BLACKROCK NEEDS TO INCREASE ITS CLIMATE PORTFOLIOS 

BLACKROCK NEEDS TO INCREASE ITS CLIMATE PORTFOLIOS

The commercialization of environmental portfolios begins with the existence of the same and the robustness of the content; together with a high volumes in constant growth.

For this, renewable energies are the only tangible solutions, both repairing and replacing direct emissions, that have the capacity to do so.

 

ENVIRONMENTAL + SOCIAL + GOVERNANCE = POLITICS

The year could not end without a final political uproar over ESG (environmental, social and governance) investment, which has become a cause célèbre of conservative and denialist politicians in the United States.

In the latest development, Tennessee Attorney General Jonathan Skrmetti sued BlackRock, the largest fund manager in the world.

The lawsuit is quite inconsistent and focused on its openness to the diversification of its ESG portfolios.

However, for both BlackRock and other ESG providers, the action arises from exaggerated claims without arguments and confusing definitions.

REFLECTION: Which leads us to think that it should be the opposite and support BlackRock’s diversification towards ESG by giving them a place of relevance for these investments and attracting the rest of the financial sector for gains in the area of sustainability, added to the care of the environment as well as the reduction of emissions that increase global warming; main factors of Climate Change.

 

DENIALISM AND LACK OF KNOWLEDGE

This has now allowed others to make even more confusing and exaggerated accusations against them.

The central accusation in the 72-page complaint is that BlackRock is making ESG investments without notifying clients.

This, Tennessee alleges, but BlackRock does not violate its responsibility to try to maximize its returns, “which is why the financial world trusts BlackRock.”

However, the accusation is not about financial performance, but about the company violating Tennessee’s consumer protection law by not disclosing what its funds are doing and in which sector it invests them (we know that Tennessee is a defender of fossils).

 

TENNESSEE’S OIL INTERESTS

The lawsuit comes at a time when Tennessee refuses to adopt climate change mitigation measures and in fact rejects them, in the same place where the prodigy son of climate change Al Gore established the great research plan, the most ambitious apparatus on the planet ever created.

Today, his own state turns its back on climate change control and mitigation policies, and goes even further by prohibiting ESG investments.

Sheer madness!

That is why the stones in the road for BlackRock from Tennessee estimate the fluctuations in ESG “that have resulted in lost money for the inhabitants of Tennessee” due to BlackRock’s private investments in sustainable practices on the planet (???).

What is strange is that they also fail to analyse how much these practices have generated for BlackRock in terms of profits.

Even if these figures could be calculated, they would be too small to be fined or put in the dock when the company makes positive changes to offer assets that contribute to caring for the planet.

 

REALITY IS TRANSPARENT AND CLEAN

“I will try to address the issues in ascending order of importance.”

ESG investing has no conflict with the normal fiduciary duty of trying to maximize returns.

BlackRock, like the rest of the investment industry, has generally chosen these assets for containing both.

The attorney general has fun pointing out the contradictions in the language of the prospectus submitted by Tennessee, while citing research that attempts to show that ESG factors tend to underperform, which is incorrect to what the results taught him about transparency and a lack of volatility or risks for investors.

“It is notable how intentional Tennessee is in covering up and defending fossil activities, seeking to stop the financial proposals for sustainable assets from BlackRock and other financial entities.”

This field has been plowed for more than a decade by denialist communication that little understands or cares to study, understand the real situations that lead to catastrophes and enormous economic losses.

This has stopped the growth of the fossil-fueled, denialist and conservative establishment.

The contradictory thing is that the fossil companies themselves have now realized that they can manage the energy supply themselves and will not lose anything, on the contrary they will gain in transparency (stopping solving the greenwashing of their fictitious image) and will add backed good economic results that are on the side of sustainability.

 

THE WAY IS GREEN

ESG itself had a great advance thanks to research that showed that you could have the cake and eat it by investing in more technologically and environmentally virtuous companies, making more money in the process.

Since then, more studies have been carried out that show that this effect is growing and increasing their profits along with a diversity of opportunities for all citizens to have their share of the cake through the digitalization of processes such as wallets and universal access to the investment of small shares that strengthen the ESG financial sector that does not stop growing.

 

TRANSPARENT ONLINE EARNINGS

Institutions investing this way are actually optimizing their clients’ money for higher and longer returns.

The most recent research I’ve seen comes from Metafoura, a research firm set up by former Nomura quant Joseph Mezrich.

Much of the noise around ESG is due to the swings in the fortunes of the energy sector. Controlling for sector effects, and also investment style (value, growth, etc.), Mezrich analyzed how a strategy of focusing only on profitable companies (when measured by return on equity) would have performed over the past five years with and without an additional filter for ESG:

If you look at Mezrich’s numbers, ESG factors performed well during the worst of the pandemic and have largely maintained their advantage.

It is far-fetched to consider non-financial inputs to ESG scores, given that they are indispensable indicators of company quality today.

ESG characteristics as a factor in industrial governance compliance.

Something that increases corporate transparency, which is so undermined by greenwashing practices that have nothing to do with proper risk management.

We must add to the monitoring of human capital management.

The observation of corruption in the data that attempts to exempt large issuers from responsibility can be changed with online data to their clients and investors; allowing them to demonstrate their good practices or correct bad ones; all in real time.

 

FREE AND ONLINE BEHAVIORAL DATA

Without a doubt, data is necessary to comply with these precepts, which are essential to define investors’ opinions on the quality of a company in order to make better decisions when investing.

These opinions could affect the impact of the reported ROE on the price of the company’s shares.

It is reasonable and increasingly common for a manager to say: “I am taking these factors into account because they will lead me to companies with superior performance?”

Yes, it is.

This is a reason in itself to claim that an investment group is failing in its fiduciary duty to maximize the qualification precautions of its assets so that they do not affect clients in losses by concealing bad practices.

Based on the research done to date, it would be better if this issue was litigated through investment researchers and academics to maintain the legitimacy of the data, rather than in the courts.

Like any other factor, once it has been detected and published by academics, investors will tend to dismiss it through arbitrage buying.

Considering ESG factors as an investment factor is the proper way in which we will discover if funds offer any superior performance in the long term or if the opportunity has already gone or is being glossed over.

What difference does it make?

BlackRock is the largest shareholder of Smith & Wesson Brands Inc., the largest exclusive arms manufacturer. It is also the largest shareholder of BP Plc and Shell Plc.

Anti-fossil fuel protesters regularly protest BlackRock events.

But we were able to see how strategic actors like BlackRock can introduce these companies (called highly polluting companies) to modify their practices by transforming them into cleaner or completely clean ones.

This relationship can speed up the inclusion of proactive habits and behaviors towards the environment by companies since investment funds like BlackRock are demanding commitments to ESG factors.

Something that is established as a standard from today for a more sustainable future.

Acquiring the sustain- skills (said by Elena Morettini CSO of Globant) a leading company in helping to modify negative behaviors into positive ones in all the areas required by the initial test.

 

BLACK-ROCK-GREEN STANCE

While the company emphasizes its ESG credentials, the huge weight of index investing in its iShares business ensures that it has to buy a lot of oil company stakes (but that’s part of the game of being a manager of other people’s financial funds).

ESG criteria have generally been hailed in recent years as a world-transforming breakthrough.

That has sparked political opposition.

The raw statistics on the amount of money deployed on an ESG basis are astonishing: Bloomberg Intelligence identified $35 trillion in assets that are supposedly managed in this way.

It is true, however, that BlackRock has begun to lean perceptibly more towards ESG in recent years, starting around 2016.

The data showed how the proportion of assets under management with an ESG tilt by BlackRock and Fidelity Investments, its largest competitor in many lines of business is managed purely passively, a much higher proportion for BlackRock than for Fidelity.

We can see that the tilt between actively managed assets is quite substantial.

So it would seem that BlackRock is really doing what it says on the tin, by getting much more involved in ESG in its active business, while its ETF holders get truly passive investments:

 

HOW FINANCIAL DECISIONS ARE MADE

Two concepts can easily be bypassed. As stewards of people’s money, BlackRock and its competitors have to decide

¹ which stocks to buy and then

² how to vote on resolutions put before shareholders.

The Tennessee lawsuit does not so much attack the first ¹ (typically much more important for returns) as they attack the communication system established by all financial institutions.

 

UNIVERSAL INITIATIVE

Both the Net Zero Asset Managers Initiative and Climate Action 100+.

Both require members to encourage companies in which they have interests to reduce carbon emissions, largely under the overarching goal of limiting temperature rise to 1.5 degrees Celsius and reaching “net zero” by 2050. This commitment covers all of their funds, including those that are explicitly non-ESG.

If we only care about stock selection, then BlackRock is safe. It has plenty of polluting companies. But Tennessee criticizes the way it votes its shares held by non-ESG funds. On many pages, it lists a number of proxy votes.

For example:

At Whitehaven Coal’s October 2021 meeting, BlackRock voted against all director nominees because the company’s disclosures did not “include GHG reduction targets or alignment with a global aspiration for net-zero GHG emissions by 2050.” Alignment with net-zero greenhouse gas emissions by 2050 is the poster child for an ESG investment strategy and a healthier investment choice.

 

TENNESSEE’S PROBLEMS WITH CARING EFFORTS

Tennessee also has a problem with BlackRock’s efforts at “soft power,” such as the letters CEO Larry Fink sends to the heads of every company he invests in each year.

Writing a letter to CEOs saying they should take global warming seriously is not, the lawsuit argues, compatible with running an avowedly non-ESG fund.

In Europe, such behavior is expected; In the US, where many do not accept the science behind global warming, they say it is a political act.

 

EUROPEAN CAPITALISM

European capitalism demands that shareholders exercise their rights, refusing to allow managers to become lazy and imposing necessary changes.

If BlackRock is doing more on governance, that is good news. Previously, they had received a lot of criticism for acting as poor stewards and allowing capitalism to weaken.

And in passive funds, it is a vital duty because it is the only way to defend clients from poor management.

The fund is stuck holding the stock no matter what, so it needs to be able to pull its weight.

Larry Fink, BlackRock’s chief executive, at the Berlin Global Dialogue last September answered those who oppose it and argue that ESG criteria interfere with the main objective of improving shareholder value.

“It certainly could.

But if that is true, then shareholders can always exercise their ownership rights to avoid being ripped off.”

The Tennessee lawsuit cites votes made by the fund manager, but does not detail the consequences for the financial fundamentals of the companies allegedly affected.

As the world continues to heat up, many people are unhappy with contemporary American capitalism.

 

SUMMARY:

“Tennessee offers no solution that can be seen. Does anyone else have one?”

 

CONCLUSION:

The largest asset managers are so powerful that they are now wary of the financial volatility of their products coupled with the intangibility of the assets in which they invest or promote, which are subject to unexpected losses or fluctuations; something that displeases the large asset managers and they have decided to put an end to such child’s games.

That is why ESG is considered such an important front in the cultural war, that it is very easy to imagine politicians legislating as it happens in the European Parliament to define what they can and cannot do, to advance comprehensive solutions on a larger scale and with positive impacts.

It is a comforting and obligatory perspective that our representatives have in the face of the urgent need to give us solutions that guarantee environmental subsistence that in turn guarantees our stay on this planet.

 

 

AUTHOR:

DIEGO BALVERDE

ECONOMIST

EUROPEAN CENTRAL BANK & CHIEF ECONOMIST

SPECIALIST CLIMATE FINANCE WORLD TRADE DEVELOPMENT COUNCIL