"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?