On Tuesday, BlackRock released its annual letter to shareholders, as well as CEO Larry Fink's annual letter to CEOs, and with them, raised the bar for environmental, social and governance (ESG) investing.
The letters, which sound dire warnings about the existential threat climate change poses, establish immediate, concrete commitments that BlackRock is making toward more sustainable investing and product offerings.
Many of the announced changes go into effect in the next few months.
‘Significant Reallocation Of Capital’
In its client letter, BlackRock identified two key risks from climate change: the "physical risk" associated with environmental changes, such as rising temperatures and sea levels; and "transition risk" associated with society moving to a low-carbon economy.
This transition may not be cheap or easy for companies, and it could and likely will cut into their bottom lines. But it will happen regardless, says Fink, because it must: "In the near future—and sooner than most anticipate—there will be a significant reallocation of capital."
"I believe we are on the edge of a fundamental reshaping of finance," he added.
Doubling ESG Lineup
Among the changes announced, BlackRock intends to double its current lineup of ESG ETFs, up to a projected 150 products worldwide.
Many of these new ETFs will be sustainable versions of its flagship index products, though which indexes or products were not specified in the announcements.
Currently, iShares offers 14 ESG ETFs in the U.S., totaling over $10.4 billion in assets under management, or more than half of all assets invested in ESG ETFs:
|BlackRock's ESG ETF Suite|
|SUSB||iShares ESG 1-5 Year USD Corporate Bond ETF||$193||0.12%|
|ESGD||iShares ESG MSCI EAFE ETF||$1,490||0.20%|
|ESGE||iShares ESG MSCI EM ETF||$890||0.25%|
|ESGU||iShares ESG MSCI U.S.A. ETF||$1,500||0.15%|
|ESML||iShares ESG MSCI U.S.A. Small-Cap ETF||$113||0.17%|
|SUSL||iShares ESG MSCI USA Leaders ETF||$1,860||0.10%|
|EAGG||iShares ESG U.S. Aggregate Bond ETF||$177||0.10%|
|SUSC||iShares ESG USD Corporate Bond ETF||$91||0.18%|
|ICLN||iShares Global Clean Energy ETF||$450||0.46%|
|BGRN||iShares Global Green Bond ETF||$43||0.20%|
|CRBN||iShares MSCI ACWI Low Carbon Target ETF||$497||0.20%|
|SDG||iShares MSCI Global Impact ETF||$75||0.49%|
|DSI||iShares MSCI KLD 400 Social ETF||$1,870||0.25%|
|SUSA||iShares MSCI USA ESG Select ETF||$1,210||0.25%|
iShares offers many more products overseas, including 67 sustainable ETFs in Europe, 10 in Singapore and seven in Canada.
Recognizing the fact that different investors approach ESG investing in different ways, BlackRock's client letter outlined a three-pronged approach toward future launches.
Some ETFs will focus on screening out specific sectors or companies that investors find objectionable—so-called "exclusionary screened" ETFs that historically had dominated ESG product offerings.
Other ETFs will provide exposure to high-ESG-ranked companies while simultaneously attempting to match the performance of traditional market-cap-weighted benchmarks. This product category has found particular success recently with the launch of funds like the $1.86 billion iShares ESG MSCI USA Leaders ETF (SUSL).
'Ex-Fossil Fuels' ETFs
Still other ETFs will attempt to optimize for both ESG ratings and implement stringent exclusionary screens, including one for fossil fuel companies. Though ex-fossil fuel ETFs from State Street and others already exist, BlackRock has yet to launch any of its own products on this theme.
Also, the firm plans to launch sustainable versions of its target-date mutual funds and its all-in-one asset allocation ETFs, which include the iShares Core Growth Allocation ETF (AOR) and the iShares Core Moderate Allocation ETF (AOM). These funds are ETFs' closest equivalent to target-date funds, which are huge in the mutual fund space. (Read: "An Unlikely ETF Revival.")
Divesting From Coal
But BlackRock's plans extend far beyond a few product launches. The company also has pledged to integrate ESG into every step of its investment process, from working with index providers to create more sustainable benchmarks, to offering ESG-optimized model fund portfolios and risk management tools.
Furthermore, BlackRock will divest the entirety of its $1.8 trillion of actively invested assets from thermal coal producers, as well as apply pressure on the companies still using thermal coal to transition to another power source.
For context, BlackRock is a top-10 stakeholder of several major coal companies, holding 5% of outstanding shares of Peabody Energy Corporation (BTU); 8% of Arch Coal Inc (ARCH); and 14% of Warrior Met Coal (HCC).
Maybe It Really Is Different This Time
In its letter to clients, BlackRock was careful to caution that use of and investment in fossil fuels is a practical necessity that will persist for the foreseeable future: "Investment exposure to the global economy will mean exposure to hydrocarbons for some time. While the low-carbon transition is well underway, the technological and economic realities mean that the transition will take decades."
Still, something about the frankness and immediacy of BlackRock's 2020 letters feels different than its past promises for greater commitment to social action. The firm appears to be approaching sustainability less as a thematic opportunity now, and more as table stakes for the pragmatic investor.
We might look back on Jan. 14 as the day everything changed. Or we might not. It all depends on BlackRock's follow-through. I've already spoken to one advisor who remains skeptical of the news, arguing that, to really believe BlackRock has had a change of heart, he'd need to see the firm start voting in line with its promises.
Even still, I'm excited by this announcement. BlackRock isn't the first asset manager to pledge itself to greater sustainability, but it is by far the largest—and perhaps the momentum generated will help pull the rest of the industry along, too.
Contact Lara Crigger at [email protected]