On Tuesday, BlackRock's (NYSE: BLK) CEO Larry Fink warned in his annual letter to corporate executives that "climate change has become a defining factor in companies' long-term prospects...Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance."
BlackRock is the world's largest asset manager, best known for its iShares brand of ETFs, has $7 trillion under its management. Operating in more than 30 countries, BlackRock's clients include large sovereign wealth funds, state pension plans and financial advisors.
The Great Index Fund Takeover
BlackRock has gained its large management amount mainly through index funds, which are a newer market innovation. In the past, investors used to pay large fees to active stock pickers who often delivered lousy returns. With index funds, a portfolio of stocks or bonds are created to mimic the composition of performance of the financial market index. In other words, when the stock market has large returns index fund benefit greatly. Index fund have lower expenses and fees when compared to actively managed funds, making them a passive investment strategy that, depending on the risk and return of the current market, will outperform any single investment.
The global shift in investment towards index funds has sent trillions of dollars into passive funds run by BlackRock, State Street Corp. (NYSE: STT), who has $2.9 trillion in assets, and privately managed Vanguard Group, who manages $5.6 trillion. Their success has had unintended consequences like the concentrating of shareholder power.
The three have also been blamed for the disappearance of smaller business, fewer startups and the loss of privacy. For example, the three own 18% of Apple (NASDAQ: AAPL), 20% of Citigroup (NYSE: C), 18% of Bank of America (NYSE: BAC), 19% of J.P. Morgan (NYSE: JPM) and 19% of Wells Fargo (NYSE: WFC).
The three also represent the key votes on matters such as mergers and shareholder activist campaigns. Antitrust worries surrounding index funds involve the common ownership, when the same large investors own large amount of shares in major corporations in the same industry.
Investors have also been flocking to large ETFs with ultra-low management fees, which has caused smaller ETFs to fail. BlackRock, Vanguard, and State Street control about 80% of all ETF assets under management. According to research from CFRA, in the past five years 20 ETFs accounted for 44% of the industry's total asset growth, with 18 of those funds being managed by BlackRock or Vanguard. In the same period, 24% of smaller ETFs have shutdown and an additional 30% have experiences a decline in assets.
BlackRock on Climate Change and Greater Impact
Climate activists have been calling on BlackRock to respond more to the climate crisis since it controls so much of the market, with groups including Amazon Watch, The Sunrise Project, and other prominent coalitions. Much of their concern centers on the company's investment in large fossil fuel companies.
"The asset management industry is uniquely placed to help drive global decarbonization efforts, but it requires a concerted effort from all, not just a few," Alex Bibani, manger of investment funds at Sarasin & Partners stated. "We are pleased to see BlackRock making these positive steps and hope that other , such as Vanguard, follow suit."
Fink's strategy of response towards climate change includes making sustainability integral to portfolio construction and risk management, exiting investments that present a high sustainability-related risk, launching new investment products that screen fossil fuels, and strengthening the firm's commitment to sustainability and transparency in its investments.
This stance will make BlackRock "increasingly disposed" to cast critical proxy votes tied to sustainability. In a separate letter the firm stated that by mid-2020 it will sell off from its actively managed client portfolios stakes in companies that derive more than 25% of their revenues from fossil fuels.
"From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios," Fink added.
BlackRock's new position of moving more of their investor portfolios away from fossil fuels and towards companies that have a better environmental impact can greatly shift global financial markets. Only time will tell who will impact market's first: Management Funds or Climate Change.