Replacing the Wisdom of Crowds With the Wisdom of Fink
January 19 2020 - 5:59AM
Dow Jones News
By James Mackintosh
Climate change poses two distinct risks for investors, and a
special one for fund managers. The pledge last week by Larry Fink,
CEO of fund giant BlackRock Inc., to push clients toward
environmental, social and governance investing highlights another
risk: that markets are shifting from harnessing the wisdom of
crowds to the wisdom of a handful of powerful money-management
executives.
Leave the pros and cons of ESG aside for a moment. Whatever you
think of Mr. Fink's view, his letter highlights the power he wields
over the direction of corporate America, thanks to the votes of
BlackRock's extensive holdings. Shareholders used to have diverse
views, with individual managers even within the same organization
often disagreeing on what companies should do. Just as the market
is meant to set prices by balancing many different opinions, there
were many people deciding on any given shareholder vote.
That's changing fast. Index funds are now as big as actively run
mutual funds, but are disproportionately run by just three
companies: BlackRock, Vanguard Group and State Street Corp. We
shouldn't exaggerate: BlackRock doesn't own enough stock to dictate
to CEOs. But between them, the three indexing giants hold roughly a
fifth of the S&P 500 through funds they run for investors, and
are often -- as with JP Morgan Chase & Co. -- the three biggest
shareholders.
Their decisions on any controversial vote are already highly
influential on the outcome, and the trend toward indexing shows no
sign of slowing.
Agree or disagree with Mr. Fink's demand for more action from
companies on climate issues, the fact that just one man -- albeit a
very smart man -- is in a position to do this in the first place is
scary. This is probably one reason Mr. Fink promised more
transparency over voting. But as the power of just three companies
keeps growing, it is time governments started to think about
spreading voting more widely. One way would be to give investors in
index funds the decision on how to vote. After all, it is
investors' money, not Mr. Fink's.
Still, Mr. Fink is surely right that investors should worry
about climate risks leading to big shifts of capital, and therefore
big price moves. The trouble is that we know very little about what
those shifts of capital will be and where they will lead to profit
or loss, both because we cannot be sure how weather patterns will
be affected and because much else depends on politics.
Aside from some obvious examples -- beachfront real estate in
Florida -- it is hard to have much confidence in assessments of the
physical effect of climate change on economies or companies, let
alone on share prices.
BlackRock thinks it is starting to get a handle on which
municipalities, and so their bonds, will suffer most; on increased
risk to commercial mortgages from hurricanes; and on which electric
utilities have, like PG&E, invested too little to counter
climate risk. But these are early days.
The political impact is even harder to quantify, because
governments might do a lot, or nothing. Even when governments do
act, shareholders of "dirty" companies might benefit; anticipation
of multibillion-euro compensation payments in Germany's belated
deal last week to end coal-fired power by 2038 led the shares of
the country's coal-reliant utility RWE AG to jump.
The risk for fund managers is clearer: If they don't act, they
face the prospect of protests and loss of assets from clients most
worried about climate. BlackRock is the obvious target, as the
world's biggest manager: Extinction Rebellion activists glued
themselves to its London building last year. Worse for Mr. Fink,
its approach to engaging with companies was a contributing factor
to last year's loss of roughly half its $50 billion mandate from
Japan's Government Pension Investment Fund, the world's biggest
institutional investor. Going public with a strong commitment to
tackling climate change is a sensible way to counter the risk to
BlackRock itself.
That doesn't mean Mr. Fink is right that incorporating ESG into
investment will lead to better performance, something he insists in
a letter to clients is the reason to integrate "sustainability"
into how the company manages money.
Performance of BlackRock's own iShares range of ESG funds shows
that ESG is no guarantee of gold-plated returns.
Its two oldest in the U.S., set up in 2005 and 2006 and now
tracking the MSCI USA ESG Select index and the MSCI KLD 400 Social
index, have both lagged behind iShares' S&P 500 fund.
Two more recent funds set up in 2016 and last year are slightly
ahead, as U.S. ESG approaches have mostly beaten the S&P in the
past three years. It's possible that U.S. ESG is starting to
outperform as it becomes fashionable. It's also possible that this
is just a temporary advantage from holding less in oil stocks
during a rough patch for crude producers.
Whatever your views on the merits of ESG investing, BlackRock
will now be nudging clients toward ESG funds and pushing companies
to act. The chances are that this will be marginal in the efforts
to do more to tackle climate change, at best. But by sending a
signal that serious money is not just prepared for government
action on carbon but might even welcome it, it is just possible it
will make that government action more likely.
Write to James Mackintosh at James.Mackintosh@wsj.com
(END) Dow Jones Newswires
January 19, 2020 05:44 ET (10:44 GMT)
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