There comes a time in every modern billionaire’s life when he starts thinking about his legacy. Grandeur in American capitalism, in particular, can no longer be achieved simply by making money — you have to give it away splendidly.
The Giving Pledge, founded in 2010 by Bill Gates, Melinda French Gates and Warren Buffett, is a commitment specifically aimed at billionaires: that they should give away most of their wealth during their own lifetimes, to benefit humanity.
It’s a worthy and potentially very valuable movement. The original 40 US signatories have grown to 226, from 27 countries, including such names familiar to capital markets specialists as Elon Musk, Stephen Schwarzman, Sandy Weill, Michael Milken, Bill Gross, Stelios Haji-Ioannou, Anne Gloag, Bill Ackman and Anil Agarwal.
Larry Fink, the co-founder, CEO and chairman of BlackRock, may only just be a billionaire — Forbes estimates his wealth at $1.1bn — but he is unquestionably in the top league of modern American business leaders.
Having started from scratch in 1988, Fink and his longstanding group of close colleagues including Rob Kapito and Susan Wagner have built, organically and through acquisitions, the world’s largest asset manager, whose growth and pre-eminence seem unstoppable.
Its most recent quarterly results in October showed assets under management of $9.5tr, up 21% in the past year. Revenue was up 16% and earnings per share 23%.
With its share price at $919, up 130% since its Covid trough in March 2020, BlackRock is worth $140bn. Fink could hardly have achieved more in his primary career.
Next level
It is at this stage in an entrepreneur’s life that one's thoughts can turn to a second kind of achievement — one that might be remembered when market capitalisation figures and even the names of great companies are forgotten.
Bill and Melinda Gates have given billions over 20 years to finance vaccination in developing countries — and advocated for it in a way that has levered in much more money from other donors.
Elon Musk, Jeff Bezos and Richard Branson are trying to make space travel a commercial reality. Each to his own.
But the opportunity for Fink is much larger than any of these. It is not to give away his own money, but to change the way money is managed.
At the pinnacle
BlackRock is the top shareholder in hundreds if not thousands of companies around the world. It is one of the biggest holders of nearly every issuer’s bonds. It also enjoys unique influence over the asset management industry.
BlackRock is, in fact, the most important channel through which society owns companies.
The firm is alert to the call of sustainability. In mainstream circles, it is often seen as a leader in this direction. Fink’s annual letters to stakeholders have been milestones on the financial industry’s halting progress towards green and socially conscious investing.
Come January, Fink will likely be eloquent on sustainability again. If he follows his usual habit, he will write open letters to BlackRock’s clients and to the CEOs of companies it invests in.
Last year’s letters set out an impressive-sounding advance in how BlackRock would begin to guide its clients towards greener investment options, consistent with a net zero future.
Stuck in the past
For the avant garde, however, BlackRock is part of the problem — the cornerstone of the old, rugged edifice of capital markets that, for all the talk about sustainability, has barely changed what it invests in.
The big gain of the past two years has been BlackRock agreeing, after pressure, to vote in favour of more shareholder motions challenging company boards on environmental and social issues. It has expanded and stiffened its engagement with companies on climate.
But there has been no dramatic change in what BlackRock holds, no compelling new exclusion policies that make environmentalists believe BlackRock could actually use its power to change the economy.
Multiple times a year, protesters gather outside BlackRock offices or events to lambast the firm for the large stakes it holds in, and the debt financing it provides to, companies engaged in, or at risk of encouraging, every shade of harm, from coal, oil and gas production to deforesting the Amazon.
Among responsible investment activists, the weakness of BlackRock’s action on these issues is a byword, which has even prompted the creation of a dedicated campaign, BlackRock’s Big Problem, which studies the matter in detail.
Gradual approach
Fink appeared at COP26 to discuss climate change, rubbing shoulders with the likes of Mark Carney. His words did not allay the fears of his detractors.
“Hydrocarbon companies are part of the solution, not the problem,” he argued. “Emerging economies should be moving from coal to natural gas before they are completely reliant on green energy.”
Fink did not acknowledge research that shows that, because of methane leakage, the lifecycle greenhouse gas emissions from gas power can be worse than those from coal.
In one interview, he argued that pressing public companies to decarbonise would just move those assets into private hands. Like many in capital markets, Fink believes this would mean sustainably minded investors losing the ability to steer such infrastructure towards greener ways.
Going the wrong way
Some of the assets are moving into BlackRock’s hands. Last week, Saudi Aramco announced that BlackRock Real Assets and Hassana Investments, a Saudi social insurance fund, were investing $15.5bn to receive a 20 year lease on 49% of an Aramco gas pipeline network. BlackRock and Hassana will be paid a tariff on the gas transported.
“Aramco and Saudi Arabia are taking meaningful, forward-looking steps to transition the Saudi economy toward renewables, clean hydrogen, and a net zero future,” said Fink in a statement. “Responsibly managed natural gas infrastructure has a meaningful role to play in this transition.”
Fink’s words may be literally true, but they display no understanding of the scale of these “meaningful steps”, set against the urgency of climate change.
Talk of a net zero future is empty unless progress starts now. Scientists estimate global emissions need to fall 7% a year this decade. In May, the International Energy Agency, long a champion of the oil industry, estimated that if net zero was to be achieved, no new oil and gas production infrastructure should be built after 2021.
Yet, as BlackRock's Big Problem points out, Aramco wants to add 15bn barrels of oil equivalent to its production portfolio this decade.
There is no way to avoid the conclusion that BlackRock is financing the expansion of fossil fuel production — just as it is at Shell and Total, which also plan to increase their emissions.
Breakthrough needed
The sustainable finance movement is now at a crossroads. Much of the groundwork has been laid — the issues are known to all in capital markets and ESG specialists are being hired by the hundred every week.
But so far, its impact on the real world has been minimal. Investors are too frightened to make big bets on the economy becoming cleaner, for fear of losing a few basis points of relative performance against their benchmarks, and dropping a notch or two down fund management rankings.
Banks spend hours talking to clients about the importance of sustainability, but can never quite bring themselves to turn down the chance of a lucrative mandate from an environmentally damaging company, which would also mean slipping in the league tables.
Sustainable finance needs a jolt forward, to shake the status quo. Regulators have tried, but they have mainly just swathed the market in red tape.
Very few people have the power to break the deadlock. Larry Fink is one of them.
Hesitant to act
Fink declared at a conference in September: “I don’t want to be the environmental police. I don’t want BlackRock — because we’re a large investor — to be telling every company who’s not moving forward ‘we’re going to divest of all your shares’. That’s not a good outcome.”
But Fink is protean — he would not have got where he is otherwise. His position on responsible investing has moved a long way already.
The shift he has to make next may be bigger and more difficult, but is both logical and necessary.
BlackRock has joined the Net Zero Asset Managers’ Initiative. But as it stands, there is an inherent paradox in this group. Asset managers say they believe the economy must transition to net zero, and want it to happen — but they cannot actually change their investments unless their clients want them to.
Even in actively managed portfolios they are cautious, wanting explicit mandates from clients to target environmental goals, and scared of deviating from conventional, old economy benchmarks.
BlackRock has made some progress here, but the effects are slight.
Passive investment — which has propelled the enormous expansion in BlackRock’s assets under management — is much worse. Here, managers such as BlackRock argue they have to adhere to the benchmark, and cannot even divest egregious environmental villains.
When it comes to sustainable investing, asset managers like BlackRock are willing to develop the tools, but feel they must leave the strategic decisions to their clients.
Needless to say, these clients — from private individuals to big pension funds and endowments — look to the likes of BlackRock for guidance. Result: stasis.
Fiduciary trap
BlackRock insists it can advise clients, but cannot tell them what to do with their money. Its fiduciary duty is to make money for them, while respecting their wishes.
Others would argue that if climate change is real — as BlackRock believes — fiduciary duty necessitates shifting the investment portfolio as fast as possible away from the present composition, which is leading to destruction.
But one sometimes suspects the investors BlackRock most respects — and is most reluctant to rub up the wrong way — are its own shareholders.
Vital letters
Fink should use his 2022 letters to clients and CEOs to change this paradigm.
He believes clients should follow ambitious ESG principles only when they have agreed to them.
Fine. Write to them all, and say that BlackRock is changing its policy to one of investing as if climate change was real.
If they wish to withdraw their money, they are free to do so. Those that stay will have their money managed in a different way. In both active and passive portfolios, BlackRock will change the benchmarks it follows.
In the first year, these benchmarks will exclude the worst 10% of companies by environmental performance in each industrial sector, from equity and bond investment. Plus any involved in the worst abuses, such as deforestation and human rights infringements.
In the second worst decile, BlackRock will halve its holding; in the third, reduce it by a quarter.
The second year, it will repeat the weeding out — and the third year.
Companies can escape being washed away by this rising tide — or get back into BlackRock’s portfolios — by signing up to validated Science-Based Targets to reduce their emissions, and adhering to other norms of good social and environmental practice.
The race to improve that this would trigger would kickstart the low carbon transition for real.
Far from losing influence over the excluded companies, Fink would find he had never been more in their thoughts.
New direction
In the process, he would have broken two chains that for decades have prevented the asset management industry from fulfilling its true purpose — to look after people’s money in a way that is just and beneficial, rather than cynical and damaging.
The first chain: the narrow interpretation of fiduciary duty as meaning “copying everyone else”.
The second: the false idea that divesting is an ineffective tactic for impact.
As any honest capital market participant knows, there is no clearer or more direct signal markets can give. Buying something means approval, selling disapproval, and that is how investors’ intelligence steers the economy.
What is the downside? BlackRock might suffer an outflow of assets. Is that really something to worry about? Only three years ago it had trillions less. Was the company a disaster then?
More likely, BlackRock would become the coolest asset manager on the block, and attract even more investment.
Mr Fink: you’ve made money. It’s time to make history.
Photo: Nasa via CNP