Larry Fink On ESG, Bond ETFs & More

Earlier this year, before a global pandemic disrupted economies and markets, BlackRock CEO Larry Fink made a strong call-to-action on environmental, social and governance (ESG) investing with his annual letter sent to company CEOs. It caused quite a stir, as BlackRock itself made a commitment to raise the bar and reallocate capital.

On Thursday at the Morningstar Investment Conference in Chicago Fink was asked to speak to BlackRock’s own progress on that front—how the firm is stacking up on ESG investing.

“When I wrote the letter, I never thought COVID would change the world, but COVID has only made climate risk and ESG a more important conversation,” he said. “We are working with sustainability, building more data to support the understanding that climate risk is investment risk.”

“More than 70% of our 5,600 active portfolios are fully ESG integrated,” Fink said, adding that the firm is committed to having ESG metrics integrated into all of its portfolios by year end.

Client-Driven A Key

But there’s a caveat: This push has to be client-driven. So far, investors seem to be speaking with their dollars, as ESG ETFs take in record asset inflows this year.

“Let me be clear: This not our money. Our job is to show investors what climate means for their portfolios, but we are investing with them,” he said.

“We aren’t investing in thermal coal, but our job is to educate, to persuade, but always to be a fiduciary,” Fink added. “If a client wants to invest in an index, we can show them an alternative to it that doesn’t have, say, hydro carbons, but if they want that, we can do that.”

Put Clients’ Needs First

Does that mean BlackRock is not looking to get into the business of excluding companies from indexes in order to push a strong ESG agenda? Yes. But they are in the business of serving client needs first, helping them access data, research as well as model portfolios that integrate these strategies.  

“We can work with indexes, customize indexes on behalf of our clients,” he said. “I’m an environmentalist. I’m a capitalist. But our job is to follow the needs of our clients.”

That said, the firm is seeing a “huge reallocation” into ESG-screened choices, as investors buy into these strategies, wanting an asset manager such as BlackRock—which has $7 trillion in assets—to have a voice. BlackRock itself is making sure these strategies are peppering its models, making this type of investing accessible to clients.

Just today, Morningstar’s Jason Kephart quantified this move. From his report:

“Sustainable strategies have attracted more than $26 billion of net new money this year through August, already surpassing the then-record $21.4 billion they attracted in 2019. Nearly one fourth of that haul has gone to iShares ESG Aware MSCI USA (ESGU), which saw a surge in demand after its addition to the firm’s model portfolios in January. It’s a sign of both investors’ increased willingness to employ sustainable strategies and how popular model portfolios can nudge investor behavior.”

BlackRock The Exception

According to Kephart, model portfolios are increasingly targeting ESG mandates, but they aren’t leading ESG flows—the exception here being BlackRock’s own efforts. Kephart says:

“The biggest impact on ESG flows hasn’t come from intentional ESG model portfolios. In mid-January, BlackRock’s model portfolio management team, which oversees the largest suite of models in Morningstar’s database, became the exception. It added ESGU to around 40 of its target-risk model portfolios that don’t have a specific ESG mandate. In the BlackRock 60/40 Target Allocation ETF model, for example, the team added a 6% weight to the ETF, or 10% of the overall equity allocation.”

Passive Investing Mythbusting

On another note, Fink addressed the ongoing debate on whether the proliferation of passive investing and ETFs is threatening the makeup of companies’ ownership and the very fabric of markets. This conversation about the dangers of a shift to passive investing, he said, is “interesting” but fundamentally wrong.

“What we are witnessing in the last three years in the growth of ETFs is not passive investing. We’re seeing more and more active investors using ETFs for active management,” Fink said. “They are using ETFs to actively navigate their exposures.”

“That’s a real myth that everyone investing in ETFs are passive investors,” he added. “They go in and out of passive exposures through ETFs, and the biggest transformation of that is in fixed income. The fixed income market will be substantially more of an ETF market in the future.”

Bigger ETF Role In Bonds

As he sees it, ETFs are going to be “one of the core foundations of how we invest in bonds.”

So far this year—and throughout 2019—asset flows data supports this trend. In 2019, for example, net creations in fixed income ETFs surpassed inflows into equity funds for the first time. Year to date, the same phenomenon is taking place, with fixed income ETFs taking in about 50% of all net new money coming into the ETF market—roughly $140 billion—outpacing asset gathering in equity funds 2-to-1, according to ETF.com data.

Fixed income may be the great frontier for innovation and growth in ETFs, but ETF adoption is growing everywhere. The advisory channel, model portfolios, retail investors and even institutional players are increasingly turning to the wrapper. ETF issuers, such as BlackRock, are playing a big role in this growth.

ETFs As Trading Tools

“We are spending a great deal of time teaching financial advisors on how to use ETFs as a trading instrument, and not just passive instruments,” Fink said.

Big investments in technology and in platforms such as BlackRock’s Aladdin Wealth have done a great deal to help advisors access ETFs, build portfolios and meet client needs, even during COVID, he said.

Still, there’s no question that passive ownership is increasing, and increasingly concentrated in the hands of the big three asset managers—BlackRock, Vanguard and State Street. That’s something academics and some industry participants have been waving a red flag about, concerned about undue influence a few can exert on many.

Fink, again, sees no threat of passive—and ETF adoption—to the way things work.

No Outsized Influence

“Our corporate stewardship team is the largest in the world. Of the $7 trillion we manage, none of it is our money. Its 100% our clients’ money,” he said, noting that “there’s no conversation” between these asset managers. “We do not coordinate those votes.”

“I understand the conversation, and the academics who allege we exert outside influence. It’s a worthy debate, but I’d argue that index ETFs have democratized access for millions of people. We are not exerting undue pressure; we are not creating any ill-incentives,” Fink noted.

“We look at each company individually, we don’t vote as an industry vote,” he added. “Most investors outsource their ideas to proxy voting firms. We will not do that. We take a fiduciary responsibility on how we vote.”

Contact Cinthia Murphy at [email protected]