Blackrock Discovers the Joy of Other People's Money
While genuflecting to its fiduciary responsibility to “promote long-term value” for those whose assets it is managing, Blackrock---the largest asset manager in the world---has announced in the form of a public letter from its CEO Larry Fink to corporate managements that henceforth“Sustainability [will serve] as Blackrock’s New Standard for Investing."
It is unsurprising that nowhere in the various materials issued by Blackrock in support of this new mission is there to be found an actual definition of “sustainability.” Instead, Blackrock informs us that
Sustainability in the investment context means understanding and incorporating environmental, social and governance (ESG) factors into investment analysis and decision-making.
That “definition” is worse than useless, as it quite obviously allows Fink and the Blackrock bureaucrats below him to impose their own political and policy preferences (“ESG factors”) upon the business decisions of the firms in which Blackrock is invested heavily, while shunting aside the obvious conflicts and tradeoffs among the myriad ESG objectives that can be imagined.
As night follows day, the deliberate contamination of “long-term value” objectives with political motivations brings with it hypocrisy, an outcome blatant in the Blackrock ESG gambit. Notwithstanding Fink’s rhetoric, he must understand the adverse implications for investor returns attendant upon the ESG diversion. After all, the imposition of a prior constraint---as we see below, investments in those evil fossil fuels are to be avoided---cannot be consistent with value maximization.
So it is not too surprising that Blackrock has agreed to political deals to avoid those very same ESG mandates in its own operations while striving to impose them on others. Blackrock received last December a demand from Boston Trust Walden and Mercy Investment Services that it align its shareholder votes with its statements on climate matters. The demand was later withdrawn, and The Interfaith Center on Corporate Responsibility, a co-sponsor of the resolution, issued a press release confirming that the withdrawal was the direct result of Blackrock’s
new position and the implications for votes on shareholder resolutions in the 2020 proxy season. This lead (sic) to an agreement to continue a dialogue including a summer discussion focusing on 2020 votes on climate and an opportunity to provide feedback to the company. Based on our agreement, we withdrew the shareholder resolution for this year. We are hopeful that Blackrock’s voting and engagements will be an effective catalyst stimulating positive company changes on climate. Clearly investors and clients globally will be closely monitoring BlackRock’s proxy voting performance on climate to ensure their statements are translated into action.
Mercy Investment Services confirmed the same arrangement: It withdrew its demands to Blackrock as a result of the more concrete commitments included in Fink’s open letter, to be imposed upon the firms controlled by Blackrock.
Back to the ESG “factors”: so much for the promotion of “long-term value” for shareholders. “Sustainability” is one of those buzzwords ubiquitous in the public discussion of environmental issues, but which allows for no easy definition. It is that definitional absence that guarantees that Blackrock’s “sustainability” campaign inexorably would become wholly ad hoc: Fink has made a commitment that in its actively managed portfolios Blackrock will divest holdings of firms that generate “more than 25 percent of their revenues from thermal coal production,” and will initiate “new ESG-oriented investment products, as well as those that [do not include] fossil fuels.”
Precisely how does the “sustainability” goal yield those imperatives? Fink fails to tell us, but the implicit attack on fossil fuels and “climate risk” is quite fashionable, a reality consistent with the hypothesis that Fink harbors high-level political ambitions. Perhaps it is more important to note that the new Blackrock ESG approach to investing is deeply problematic in terms of its own business model. Blackrock’s central business is index investing, with about $2.2 trillion in long-term institutional assets as of March 31. The actively managed total: about $1.2 trillion. This is not surprising, as index investing derives from the efficient markets hypothesis: The market price of an asset reflects all available information, so that it is difficult at best consistently to do better than the market average return in the absence of inside information. It is easy, however, for an investor to drive down investment expenses by investing in index funds requiring little management, with a resulting long-term net return higher than that for funds managed actively.
And so Fink’s new sustainability/climate mission is vastly more than an attempt to change the management objectives of the businesses in which it is invested. It implies clearly an obvious change in its own investment behavior, because Blackrock cannot divest specific firms included in given index funds (e.g., the S&P 500), which are defined by third parties. Virtually unnoticed in much of the reporting on Fink’s new management imperative is its corollary: a Blackrock shift away from index investing toward active fund management. Does Fink believe that he can beat the market systematically? Perhaps he does, even as he believes, preposterously, that he can engineer a market shift away from fossil fuels in the bargain. But his high self-regard seems not to be shared universally, as PNC Financial, owner of about 20 percent of Blackrock, has announced that it is divesting itself of that position.
The central Fink argument is that the market does not understand the risks posed by increasing atmospheric concentrations of greenhouse gases---or the business risks posed by potential climate policies attempting to reduce GHG emissions---but that he and Blackrock’s bureaucrats do, and that corporate managements are in a position to evaluate the science and politics of such future outcomes. That Fink has failed to offer a rigorous definition of the “sustainability” concept underlying his initiative does not inspire confidence. Does he believe that market forces are incapable of allocating a depletable resource over time? Does he understand the implications of the failure of the mainstream climate models to predict the past or ongoing climate record? Does he understand the implications of the alternative scenarios examined by the Intergovernmental Panel on Climate Change? Is he aware that the IPCC in its most recent assessment report was deeply dubious (Table 12.4) about the various horror stories commonly asserted by climate alarmists? The more recent IPCC “1.5 Degree” report is a travesty; and the shift from the earlier 2 degree “safety” limit to 1.5 degrees is an exercise in moving the goalposts driven by the reality that given current and likely prospective trends, the 2 degree limit will be met without any GHG policies at all. Does Fink understand that there is no evidence---none---consistent with the argument that a climate crisis is looming?
Does Fink understand that the climate effects of “climate action” would be virtually unmeasurable? The deeply unserious Paris agreement: 0.17°C by 2100. Zero greenhouse gas emissions by the entire Organization for Economic Cooperation and Development: about 0.3°C. A 30 percent cut in GHG emissions by virtually the entire world (stop laughing): about 0.6°C. The sharp reduction in global economic output attendant upon the COVID-19 pandemic will reduce GHG emissions by approximately 5 percent this year. If maintained for the rest of the century, the temperature reduction in 2100 would be about 0.1°C. Put aside the past refusal of the U.S. political system to implement serious reductions in GHG emissions; given the harsh economic effects of the COVID-19 pandemic, can anyone believe that Congress will act to increase energy costs? Precisely who is being naïve politically?
And how is it that Fink has come to the conclusion that corporate managements are in any better position to answer such questions? After all, successful businessmen and women are skilled at producing things that other people value; there is no reason to believe that they are good at climatology narrowly or ideological battle more generally. Fink’s new campaign will lead managements to employ armies of consultants refusing to recommend any climate investment stance that might engender vociferous attacks from the environmental left.
That disinvestment in fossil fuels is inconsistent with the diversification imperativesconsistent with the long term interests of investors will be lost in the discussion. The direct relationships among individual incomes, energy consumption, and life expectancies are large. If fossil fuels are evil, then so are activities that increase the demand for them; prominent among the latter are investments in education, health, and other sources of human capital. Accordingly, the ideological campaign against fossil fuels is fundamentally anti-human in that it implies directly a disinvestment in people. It is no accident that the environmental left is happy to accelerate economic and physical suffering among ordinary people so as to further its goals: Witness the happiness about the reduced emissions of GHG and conventional pollutants attendant upon the sharp decline in economic activity worldwide caused by the COVID-19 pandemic. Instead of a central hope that the economic suffering will end, we have instead the central left-wing fear that an economic revival will increase emissions! In short, the climate movement views ordinary people as only mouths to feed wreaking environmental destruction, rather than as individuals with moral value and as the ultimate resource yielding ingenuity and inventiveness driving a dynamic process of finding solutions to problems.
Accordingly, the Blackrock/Fink/ESG/climate gambit is vastly more perverse than generally recognized. It should be rejected by corporate managers interested in the financial wellbeing of their firms and investors, and in the general wellbeing of society writ large.