BlackRock I get a little tired of this stuff: Laurence D. Fink, the founder and chief executive of BlackRock, plans to announce Tuesday that his firm will make investment decisions with environmental sustainability as a core goal. BlackRock is the largest in its field, with nearly $7 trillion under management, and this move will fundamentally shift its investing policy — and could reshape how corporate America does business and put pressure on other large money managers to follow suit. Mr. Fink's annual letter to the chief executives of the world's largest companies is closely watched, and in the 2020 edition he said BlackRock would begin to exit certain investments that "present a high sustainability-related risk," such as those in coal producers. His intent is to encourage every company, not just energy firms, to rethink their carbon footprints. Will BlackRock's decision to send a strongly worded letter about environmental sustainability reshape how corporate America does business? Well, I remember two years ago when Larry Fink sent a strongly worded letter about how companies needed to make society better, and that too was supposedly "likely to cause a firestorm in the corner offices of companies everywhere," and now, uh, same society really. Now BlackRock will send a strongly worded letter to CEOs about the environment. It will arrive on the desk of the CEO of, I don't know, giant state-owned oil company Saudi Aramco? A company where, according to Bloomberg data, BlackRock is the largest outside shareholder. A company that did a bond offering last year—after the Saudi government murdered and dismembered Jamal Khashoggi, after Fink sent that letter about making society better—in which BlackRock was also a big investor. "We wanted the Aramco bond to be much bigger," Fink said, way back in April, when his public-relations goal was to butter up Saudi Arabia. Now it is January, and his public-relations goal is to butter up environmentalists, so BlackRock "will make investment decisions with environmental sustainability as a core goal." Next time a big oil company is looking for money, presumably that will change again. I could keep being cynical about this all day. But let's not. For one thing, we should be a little sympathetic about Fink's need to be all things to all people. That's kind of his job. BlackRock, to a first approximation, is the entire stock and bond market; of its almost $7 trillion of assets under management, some $4.6 trillion is in index funds and exchange-traded funds. I wrote the other day that index fund managers like BlackRock "are just aggregators of human preferences, and if people want to destroy human civilization—in more neutral terms, if people want to invest in fossil-fuel companies or whatever—then the index funds will take a piece of that." But if other people want to avoid investing in fossil-fuel companies or whatever, BlackRock will take a piece of that too. There are investment managers with strongly held, idiosyncratic views who appeal to a specific type of client who share those views. BlackRock is the opposite. BlackRock's business is appealing to all clients with all views, so it has to simultaneously hold all possible views. It can make for confusing PR. But also Fink's actual CEO letter, and a related client letter and FAQ, are more substantive and interesting than the PR highlights. Two things are particularly worth noting. One is that Fink frames the emphasis on sustainability as coming from BlackRock's clients, the institutions and individuals whose money BlackRock manages. "Over the past few years, more and more of our clients have focused on the impact of sustainability on their portfolios," says the client letter. "Climate change is almost invariably the top issue that clients around the world raise with BlackRock," says the CEO letter. Fink doesn't own that $7 trillion of assets, he manages it as a fiduciary for others, and it is obviously wise for him to say that this initiative is client-driven. But it's also helpful for him if that's true. This letter will get attention, and if BlackRock's biggest and most vocal clients think it's bad then they might take their money from BlackRock and give it to some other, less environmentally committed manager. The fact that Fink sent this letter and did the accompanying PR push means that he thinks it's good PR, probably not just for his own personal political and public-intellectual aspirations but more fundamentally for BlackRock's business. BlackRock is pushing for sustainability because it rationally concluded that its clients want it to push for sustainability. This isn't BlackRock's idea; BlackRock is the messenger for the preferences of the people whose money it manages. Conversely, though, most of the important substantive changes that Fink lays out are about nudging clients into more sustainable investments. Here are the first bullet-point proposals in the client letter: Sustainability as Our Standard Offering in Solutions – BlackRock manages a wide variety of investment solutions that combine different funds to help investors achieve their investment objectives. We intend to make sustainable funds the standard building blocks in these solutions wherever possible, consistent with client preferences and any applicable regulations such as ERISA. All aspects of this approach will be executed over time and in consultation with our clients, and we are committed to offering these sustainable solutions at fees comparable to traditional solutions. This year we will begin to offer sustainable versions of our flagship model portfolios, including our Target Allocation range of models. These models will use environmental, social, and governance (ESG)-optimized index exposures in place of traditional market cap-weighted index exposures. Over time, we expect these sustainability-focused models to become the flagships themselves. We also plan to launch sustainable versions of our asset allocation iShares this year, in order to provide investors with a simple, transparent way to access a sustainable portfolio at good value in a single ETF. Many more steps will follow to make sustainable investments the standard. In huge swaths of its business, BlackRock does not exactly tell its clients how to invest. It offers more or less passive investment vehicles, and the clients pick those vehicles off a menu. If you want an S&P 500 index fund, BlackRock will sell you an S&P 500 index fund, and that fund will just invest in all the stocks in the S&P 500 index, including the coal producers. And Larry Fink will write strongly worded letters to CEOs about how coal is bad, because that is his hobby, and then he will invest your money in coal stocks, because that is his job.[1] But he can try to change your mind. A little bit. Carefully. Unobtrusively. On the menu, next to "S&P 500 index fund," he can put "S&P 500 index fund except no coal," or whatever. ("Sustainable versions" of the flagship funds.) Or he can put "S&P 500 index fund except no coal" first, in a bigger font, and then "S&P 500 index fund but this one has coal and coal is bad" second in a smaller font. ("Make sustainable investments the standard.") Print the sustainable one in green and the regular one in red, even, because there is no more deeply held belief in the financial industry than that clients don't buy things printed in red. Or to the extent—and it's a large extent—that BlackRock isn't just offering clients the free choice of funds, but also suggesting which funds they should buy and in which quantities, now it will (apparently) suggest the sustainable ones rather than the regular index funds ("make sustainable funds the standard building blocks in these solutions wherever possible"), although of course if clients say no they can have the regular ones ("consistent with client preferences"). If you want total exposure to the market without any effort at environmental sustainability, you can still get that from BlackRock, which is in the total-exposure-to-the-market business. But, this letter suggests—and I suppose we'll see if it's true—that will increasingly not be the default. The default, the flagship, the suggested portfolio, will be modified index funds that tilt more toward environmental sustainability. It is worth saying that (1) that's all that BlackRock can plausibly do, and (2) it's a lot. It can't turn entirely away from offering passive products, from giving clients exposure to the total market if that's what they want; that offering is a core part of why BlackRock is so big and influential. Other, purely active investment managers can just say "we're not doing coal anymore," and mean it, but it's not that big a deal because they are a small part of the market. BlackRock is important because it's giant, and it's giant in part because it has embraced and led the passive revolution, and it has to balance its desire to exert its influence with its need to maintain that influence. The right model of BlackRock is probably that it is mostly an aggregator of preferences, but it is also, at the margin, a shaper of preferences. It passively reflects what investors want generally, but it has some ability to push those investors to want different things. There are other things that BlackRock does—it votes the shares of stock that it owns on behalf of investors, it meets with managers to talk about their sustainability plans, it writes strongly worded letters to CEOs—but I suspect that they're mostly less important than the basic core function of taking $7 trillion from investors, channeling it where the investors want it to go, and slowly and subtly diverting those channels so that the money moves more in the direction that BlackRock wants it to go. This is an unavoidably uncomfortable role. If you want BlackRock to do more on climate change, you will be annoyed that it mostly offers broad passive products that buy all the stocks, including the ones you don't like. If you want BlackRock to do less on climate change, you will be annoyed that it is pushing its clients into sustainability-focused funds rather than neutrally giving them all the stocks, including the ones BlackRock doesn't like. Mostly it is an uncomfortably powerful role: BlackRock really is a general aggregator of preferences, so it speaks with the authority of its $7 trillion and its universal ownership, which means that its ability to shape those preferences matters. Due diligence When I was an investment banker, I once negotiated a billion-dollar swap deal with the chief financial officer of a foreign company. I was pretty sure he was the CFO. He had business cards. He was smart and knowledgeable. I met him, once, at the company's offices, though after that we only spoke by phone. Our local banker knew him. When we signed the deal we got representations of authority and so forth. But at some point someone on my desk asked how I knew that he was really the CFO of this company. What if he was just some guy, taking my bank for a billion dollars? What if he snuck into their offices to meet with me? What if the office I went to, on a brief and busy visit to a foreign city, was fake? What if he was the company's janitor? What if our local banker—a relatively new hire—was in on it too? None of these worries were especially well founded, but once you start down that path it's hard to stop. It's hard to be certain that anyone is who they say they are, especially if they're thousands of miles away in a country with a different language and legal system. You have checks and certifications and people to vouch for them, but if you are in a paranoid mood you might worry that they are all part of the conspiracy too. My colleagues spent months asking me "how's that deal with the janitor going?" Mostly I laughed, but it was a little nerve-wracking. It was fine, he was the CFO, everything worked out fine. Lekoil, on the other hand, oops: London-listed oil producer Lekoil on Monday said it had fallen victim to an alleged fraud after paying a middleman to facilitate a bogus loan agreement from one of the world's largest sovereign wealth funds. The Aim-listed energy company, which Mark Simmonds, the UK's Africa minister under David Cameron, joined as non-executive director last week, said it would be "contacting the relevant authorities" to investigate what seems to be "an attempt to defraud Lekoil". Its concerns came to light after the Qatar sovereign wealth fund questioned the validity of a $184m loan agreement brokered by a Bahamas-based consultancy called Seawave Invest and announced by Lekoil earlier this month. Nigeria-focused Lekoil said it had paid $600,000 to Seawave, which introduced the company to individuals who it alleges "constructed a complex facade in order to masquerade as representatives" of the Qatar Investment Authority. Agggggghhhhhh. Here is Lekoil Ltd.'s press release, dated yesterday, saying that "the Company is now in a position to advise that, based on all information currently available to Lekoil, the loan agreement announced on 2 January 2020 by the Company, purportedly with the Qatar Investment Authority ('QIA') (the 'Facility Agreement' or the 'Transaction') seems to have been entered into by the Company with individuals who have constructed a complex facade in order to masquerade as representatives of the QIA (the 'Counterparties')." It is a true triumph of legalese as dramatic writing; imagine having the presence of mind, in these circumstances, to put in that pile of parentheticals "('QIA')(the 'Facility Agreement' or the 'Transaction')" between the start of the sentence and the punchline. Here, meanwhile, is Lekoil's press release dated January 2 announcing the deal. This was out there for almost two weeks! For two weeks they thought they had a deal with QIA to provide essential funding to develop an oil field. ("As at 31 December 2019, the Company had cash at the bank of approximately US$2.7 million," it says now; the loan was for $184 million.) The stock more than doubled, from 4.65 pounds just before the announcement to as high as 10.50 pounds on Jan. 6; it was halted yesterday and opened at 2.80 pounds today. Every sentence of yesterday's press release is almost unreadably brutal: The Company will be contacting the relevant authorities across a number of jurisdictions without delay, with regard to what appears to be an attempt to defraud Lekoil, and would like to thank the QIA for drawing this matter to the Company's advisers' attention on 12 January 2020, who then immediately made contact with the QIA to establish the facts of the situation. Lekoil's due diligence on the parties involved in the Transaction included, inter alia, meetings with individuals who, the Company now understands falsely presented their credentials as QIA representatives and interaction with individuals purporting to be carrying out legal and technical due diligence on behalf of the QIA (again, falsely). In addition, at the behest of the Company's Non-Executive Directors, a third party due diligence report, based predominately on open source information, was commissioned by Lekoil on Seawave Invest Limited ("Seawave") in its capacity as introducer of the Counterparties and lead adviser to the Company in relation to the Facility Agreement. In addition to the work of its in-house specialists, Lekoil also sought advice in relation to the Transaction from its retained UK legal counsel. "Would like to thank the QIA for drawing this matter to the Company's advisers' attention on 12 January 2020"! Imagine ... any of it. Imagine being at the QIA and getting an email from your boss like "uh here's a press release saying we're funding Lekoil, do you know anything about that?" Imagine doing that research—by calling up everyone else at QIA and being like "wait did you do this deal?"—until you're pretty sure no one did. Imagine drawing lots to decide who's gonna be the one to call Lekoil and tell them. Worst of all, imagine being the Lekoil employee who gets that call. How do you know that call is real? Like your phone rings and some guy you've never talked to is like "hi I'm with the QIA." Why would you believe that? You've been talking to the QIA, you think, and you've never heard of this guy. Why would you believe him and not them? I guess you could take the traditional approach of hanging up and calling QIA back at the main number on its website? But how do you know the website is real? How do you know anything is real anymore? Sure yes this incident has cost Lekoil $600,000 and some time and an infinite amount of embarrassment, but the real damage here is that the people who did this deal will never trust anyone again for the rest of their lives. Grossman-Stiglitz A recurring theme around here is that financial markets generally get more efficient, what with the computers and the algorithms and the disclosures and the data and so forth, but hedge fund managers make money by spotting and exploiting market inefficiencies. So as markets get more efficient hedge fund managers get sad, and because hedge fund managers generally have high opinions of themselves, they complain about the increased efficiency in sort of silly and point-missing ways. "These 'algos' have taken all the rhythm out of the market, and have become extremely confusing to me," Stanley Druckenmiller once said on television, which is exactly what you want. You don't want markets to have a "rhythm"; you don't want prices to be wrong in predictable ways so that Stanley Druckenmiller can make more money. You want prices to incorporate all available information, so that any future price movements are unpredictable and any random retail investor who buys stock is as likely to get it at the right price as Stanley Druckenmiller. But of course if you're blindly buying 10 shares at the right price you don't go on television, but Stanley Druckenmiller does, and he misses the days when prices were wrong and it was easy for him to make money. Also, to be fair to the hedge fund managers, you don't want life to be too hard for them. They are not only in the business of spotting and exploiting market inefficiencies; they are also in the business of closing those inefficiencies, by exploiting them. They make the market more efficient by spotting inefficiencies and trading the other way. If the market gets too efficient, they will go away, and then there'll be no one to make the market efficient. This sounds paradoxical because it is; it's usually called the Grossman-Stiglitz paradox. Anyway markets mostly move in the direction of greater efficiency—the algos, the data—and so hedge fund managers mostly complain, but there are occasional eddies the other way, situations where information is reduced and markets get less efficient. You would expect, for completeness, hedge fund managers to celebrate these situations. Every time a source of public information and transparency goes away, you'd expect some hedge fund manager to be like "this is great, now that public information has gotten worse, prices are wrong, and I am able to make more money with my private information." I mean, maybe you wouldn't expect that, for psychological reasons—people like complaining about how they are unfairly disadvantaged more than they like boasting about their unfair advantages—but it ought to happen. Pleasingly it does! From the Wall Street Journal: Hedge funds are cashing in on an unintended consequence of European financial regulations on investment research: Less information about some stocks. Put in place two years ago, the regulations, known as the European Union's second Markets in Financial Instruments Directive, or Mifid II, require banks to charge fees for stock research that used to be mostly free. Many sell-side outfits have scaled back their research as investors have spent less money on it since the rules were implemented. Some investors have built their own in-house research teams. The knock-on effect is analysts are covering some stocks in less depth or not at all. Hedge funds are seizing on this information asymmetry, sniffing out companies that have become cheaper due to their lack of coverage. ... Managers of hedge funds and mutual funds say the spotty coverage has led to buying opportunities for undervalued stocks, particularly among small and midcap companies. That's so nice for them. Things happen JPMorgan's Trading Surge Helps Fuel Most Profitable Year Ever. Jamie Dimon Says His Retirement from JPMorgan Is Still Five Years Away. Citi Fixed-Income Trading Surges 49%. Visa to Buy Plaid for $5.3 Billion in Bid to Reach Startups. Hedge fund puts $550m into technology stock option financing. KKR Breaks Into Wall Street Club of Top Buyout Loan Underwriters. Wall Street's Biggest Oil Hedge Is Declared a State Secret. Oyo Scales Back as SoftBank-Funded Companies Retreat. Ghosn sues Renault for €250,000 pension payment. Ghosn's Escape Leaves Nissan's Kelly to Face the Music Alone. Jeffrey Epstein set Elon Musk's brother up with a girlfriend in effort to get close to the Tesla founder, sources say. "People who have resources would like to spend more time together with people who have resources." If you'd like to get Money Stuff in handy email form, right in your inbox, please subscribe at this link. Or you can subscribe to Money Stuff and other great Bloomberg newsletters here. Thanks! [1] The client letter mentions that BlackRock is "in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020," and that got a lot of attention, but of course the much larger passive portfolios can still hold coal companies. Even the active ones can still hold some of the biggest coal miners, because they're diversified enough not to meet the 25% thermal coal standard. | 
Post a Comment