink raises the prospect of active portfolios divesting from companies that didn’t commit to the achievement of net zero carbon emissions by 2050.

Included in BlackRock’s $9 trillion of assets under management is $5 trillion in passive investment vehicles, making BlackRock a significant shareholder in many of the world’s largest companies.

Where companies didn’t commit to net zero emissions, BlackRock would flag these holdings in both its active and index portfolios for potential exit because “we believe they would present a risk to our clients’ returns”, said Fink.

BlackRock is not alone. Fidelity, UBS and Schroders are among the world’s largest asset managers to have announced commitments to the cutting of emissions.

But it goes broader than emissions.

Fink noted that “companies with better ESG [environmental, social and governance] profiles are performing better than their peers”.

They were enjoying what he described as a “sustainability premium”.

The language of ESG is usually couched in warmth and goodness, not taunts and harassments.

There’s now a game-changer, not necessarily from a sense of social responsibility but more from a hard-nosed rebalance in assessments of risk relative to return. The third investment criterion, suddenly to the fore in SA, is impact.

SA’s situation

What sets SA apart from the global heavyweights, however, is the tiny size of the domestic investment universe.

Divestments simply aren’t on. Perish the thought that ESG counted against Naspers/Prosus, for example, because of a governance concern at a Chinese glamour stock (see Gravy). Perish the manager who withdraws; ditto on discovering that star performer British American Tobacco, automatically in local portfolios, sells tobacco.

Try as they might, local asset managers cannot wield the influence of a BlackRock. Few would have the resources for similarly exhaustive research and, as John-Kane Berman illustrates on page 37 here, they’d anyway lack the options to prioritise some ESG factors over others. Their real test, increasingly, will be in the unlisted space where they need not just pick and choose but can also initiate projects for themselves.

In the complex welter of ESG metrics, climate change is arguably the most straightforward and simultaneously the most paramount. Fink views it as the key risk for the global economy.

He expects a “tectonic shift” in passive investing once more public companies disclose their carbon footprint. This shift in finance won’t occur on asset management’s active side, which is already addressing the issue, but on the passive side after more companies release their mandatory disclosures. He believes this will enable BlackRock and others “to ‘design and democratise’ indices that closely approximate the liability risk but with more sustainable attributes”.

However, it won’t all be plain sailing.

Most importantly, Fink recognises that the goal to prevent the world from overheating will not be achieved if only public companies disclose their carbon emissions. By selling these emissions onto private companies, in carbon offsets, there would be only a reallocation of assets rather than a decarbonisation.

More than this, there are Financial Times reports in BlackRock’s regular monitors:

• The huge rise in ESG-based investing is funnelling money into companies that pay less tax and provide fewer jobs than many counterparts with lower ESG ratings. Assets under management in ESG exchange-traded funds jumped three-fold from just under $59 billion at end-2019 to $174 billion at end-2020. “There is an almost perfect inverse relation between companies’ ESG ratings and their effective tax rate,” a New York analyst is quoted as saying. “Big tech’s profits are so massive that a small increase in tax compliance would do more social good than all the remarkable initiatives touted in their glossy corporate social-responsibility reports.”
• The UK’s largest workplace pension schemes will have to comply with new mandatory requirements to take action on climate change. Trustees will be required to assess in some detail what different climate-change scenarios will mean for their portfolios and, critically, their sponsors, said a leading pensions advisor. “Asset managers are going to work hard to get that information.  [Trustees] will need consistent scenario analysis not just from asset managers but also others, including actuaries.”
• Financial advisors face “high barriers” when working to integrate ESG investing because third-party tools are inadequate. It was difficult for advisors to ascertain the extent to which ESG factors are really embedded in asset managers’ investment processes and wider cultures. Some 40% of 316 advisors polled said there was “virtually nowhere” to find data that identified ESG credentials of existing holdings.
• Observation on ESG investing: “The single most salient feature of these exchange-traded funds is that they favour machines and intangible assets over humans. Companies with no employees do not have strikes or problems with their unions. There is no gender pay gap when production is completed by robots and algorithms.”

Allan Greenblo is Editor of Today’s Trustee

This article was first published in the March/May 2021 edition of Today’s Trustee, here.