BlackRock, the world’s largest private asset manager, has over the past two years begun to shift its investment strategy, placing a much greater emphasis on environmental, social, and governance (ESG) factors and boosting the presence of ESG funds in its portfolios.
In a newly released issue brief, the Institute for Pension Fund Integrity delves into the steps that BlackRock and its founder Larry Fink have taken to arrive at this point, and examines the consequences that this shift will have on investments – particularly public pension funds. Some major takeaways include:
- Transition to a High-Fee Forecaster – Over time, BlackRock will look less like a low-fee, efficient index provider and more like a higher-fee forecaster of economic and social trends, with a bias toward stocks and bonds that meet its new ESG bias. Index investing has become intensely competitive, putting the firm’s returns in jeopardy. ESG investing permits much higher fees. In addition, BlackRock may see an emphasis on ESG as beneficial in drawing new customers by differentiating the firm from other index-portfolio specialists.
- Adverse Effects on Public Pension Funds – BlackRock takes the position that the pricing of many stocks does not properly reflect the risks of climate change. This view undermines the fiduciary duty of public pension fund managers, who will have to explain to retirees that their money is no longer being invested according to an established, time-proven methodology but is open to influence from outside political interests.
- Lower Returns on Investment – Research has consistently indicated that conventional index portfolios outperform ESG portfolios. By increasing the importance of social and environmental investing in its clients’ portfolios, BlackRock has created a major distraction from the focus of achieving the highest risk-adjusted returns for its client.
- Outsized Influence on Corporate Policy – The shift also indicates that BlackRock will try to take a more active role in influencing corporate policy through proxy voting and direct advocacy. That, too, is bad news for pension funds. Businesses run best when they are run by their own managers rather than being pressured in their governance by investment funds.
- BlackRock’s ESG Strategy: A Marketing Ploy with Higher Fees – Because the shift puts BlackRock’s own franchise at risk, why the change? A major reason is that index investing has become intensely competitive, putting the firm’s returns in jeopardy. ESG investing permits much higher fees. (BlackRock’s iShares Global Clean Energy ETF, one of the largest ESG funds in the world, carries an expense ratio 11 ½ times as great as the expense ratio for BlackRock’s S&P 500 ETF.) In addition, BlackRock may see an emphasis on ESG as beneficial in drawing new customers by differentiating the firm from other index-portfolio specialists such as State Street and Vanguard.
While BlackRock may perceive the shift in its own interests, pension fund leaders must consider whether the shift is in the best interests of its own current and future retirees.
Click here to read IPFI new issue brief: Behind BlackRock’s ESG Shift