Welcome to Year Three of the 'Financial Age of Enlightenment', a year where the "tectonic shift towards sustainable investing is still accelerating", according to financial guru Larry Fink.
If you are not familiar with the era I'm referring to, it all started back in 2020 when the founder of BlackRock landed back on planet Earth, after a trip to Planet Sustainability.
"Climate risk is investment risk," Fink declared upon landing. A small sentence after his splashdown, perhaps - but a giant philosophical leap for the asset management powerhouse that BlackRock is.
"Our investment conviction is that sustainability - and climate-integrated portfolios can provide better risk-adjusted returns to investors," Fink wrote in his annual CEO letter in 2020. "And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward."
I remember a conversation I had with a chief investment officer of a large European insurance company back in 2020, just weeks after Fink 'found ESG religion' and issued his newly-'greened' capitalistic rhetoric.
The CIO, who has an outsourcing mandate with BlackRock, said: "[Fink's letter] drove me mad, I've been asking BlackRock to engage [with investee companies] and take a stand for years. Every time I was told, 'we are passive investors, we can't'."
Fast forward to 2022, and Daniel Dunay, head of the BlackRock's Financial Institutions Group for Americas, suggested to Insurance Asset Risk this week that some clients might see a dichotomy between returns and ESG principles. Indeed, some have expressly instructed the world's largest asset manager to disregard any sustainability considerations that might impact their returns – and BlackRock will comply, he said.
It seems some client wishes are more equal than others!
And... was it all a lie when Fink said "climate-integrated portfolios can provide better risk-adjusted returns to investors"?
Also, has BlackRock not the strength to try and take its reluctant customers on that 'tectonic shift' journey that its CEO – a "stakeholder capitalist" – has set his ambitions on?
BlackRock is a signatory to the Net Zero Asset Managers initiative, whose first commitment is to "work in partnership with asset owner clients on decarbonisation goals, consistent with an ambition to reach net zero emissions by 2050 or sooner across all assets under management" – it seems a bit too easy to hide behind 'fiduciary duty' precepts at the first obstacle (i.e. the customer is not interested in net-zero).
Is the argument even valid? Although there are several definitions out there, fiduciary duty is grounded in the trust that a firm puts its clients' interest ahead of its own interests.
So, under scenario one, in Fink's words "climate-integrated portfolios can provide better risk-adjusted returns to investors". Easy peasy, BlackRock pushes all of its clients' investments towards ESG and lets them reap those financial rewards.
Under scenario two, ESG does come at a cost to returns, on the short term at least – that is the tricky one. Because, if the client's interest is financial returns, then that is what the asset manager should deliver. But, is delivering blindly in the best interest of the client? Probably not, and one could argue that BlackRock would be failing its fiduciary duty by doing so, or at the very least it would be failing its duty of care.
Point in case: years ago, I had the chance to interview Harry Belafonte's accountant. He recalled how Belafonte had heard of a scheme from several Hollywood stars to avoid tax. "I can do it, and it's not illegal," the accountant told him. "But Harry, it is highly unethical, and if it ever became public it would cause tremendous reputational damage."
Belafonte followed his accountant's advice and sent him a thank you note when, later, several Hollywood actors had to fight off tax avoidance accusations in the media.
So, from Harry to Larry – Maybe BlackRock's Fink should start wondering: "'Is the customer always right?"
