If you need some clarity around social investing, don’t look to the world’s biggest money manager for help.
Larry Fink, chief executive officer of BlackRock Inc., threw social investing into the spotlight on Tuesday in his annual letter to America’s CEOs. Climate change is an urgent problem, he said, and BlackRock will make it the center of its investment approach by “making sustainability integral to portfolio construction” and exiting investments that contribute to climate change, such as coal producers.
That may sound straightforward, but it’s far from it. A key aspect of social investing that is widely misunderstood is that the movement comprises two distinct camps. On one side is socially responsible investing, or SRI, which attempts to align investors’ portfolios with their values by excluding companies and sectors that conflict with those values, regardless of the financial impact to investors. On the other side is ESG, which attempts to identify environmental, social and governance policies that reduce companies’ — and thereby investors’ — exposure to risk. Whereas SRI is concerned with values, ESG is about maximizing wealth.
Mr. Fink’s letter is rooted in ESG, not SRI. His main point is not that climate change is bad per se — although I have no doubt he believes that — but that it’s a threat to economic growth and prosperity and therefore a threat to companies’ future prospects. “Climate risk is investment risk,” Mr. Fink said, and investors are “seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.” That process of identifying the investment risks associated with environmental policies is the very definition of the “E” in ESG.
Of course, BlackRock is a money manager, not an investor, so the investment risks associated with climate change are those of its clients rather than its own. “As an asset manager,” Mr. Fink opens his letter, “BlackRock invests on behalf of others, and I am writing to you as an advisor and fiduciary to these clients.” But BlackRock can give investors the tools to navigate climate-related risks without a broad overhaul of its investment approach. It already offers a suite of ESG funds. It will also double its lineup of ESG exchange-traded funds and push index providers to create ESG versions of their popular broad market indexes, according to Bloomberg News.
So why the larger overhaul of BlackRock’s investment approach? The answer is SRI. BlackRock is facing growing criticism that it’s not doing enough to combat a host of ills, including climate change. Mr. Fink stoked that in his letter last year, saying that people are looking to corporate executives to fix social problems that governments are failing to tackle. If investors decide that BlackRock is doing too little to align with their values, they may decide to exclude its products — or even its stock — from their portfolios. That’s the very definition of SRI.
That blurring of ESG and SRI is not good for BlackRock or social investing. For BlackRock, where does it end? There are numerous other threats to global growth and prosperity, notably wealth and income inequality. Does BlackRock now have an obligation to place inequality at the center of its investment approach, too, or to divest from companies that pay workers less than a living wage, such as Walmart and Amazon? Mr. Fink’s letter invites that expectation, and those who view it as an attempt to correct an ethical failing rather than bolster BlackRock’s investment offering will undoubtedly say it does.
As for social investing, funds have had difficulty attracting investors. I have argued previously that one reason is that investors don’t understand what they’re buying. Here, too, BlackRock has contributed to the confusion. Its iShares ESG MSCI USA ETF, for example, both invests in stocks with high ESG scores and excludes tobacco and weapons companies, a mishmash of ESG and SRI. The confusion may be why, despite social investing’s apparent popularity, BlackRock’s ESG-related ETFs are among its smallest. The funds account for just $7.6 billion of the roughly $1.7 trillion invested across BlackRock’s ETFs.
Mr. Fink should have used his letter to explain the difference between ESG and SRI and to make clear that BlackRock is in the business of giving investors the tools to express their preferences around social investing, not dictate those preferences to them. It would not have pacified BlackRock’s most ardent critics, but it would have gone a long way to curtailing future calls for BlackRock to address other societal ills.
Investors are smart to pay attention to the risks unearthed by ESG researchers, including those around climate change, and they have every right to express ethical and moral views with their money. BlackRock is also smart to offer them a variety of social-investing funds to do so. But this sweeping focus on climate change further muddies a desperately confused investing movement.
