BlackRock signaled a new era for sustainable investing last week that NZ fund managers must catch up with, according to John Berry, co-founder of Pathfinder.
In letters to clients and industry leaders last week, the almost US$7 trillion BlackRock laid out a major shift to sustainable investing principles across its product range. Among a raft of other changes, the US firm headed by Larry Fink vowed to sell down debt and equity of coal miners (with a 25 per cent of entity income threshold) across its discretionary active management products by the middle of this year.
As well, BlackRock says it plans to beef up business-wide sustainable investment measures and double the number of passive exchange-traded funds (ETFs) linked to environmental, social and governance (ESG) factors.
“[The BlackRock move] sends an important message to the market that sustainability is taken seriously by the world’s largest asset manager,” Berry said. “It’s further evidence that issues like climate change are influencing real investment decisions now.”
However, he said the NZ fund industry was generally behind global best practice on integrating sustainable principles into investment processes.
Pathfinder rebranded under a sustainable investment banner in 2017 before launching an ‘ethical’ KiwiSaver scheme – dubbed CareSaver – last year.
While NZ has been one of the fastest-growing jurisdictions in the uptake of ESG-aware investing, according to the Responsible Investment Association of Australasia, Berry said the BlackRock announcement reinforced why local fund managers should do more, particularly in addressing climate change risk in their portfolios.
“It’s not just about divesting from thermal coal firms – which many NZ managers do – but about assessing the carbon intensity of all portfolio holdings in every sector relative to peers,” he said.
Berry said CareSaver excludes fossil fuel investments while increasing exposure to sustainable energy businesses.
But the broader NZ finance and investment industry is moving ahead with the climate change debate. Last November, for example, the Sustainable Finance Forum (SFF) published wide-ranging proposals on climate change that covered managed funds and KiwiSaver. In December, too, broking house Forsyth Barr released ‘The Carbon Report’ detailing how the climate change investment trend could impact NZX firms.
A raft of NZ managers including AMP Capital, Mercer and Russell Investments have introduced fossil fuel screens and/or stand-alone low-carbon products.
BlackRock, though, has considerably raised the stakes. In addition to some divestment, integrating ESG and increasing supply of sustainable ETFs, the global manager says it will ramp up pressure on underlying portfolio companies (bonds and equities) to meet sustainability standards.
Furthermore, the managed funds giant will back more collaborative industry initiatives (such as signing on to the Carbon Action 100+ group in January), include ESG “at the heart” of its famous risk analytics platform Aladdin and roll out an ‘impact investment’ suite later this year.
Despite the sustainable product overhaul, the majority of BlackRock assets remain in vanilla index-linked ETFs and unlisted funds. According to Bloomberg, investors have plonked about US$90 billion in BlackRock ESG-themed passive products, which the manager targeting a more than 10-fold increase to US$1 trillion over the next decade.
The manager says it will work with index providers to “expand and improve” sustainable benchmarks but market cap related indices – which by definition hold all underlying securities – are likely to dominate for some time.
Ben Trollip, Melville Jessup Weaver (MJW) principal, said passive investors would have to accept higher costs for ESG-style index products.
“ESG investing doesn’t come for free,” Trollip said. “There are extra research and implementation expenses compared to market cap passive funds.”
He said if more index funds do divest stocks that could open up opportunities for active managers.
In its letter to clients, BlackRock says: “We recognize that many clients will continue to prefer traditional strategies, particularly in market-cap weighted indexes. We will manage this money consistent with your preferences, as we always have. The choice remains with you.”
Fink says in a separate letter that climate change and other ESG risks would transform finance and investing in the years ahead.
“… because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself,” he says. “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
BlackRock reported net income for the 2019 calendar year of almost US$4.5 billion, up 4 per cent compared to the previous period.