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Week in Impact: The problem with passives

Does BlackRock's watershed CEO letter suggest the finance industry is finally taking climate risk seriously?

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🛢️ BP pledged it would reach net zero by 2050 (though plans to increase oil & gas production by 20% in the next decade render the announcement a bit hollow).

🏭 A 60% rise in industrial emissions among Australia’s energy ‘megaprojects’ threatens to derail the nation’s climate targets, according to consultant RepuTex.

⛽ Global CO2 emissions defied forecasts of a rise and flatlined in 2019, according to data from the International Energy Agency. Have emissions peaked?

🗳️ Shareholder advocacy Majority Action called on investors to oppose the renomination of former Exxon chief executive Lee Raymond to JP Morgan’s board.

🏦 The bank also came under fire for blocking a shareholder proposal asking it to demonstrate how it will fulfil last year’s Business Roundtable commitments.

🌱 Climate activists stormed BlackRock’s Paris offices on Monday, just weeks after CEO Larry Fink pledge to move to a more sustainable business model.

📊 A “lack of quality and consistent data” is deterring hedge funds from sustainable investing, according to a new report.

📈 Does sustainability have a passives problem? The Hewlett Foundation argues index funds are “setting our economy on autopilot and feeding the climate crisis.”

🔐 Private equity firm KKR closed its $1.3bn Global impact Fund.

🚀 Bloomberg and MSCI announced the expansion of the Bloomberg Barclays MSCI ESG Fixed Income index suite with nine new ESG high yield indexes.

🗞️ Democracy is under threat and investors aren’t paying attention, argues Marcos Buscaglia. The solution? Add a ‘D’ to ESG with a democracy bond market.

The problem with passives


On Monday, climate activists stormed BlackRock’s Paris offices: less than a month after CEO Larry Fink announced plans to put sustainability at the heart of the firm’s investment strategy.

True, it doesn’t take much to spark a protest in Paris. But the mini siege speaks to growing pressure on asset managers to act on social and environmental concerns.

BlackRock’s pledge arrived after months of controversy centred around its fossil-fuel holdings. In two letters to clients and CEOs respectively, Fink wrote that climate change could lead to a “fundamental reshaping of finance” and outlined how the firm planned to mitigate its footprint. These weren’t empty words: in the wake of the announcement, BlackRock bolstered its sustainability team, cut its stake in coal miners and attracted $600 million into a new ESG ETF.

Monday’s actions, however, demonstrate how much further the world’s largest asset manager and its competitors must go to appease their harshest critics.

It’s not as if the broader industry isn’t moving in the right direction. A combination of public pressure and the emerging financial case against fossil fuels has seen investors abandon traditional energy for both ideological and non-ideological reasons. Yet, as the FT pointed out this week, even with this tailwind, efforts to stymie fossil fuels will be limited “as long as people continue ploughing money into market-tracking passive funds.”

It’s easy to criticise asset managers for not doing enough. But the reality is, fossil fuel companies will continue to attract investments for as long as index funds do—and that trend shows no sign of slowing.

Despite the fanfare around its announcement, there are real limits to what BlackRock, which has a huge slice of its assets tied up in indexes, can do. Unless customers explicitly select funds that exclude fossil fuels, writes the FT, “the firm will retain its spot as a top-three owner in every major oil company for the foreseeable future, regardless of any environmental or fiduciary concerns about the investments.”

Others have honed in on the issue, with the Hewlett Foundation last month putting forward an RFP to generate ideas and solutions to support the development of ESG-driven funds that “remove climate change-causing investments from products.” Among other complaints, Hewlett criticises existing index funds for “destructive consequences,” “putting the economy on autopilot” and “feeding the climate crisis.” The foundation rightly claims that passive investing “creates a consistent flow of capital to carbon-intensive companies that can artificially raise [their] valuation,” while also “systemically [influencing] financial flows to carbon-intensive industries.”

Until indexes fundamentally change or people move away from index-linked products, however, there’s no clear solution to the passive problem.