BlackRock Puts Climate At The Center Of Its Investment Strategy

"BlackRock, the world's largest asset manager, says that it will now make climate change central to its investment considerations. And not just for environmental reasons -- but because it believes that climate change is reshaping the world's financial system. That was the message in BlackRock Chairman and CEO Larry Fink's annual letter to CEOs published on Tuesday." NPR

"BlackRock is also pulling back from thermal coal producers in actively managed debt-and-equity portfolios by mid-2020, a move that will lead to $500 million in sales. It will expand the range of sustainable investment products as well as double to 150 the number of exchange-traded funds that address environmental, social and governance challenges." WSJ

I have always viewed the "ESG investing" mantra with healthy skepticism, despite the vast amount of ink that has been spilled advocating for it. While I could pontificate all day on the topic, my broad view as an investor is as follows:

  • All investment managers should incorporate ESG factors into their research process / analysis; these are relevant factors in evaluating a prospective investment and thus warrant consideration.
  • However, an ESG-focused (to generalize . . . I know there are many approaches) investment strategy has zero chance of outperforming an otherwise identical strategy with a larger opportunity set.
  • For example, lets pretend we have 2 clones of Warren Buffett (or Seth Klarman if you like cheaaa). One has an investment universe of 500 stocks, while the other has a universe of 1,000 stocks inclusive of the first 500 . . . it is impossible for the first clone to outperform the second.
  • If you are willing to accept a degree of underperformance inherent to these ESG-focused strategies in order to "feel good" about your investments, fine by me it is your choice (although I think writing a check to your preferred charity is a better option).
  • While I'm not a crazy "passive indexing is the only way" type (otherwise I'd be out of a job), lets call out the proliferation of ESG advocacy from within the investment community for what it is - a justification for active management in order to sell product.

So WSO . . . I'm curious to hear your thoughts. Reading Larry Fink's letter made me want to pound my head on the table, although I suspect that in private he would generally agree with me (aka this is a Nike / Kaepernick scenario where making the "wrong" decision from a moral/factual standpoint was acceptable considering the prospective sales boost),

Do you think that BlackRock is making the right decision here? Will this have a positive impact on shareholders, fundowners, and the investment community at large? Or is this simply pandering in an effort to score political points and/or positive PR?

Comments (92)

Controversial
Jan 15, 2020

https://pbs.twimg.com/media/DuIQUP1WkAAfedH.png
daily reminder climate change is a hoax and it is meant for westen countries to redistribute their wealth to their third world under the guise of carbon credit/taxes

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Funniest
Jan 15, 2020

Eat this monkey shit you climate change denier. I know what you look like in real life.
nerd

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Jan 15, 2020

it literally states in article 9 of the paris agreement that

Developed country Parties shall provide financial resources to assist developing country Parties with respect to both mitigation and adaptation in continuation of their existing obligations under the Convention.

s part of a global effort, developed country Parties should continue to take the lead in mobilizing climate finance from a wide variety of sources, instruments and channels, noting the significant role of public funds, through a variety of actions, including supporting country-driven strategies, and taking into account the needs and priorities of developing country Parties. Such mobilization of climate finance should represent a progression beyond previous efforts.

climate change is a global wealth redistribution scheme. trust me, if its on CNN, its definitely not true

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Jan 16, 2020

Lol ok. He's the one who's been online chatting with babes all day. Jealous much?

Jan 15, 2020
Ark Status:

daily reminder climate change is a hoax and it is meant for westen countries to redistribute their wealth to their third world under the guise of carbon credit/taxes

Daily reminder that 99.9999% of scientists agree with man-made climate change

Edit: Apparently there are other political parties that deny basic science, so I removed the claim that there aren't. What a sad state of affairs.

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Jan 15, 2020

scientists are literally BLACK LISTED from journals/societies/publications if they disagree with the fact that anthropogenic climate change does not exist.

climate change is a complete hoax, at least on the scale that is portrayed by the media

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Jan 16, 2020

yeah... that isn't true friendo. the liberal party in australia (the "conservative" party, weird i know), for example, are also climate-change deniers. there are many parties who choose to overlook the environment for short-term political gains.

maybe read some non-US news sometime.

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Jan 16, 2020

ur a libtard bro

Buying tesla weeklies is literally free money.

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Jan 16, 2020

The biggest driver of climate change denial is the aggressive shutting down of everyone who denies climate change. When people constantly refer to it as basic science and say dramatic things like 99.9999% of scientists against 0.0001%, that's not the attitude of someone who's confident.

Someone who's confident in his view would grab a bowl of popcorn, sit back and allow the other side to present their case with the comfort of knowing how silly and wrong it will look. But I don't see the climate change crowd doing that. I see them shouting down anyone who would dare question them.

To be clear I don't have an opinion on the matter. Unlike most people on both sides, I think I should do my own homework before speaking authoritatively

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Jan 27, 2020

CRE:

Ark Status:
daily reminder climate change is a hoax and it is meant for westen countries to redistribute their wealth to their third world under the guise of carbon credit/taxes

Daily reminder that 99.9999% of scientists agree with man-made climate change
Edit: Apparently there are other political parties that deny basic science, so I removed the claim that there aren't. What a sad state of affairs.

I'm tired of this claim about scientists believing something as if it matters. 99.9999% of scientists believed the Earth was flat prior to the 1400s but you know some asshole named Galileo messed that up.

Whether you believe in climate change or not, consensus is NOT science.

Jan 16, 2020

TIL that there are people that still don't believe in climate change.

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Jan 16, 2020

I'm not finding the website you found this on, nor can I find anything similar. Can you link it please?

Jan 16, 2020

Look up Paris Agreement Articles

Jan 17, 2020

FYI guys, this moron might be wrong on the climate change side (which should more correctly be called "anthropogene biosphere disruption", since that is very literally what we are doing, but that doesn't quite roll of the tongue) but capital distribution - material and human - is the very explicit goal of several UN resolutions and climate activists, such as Greta Thunberg.
Climate change (or rather the term above) is damn real - but so is the agenda of the people making the news and laws.

Omnia facit Voluntas - Will alone suceeds

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Jan 17, 2020

And why doesn'y capital distribution make sense? After all, we would love the Western world to give access to cleaner technologies to developing nations fo free, but that isn't possible, so the West looks at any cleantech initiative in the East as a potential money-making cash cow and charge exorbitant prices for it.

If you want to disagree with me, sure. But I'll let you know that Africa is currently leapfrogging a number of technological innovations, without any initiative from the West. On the contrary, it's countries such as India, China and Israel which have been providing them (and most of the developing world) with the technological know-how - most of which they themselves obtained mainly from Russia, and in a small number of cases, some mainland European countries. In no way has the US or the UK contributed to the overall development or upliftment of the peoples of the developing world, and especially not by a technology transfer.

When a discounted technology transfer (which is ardently the most important thing in need right now) is not facilitated by the innovators themselves, then the next best thing is capital transfer, like it or not.

GoldenCinderblock: "I keep spending all my money on exotic fish so my armor sucks. Is it possible to romance multiple females? I got with the blue chick so far but I am also interested in the electronic chick and the face mask chick."

Jan 15, 2020
whitecollarandsuspenders:

Do you think that BlackRock is making the right decision here? Will this have a positive impact on shareholders, fundowners, and the investment community at large? Or is this simply pandering in an effort to score political points and/or positive PR?

Yes to all three?

It is a smart move financially as well as the right thing to do morally. That's called a no-brainer.

Publicizing it is obviously for PR points, but this is a business after all. Marketing is a thing.

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Jan 15, 2020

While pushing companies on climate impact disclosures (if done in the right way) may do some good in terms of convincing bad actors to alter their behavior, I really don't see the rationale in eliminating thermal coal producers from the investment opportunity set . . . yes it may result in a temporary discount to intrinsic value, but people/investors are greedy so to speak and will absolutely step in and take advantage of the opportunity. In my mind excluding certain industries/sectors/companies from the investment universe has zero tangible benefits to a rational investor, and if I was invested in BlackRock actively managed funds would be concerned about the decision.

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Jan 15, 2020

Great balanced response @CRE. It's fine to use this as a marketing strategy... it is the right move for several reasons, after all.

Jan 15, 2020

This is just about putting positive PR in the bank so people won't blame them as harshly for the index investing negative feedback loop market crash that will happen.

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Jan 15, 2020

I think these very smart people have thought this through. Is this your gut reaction, or have you been on a team analyzing this for a few months?

Jan 15, 2020
urmaaam:

I think these very smart people have thought this through.

I would certainly agree. Its similar to my Nike anecdote; I'm sure BlackRock ran the numbers and ultimately concluded whatever benefits would accrue to the firm as a result of this decision outweighed the costs. But what is in the interest of BlackRock shareholders is not necessarily in the best interest of investors in BlackRock funds.

As to your second question, I've spent a good deal of time evaluating the merits of ESG strategies from an investment perspective and find the case for them questionable at best. However ESG funds are a product, and if there is demand for that product (however irrational it may be) then asset management firms like BlackRock are going to sell it, and I certainly don't fault them for this.

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Jan 15, 2020

@thebrofessor

From your posts on WSO it appears we have a similar role/experience . . . as such would love to hear any thoughts you have on this.

Most Helpful
Jan 15, 2020

I like blackrock, I do a shitload of business with them, I've met their top strategists and been to their conferences (though not larry fink personally). they are a top notch firm and great investors. my firm loves blackrock, we have one of the most comprehensive ESG platforms on the street (not the most), and it's a big deal at just about every conference I attend.that said, I think this is a massive mistake.

first, I know climate change is real and if not wholly, likely exacerbated by humans. if you disagree with that, don't waste your breath, I won't read your replies, go to 4chan. what's not agreed on, however, is the best way to go about solving the problem AND exactly how serious the problems will be (what the impacts will be and whether those impacts are even that bad).

ok, why is this a mistake? for one reason and one reason only - the precedent it sets. blackrock, through their enormous AUM has tremendous clout in the industry and will basically shape how the world moves after them, and since fink is more vocal than fidelity, vanguard, TRowe, CapGroup, etc., he'll be the one listened to.

why does this set a bad precedent? because, while it may be altruistic in nature (wanting to save the planet), you're implying that not only is climate change real (agree), but that it has bad impacts (seems reasonable), that you know what those impacts will be (whoa, slow down), and that you know what policies are best to prevent those bad impacts (well, that's a stretch).

it's the intellectual arrogance that bothers me. no one knows with certainty if what we're doing to the climate is even a long term problem. I think it's reasonable to assume that things like plastic pollution are an issue as well as overfishing, but does that mean you shouldn't buy LNG? or what about electric cars and the insane carbon footprint it takes to produce those batteries? these are not simple problems which can be solved by saying "we're not going to invest in companies that make XYZ"

look, the studies are clear that companies with good governance and sustainable business practices (fair employee pay, independent boards, etc.) perform better ceteris paribus, but the fact he includes certain outcomes from climate change and how that will affect investing, that's just arrogant.

complex systems require complex solutions, debate, research, and much more scrutiny than what fink is proposing. I think it'd be wise for him to call foul on automatically voting his ishares money to whatever the board suggests, but climate change? we've been calling for the end of the world as long as humanity has been around, extreme environmentalists think they know exactly what's going to happen if WE DONT DO SOMETHING, and guess how many times they've been right?

I think the arrogance of this could lead to us doing something with possibly catastrophic unintended consequences (like idiots suggesting stifling small fires eventually leading to massive wildfires in australia and california) when maybe the best thing to do is pump the brakes, ensure boards have good governance (something an investment firm has expertise in), and instead maybe dedicate the blackrock foundation to scientific/climate research.

so in closing, stay in your fucking lane, larry. ESG is bullshit, you know it, you're just too arrogant to realize you're stretching here.

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Jan 15, 2020
thebrofessor:

so in closing, stay in your fucking lane, larry.

lol

Thanks for the input. I specifically didn't want this thread turn into a debate on climate change filled with partisan shit-throwing but I guess the first poster thought otherwise. Definitely will acknowledge that human activity has a negative impact on the climate and that this is something that needs to be addressed, but disagree with some of the hyperbolic takes on how we are 100% fucked in 10 years or the proposed solutions that will crash the global economy and impoverish a large chunk of the population (and the disintegration of society that would be likely to follow).

And I completely agree re: setting a bad precedent. Its a slippery slope for sure. For example nuclear war is an existential threat to the planet and would certainly "reshape the world's financial system" to use Larry's words . . . are Boeing, Honeywell, Lockheed Martin and Northrop Grumman now on the naughty list as well?

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Jan 16, 2020
thebrofessor:

first, I know climate change is real... what's not agreed on, however, is the best way to go about solving the problem AND exactly how serious the problems will be

The fact that no one can seem to acknowledge this painfully obvious truth... all I can do is shake my head sometimes. It's either literal Armageddon or a worldwide leftist conspiracy. No nuance. For or against.

By and large I'm with you on the rest too, but... isn't this the kind of market-driven solution (or step in the right direction) we should strive for instead of government intervention?

Is everyone acting altruistically? Of course not. We don't expect that out of capitalism. We rely on greed to get people to go along when they otherwise wouldn't. I'm glad that Blackrock has a profit motive to market products to people who want to invest with conscience. Whether or not Blackrock makes the right claims or selects the right investments can and will be debated, but at least the market will offer alternatives so investors can educate themselves as much as they like and make their own choices. Yes, in the short term it will be a lot of noise, hyperbole, misdirection and misinformation. But in the long term, isn't this likely a net positive?

I'm not saying your critiques are wrong, just that you may be letting perfect be the enemy of good.

Jan 15, 2020

LMFAO. This is virtue signaling nonsense. Do you know what the least environmentally friendly behavior in real estate is? Building new buildings (as opposed to renovating old ones). BlackRock's portfolio is replete with brand new, Class A property. Do I think for one second that these guys care about the environment? Absolutely not. My guess is that most of them would stab their grandmother in the back to get ahead.

Jan 16, 2020
real_Skankhunt42:

This is virtue signaling nonsense.

Ah there it is. Conservatives' second favorite word behind FAKE NEWS!!1!1 used to dismiss any progressive, avoid any deep complex, nuanced thought, and shut down any conversation with a progressive pushing for a better world, god forbid. Pathetic that climate change has even become partisan, but what else would you expect from the party that now openly detests higher education.

This is literally the opposite of virtue signaling. They're putting their money where their mouth is. That phrase has lost all meaning on the Right.

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Jan 16, 2020
Alt-Ctr-Left:
real_Skankhunt42:

This is virtue signaling nonsense.

Ah there it is. Conservatives' second favorite word behind FAKE NEWS!!1!1 used to dismiss any progressive, avoid any deep complex, nuanced thought, and shut down any conversation with a progressive pushing for a better world, god forbid. Pathetic that climate change has even become partisan, but what else would you expect from the party that now openly detests higher education.

This is literally the opposite of virtue signaling. They're putting their money where their mouth is. That phrase has lost all meaning on the Right.

As others have pointed out, this move is an obvious cynical ploy to differentiate their fund. I can't believe you really believe the sincerity of people who knock down buildings to build giant new ones to great environmental damage, who drive giant luxury vehicles, live in huge houses, and fly on private jets. Your belief in the sincerity of this move is childish in its naivety.

There's great irony in you declaring that I lack nuance in my position when you uncritically accept the progressive sincerity of hyper-capitalists with absolutely no skepticism.

  • Analyst 2 in IB-M&A
Jan 17, 2020

How many genders are there?

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Jan 15, 2020

BlackRock is still largest outside investor in Saudi Aramco deal, no? Only way to know if this will mean anything is after some time passes. Could be a big shift in investing strategy / perspective, or just some casual, beginning of the decade, wannabe trend-setting press release

Jan 16, 2020

within their ESG USA fund, here are some of their top holdings

FB
GOOGL
JPM
PEP
KO
XOM
CVX

it's basically an S&P 500 fund. in fact, out of the top 10 of the ESG fund, the S&P version (which is 66% cheaper) has 9 of the same top 10, the only different one is BRK'B, which is holding #30 in the ESG fund.

there's a reason why fund companies like ESG, because they can charge more for giving you the same shit with slightly different percentages

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Jan 17, 2020
thebrofessor:

within their ESG USA fund, here are some of their top holdings

FB
GOOGL
JPM
PEP
KO
XOM
CVX

it's basically an S&P 500 fund. in fact, out of the top 10 of the ESG fund, the S&P version (which is 66% cheaper) has 9 of the same top 10, the only different one is BRK'B, which is holding #30 in the ESG fund.

there's a reason why fund companies like ESG, because they can charge more for giving you the same shit with slightly different percentages

It also kinda proves that ESG is fundamentally a facade for PR, behind it which there might as well be the opposite. Facebook is on record hiring psychiatrists to make users addicted to products.

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Jan 17, 2020

I would argue that this does not make them a fraud at all.

People drive cars which require gasoline. XOM and CVX drill for the oil and refine it. How are they exactly bad people for providing the fuel which nearly EVERYONE uses????

If you can prove that XOM is a more dirty company than other oil producers, then yes, Take them out of your ESG fund, but it's moronic to condemn a whole industry where everyone on the planet uses their product.

Jan 15, 2020

blackrock can suck my blackhog

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Jan 16, 2020

I think you are missing the forest through the trees. ESG is, largely speaking, something that institutional investors care about. Whether it be that they are a public sector entity, an endowment with a variety of mission statements as well as biases or ultra high net worth clients that want an option to feel better about themselves - they drive what is being offered.

Yes - it's absolutely a ploy to sell more actively managed strategies with higher, hopefully, margins since fee compression is slaughtering everyone. ESG presents a point of differentiation since no one can tell you what it actually is - but they sure as hell can sell you on THEIR view of it and why THEY are the best partners to work with. Again - you work in investments, you fully understand how competitive the industry is and with that the realities that we all face.

My thoughts are the smart guys are doing exactly what they always do - set the market with their size and cachet. Bring the rest of the industry to heel - Eaton Vance bought Calvert to do a similar thing. LEAF, while a laughable product from any perspective related to actual impacts on the environment, is a great product to sell to an entity that has concerns, a lot of liquidity and wants a diversifier which they can sell to their board/constituents/whomever that they are doing their part.

Is this the cynical view? Probably - but the reality is that if i'm an asset manager at this stage in the game you simply have to look beyond simple performance and/or strategies... especially when you are this large and saturated within the market.

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Jan 16, 2020
Addinator:

I think you are missing the forest through the trees. ESG is, largely speaking, something that institutional investors care about.

just because people want it doesn't make it a justified position on investment merit. I could easily say "people want guaranteed returns, so we're launching a fund that guarantees 10% yield" and it's still false advertising. that's my beef, is that ESG is false advertising.

also, from where I sit in the retail high net worth world, no one's clamoring for it. I have clients in 60% of the country, 1 has asked about ESG, and I discovered he basically just wanted to exclude tobacco stocks.

it's a total crock and fink knows it, or he's too arrogant to see the point

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Jan 16, 2020

I won't argue with you that in large part, there's a ton of green washing that goes on throughout the industry with different funds, strategies, etc.

What I can tell you is that regardless of the 'investment' merit, our largely public sector clients (and i'm using that term very broadly) in the institutional space are asking for solutions and someone is going to provide them - whether it's black rock or otherwise. I don't know high net worth well enough, or at all frankly, so i'll eat my own crow on that one.

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Jan 17, 2020
Addinator:

I think you are missing the forest through the trees. ESG is, largely speaking, something that institutional investors care about. Whether it be that they are a public sector entity, an endowment with a variety of mission statements as well as biases or ultra high net worth clients that want an option to feel better about themselves - they drive what is being offered.

Yes - it's absolutely a ploy to sell more actively managed strategies with higher, hopefully, margins since fee compression is slaughtering everyone. ESG presents a point of differentiation since no one can tell you what it actually is - but they sure as hell can sell you on THEIR view of it and why THEY are the best partners to work with. Again - you work in investments, you fully understand how competitive the industry is and with that the realities that we all face.

My thoughts are the smart guys are doing exactly what they always do - set the market with their size and cachet. Bring the rest of the industry to heel - Eaton Vance bought Calvert to do a similar thing. LEAF, while a laughable product from any perspective related to actual impacts on the environment, is a great product to sell to an entity that has concerns, a lot of liquidity and wants a diversifier which they can sell to their board/constituents/whomever that they are doing their part.

Is this the cynical view? Probably - but the reality is that if i'm an asset manager at this stage in the game you simply have to look beyond simple performance and/or strategies... especially when you are this large and saturated within the market.

Lol I'll believe they care when they downsize their multi-location 15k plus sq ft homes on compounnds larger than neighborhoods.

Get real. You sound like a Hollywood actor who says guns are bad but employs a small militia for protection.

It's like the war on drugs, minorities etc. It's a fad tool used to manipulate... anything someone with that amount of money says is bs.

You're basically rooting for a professional team while "the bad side" roots for the other team. The players don't care about you bc they are getting paid but the owners/league are the real bad.

If the glove don't fit, you must acquit!

Jan 21, 2020

Er... my point is that the people who pay you, unless you are like the Brofessor and similar, care about ESG/SRI. Period. They are going to allocate a lot of assets, significant amounts, to those strategies and firms can either provide an option or ignore the business.

Fink is a smart guy - he knows full well that fee compression is crushing the fund industry, and AM largely, and you need to diversify and differentiate offerings that are, hopefully, somewhat isolated from the race to zero. Either providing a service, or niche, offering that will see inflows and generate fees.

It's the reality of the business unless you are an asset owner or have significant influence on an asset owner as a consultant, partner, etc. to say 'hey, this is all BS. Ignore it and focus on alpha generation". Good on you if you do. I just hope you aren't then selling them on the next factor modeling, alpha promising niche hedge fund that just CAN'T MISS with their proprietary strategy.

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Jan 16, 2020

One thing we all take for granted is that investors want to maximize returns. But the pensions have other goals. Or more specifically, the folks who work for the pension investment office have other goals. The pension CIO is mostly a politician type who wants to be governor one day. Sure he'd like better returns but he sure AF will trade 20 bps on his 5% ESG allocation if it buys him positive press. So he calls up his sales guy at BlackRock and pushes them to make an ESG fund so he canto call a press conference to announce that his pension is leading the charge to save the world.

The fund underperforms a bit net of fees, the pensioners all lose a few bps, the BlackRock salesman gets a fat bonus, the CIO gets his political capital and Larry Fink gets content for his annual letter. That's how the sausage gets made folks.

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Jan 16, 2020
PteroGonzalez:

BlackRock salesman gets a fat bonus

as a matter of fact, my blackrock rep called our team yesterday to talk about ESG...

spot on ptero

Jan 16, 2020

What a machine they are. Might have to add BLK to my watch list.

Jan 16, 2020

The sales guys I have more of a personal relationship with all say its getting pushed down from the top. They also say the shit doesn't sell to RIAs at all.

Jan 20, 2020

https://www.theguardian.com/commentisfree/2020/jan... Article above is why it's happening. BlackRock, due to its size, has attracted the attention of the communist left, which is increasingly influential in the big left-leaning parties and the academia.
BR has essentially made its PR shield because progressive values are wildly popular among UHNW individuals and they want to show they are on the same page.

Just another page of woke capitalism.

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Jan 20, 2020
Comment
Jan 21, 2020