Christopher Hohn, founder of TCI hedge fund, made his millions as a pugnacious activist. So it is no surprise that when he jumped into the climate debate this week, he was characteristically critical on two counts.
First he warned that he would unleash his activist muscle on companies including Airbus and Moody's if they did not improve their standards of disclosure — and action — over climate risks. Then he lambasted BlackRock for failing to impose equally tough disclosure requirements in their own investments. “Major asset managers such as BlackRock have been shown to be full of greenwash,” he thundered.
The move sent ripples through the normally-sedate world of environmental, social and governance investing. And Sir Christopher is certainly not alone in his criticism of BlackRock.
In recent years the asset manager’s chief executive, Larry Fink, has won favourable headlines by championing ESG ideas in his annual “Larry’s letter” to clients. The group has also adeptly become an industry leader in launching and running ESG funds.
However, environmental groups complain that the asset manager continues to pour money into sectors such as fossil fuels through its mainstream investment products. Although BlackRock replied to Sir Christopher’s attack by pointing out that it “has the largest stewardship team in the world, and engaged 370 companies globally on the topic of climate risk in the past two years,” this will not dampen the scrutiny of Mr Fink’s environmental record — or Sir Christopher’s drive to win business with his attacks.
While the tussle is striking, it obscures a far more fundamental question: will it ever be possible for the asset management world to fight climate change while the sector is so dominated by passive funds that track indices, rather than active managers?
Think about it. Sir Christopher is able to put pressure on companies because he is not only confrontational but also has relatively few companies to analyse. His portfolio is focused on under two dozen stocks.
BlackRock, however, has grown enormous largely on the back of exchange traded funds and other forms of passive investing that track the performance of a particular market or sector. It is not alone: since 2008, investment flows into passive strategies have exploded to such a degree that the ETF sector recently passed the $6tn milestone and BlackRock projects this will double by the end of 2023.
That leaves mainstream asset management groups exposed to huge numbers of companies which are automatically selected according to indices; it also means that a growing proportion of shareholder engagement is outsourced to proxy advisers, such as ISS. Thus officials at BlackRock argue, with some justification, that if climate activists want to attack finance for its lack of “green” credentials, they should start with the index companies and proxy advisers — not the asset managers themselves.
Sir Christopher disagrees: he argues that groups such as BlackRock should still insist on screening ETFs for climate issues, perhaps by using the metrics developed by the Carbon Disclosure Project. And while that would be a break with convention, the fact is that other large asset managers are also finding ways to do things differently.
Look, for example, at what Japan’s $1.6tn Government Pension Investment Fund is doing: its chief investment officer Hiro Mizuno is breaking all manner of existing rules to impose new ESG standards across the fund’s portfolio.
However, it would be foolish to expect Mr Fink to concede Sir Christopher’s point anytime soon. So in the meantime, investors should watch three things. First, BlackRock itself is now implementing a comprehensive internal analysis of all its operations in relation to climate change, covering both active and passive funds. It will be fascinating to see what this does (or does not) produce.
Second, the World Economic Forum plans to corral the world’s biggest asset managers to agree joint standards — and commitments — for active and passive funds in Davos next month. Coincidentally, Mr Fink is playing a central role in this.
Third, European regulators are raising pressure for reform too, with Brussels preparing a lengthy taxonomy of green standards. It may end up being the green equivalent of the EU’s General Data Protection Regulations: namely, something that even American fund managers will find hard to ignore. This battle for green investment, in other words, is set to heat up, and it goes well beyond Sir Christopher.
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