There has been a lot of excitement in the sustainability world recently following the BlackRock annual letter to CEOs. One website even claimed it as “momentous”. Now Vanguard and other asset managers are also getting in on the act. The question is whether these missives to company CEOs are game changing signs for sustainability, or just talk.
The evidence suggests the latter. Andrew Winston in an HBR blog pointed out that it is the 4th year running that Larry Fink (of BlackRock) has spoken in these terms so why the attention now? Gillian Tett has highlighted a few reasons here.
The Problem with Passive Funds
Her third reason relates to passive investing. The governance problems that passive investment funds introduce has been a running theme in the press during 2017. John Authers went as far to suggest that passive investors, a sector that BlackRock and Vanguard have significant exposure to, are now the “bad guys“.
With little rationale for the asset managers running passive funds to engage with company management, and vice versa, public letters may be the only recourse that asset managers have. John Wigglesworth in the Financial Times has commented on this and whilst he welcomed the BlackRock letter as going in the right direction, he stated that more needs to be done. Here’s why.
Not Quite a Game Changer
One quote from Larry Finks letter stands out in particular, “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” So it’s interesting to see how BlackRock delivers on that through its active funds, and particularly the ones it positions as contributing to society.
The evidence is not reassuring. Their “Impact Fund” has companies that I am sure most impact investors would shun.
They are however no different to other large fund managers. Vanguards Social Index Fund has almost the same composition. Over at UBS the choices in their Enhanced Sustainable fund may raise even more eyebrows.
BlackRock’s ESG filters also need some serious consideration. Reading some of their annual reports shows that their approach to corporate governance is a lot looser than some other fund managers such as Henderson. All of which shows that they need to start to walk the talk.
BlackRock announced that they are about to improve their own capability, and will double the number of people dedicated to investment stewardship and engaging with companies within the next three years. That’s from 32 to 64. BlackRock has 13000 employees and there are over 40000 listed companies globally which they will need to review. As Gillian Tett observed, this increase is paltry.
The letters from BlackRock and Vanguard et al are of course welcome. As Andrew Winston pointed out, much depends on how asset managers use their voting power. But they also need to follow their own advice on purpose and set up true impact funds and develop meaningful ESG filters. As asset owners (through our pensions) we have our own part to play, by being activists and using our own voting power to set these expectations for them.