BlackRock is all in on firmwide sustainability

The world's largest money manager, BlackRock Inc., staked its claim on sustainable investment within the global investment management industry when it announced that it will incorporate sustainable investment principles firmwide.

Sustainability now is BlackRock's standard for investing, given the risk that global climate change poses to "economic growth and prosperity," Laurence D. Fink, chairman and CEO of the New York-based firm, announced in his annual letter to corporate CEOs. BlackRock has set itself a high target: The firm intends to increase sustainably managed assets more than tenfold over the next 10 years to more than $1 trillion from $90 billion currently, a BlackRock employee letter obtained by Pensions & Investments said.

The firm's Jan. 14 sustainability announcement had a nearly immediate impact: BlackRock's iShares ESG MSCI USA ETF experienced its biggest-ever one-day inflow of $1.5 billion the next day, Bloomberg reported.

Additionally, the Climate Finance Partnership announced that BlackRock is in the early stages of setting up a new fund for institutional investors on behalf of the partnership that will make climate-related investments in private market renewable energy projects in emerging markets. The fund is expected to reach a first close of $500 million (Pensions & Investments, Jan. 22).

High demand for sustainable investment strategies across all segments of its massive client base, with assets totaling $7.43 trillion, was the driver behind BlackRock's action.

BlackRock discussed the initiative with institutional and other investors before the rollout, and many were "aggressively on board and firmly believe that they need these strategies in their portfolios," said J. Richard Kushel, senior managing director, head of client solutions, multiasset strategies and global fixed-income groups, in an interview. "The reception has been particularly strong."

Mr. Fink suggested in his letter that if 10% or even 5% of global investors reallocated assets to sustainable strategies "we will see massive capital shifts. And this dynamic will accelerate as the next generation takes the helm of government and business."

Given the high-stakes reallocation Mr. Fink predicted, sustainability likely will become the standard for the whole investment industry, sources agreed.

Investment in sustainable, responsible and impact strategies by U.S. investors totaled $11.6 trillion in the U.S. in 2018, up 38% from 2016, per the U.S. SIF Foundation's most recent biennial U.S. Sustainable, Responsible and Impact Investing Trends report. U.S. institutional investors accounted for $8.6 trillion of that figure.

Appetite for sustainable investment strategies by asset owners has increasingly shifted from high-net-worth individuals, family offices, foundations and retail investors to institutional investors over the past couple of years, said Benjamin L. Thornley, managing partner at Tideline Advisors LLC, San Francisco, a consulting firm that advises money managers and institutional investors on sustainable investment.

"More interest and investment from institutional investors is giving managers the confidence to be bolder in moving to a sustainable investment focus," Mr. Thornley said in an interview.

"With its announcement, BlackRock signaled to the investment world that sustainability is the new license to operate for money managers at this confluence of investor demand and growing capability by money managers to meet it," Mr. Thornley said.

Part of that confluence is fueled by growing acceptance of asset owners that sustainability has become a pure investment decision, rather than values-based, due in large part to the acceleration of climate change, sources said.

Ashbel C. Williams Jr., executive director and CIO of the Florida State Board of Administration, Tallahassee, said in an interview that Mr. Fink's letter contained "a very well-chosen message because it effectively bridged the philosophical argument, the tilting-at-windmills aspect of ESG principles that troubled many pension fiduciaries, and the economic reality of investments."

He added that Mr. Fink's focus on the immediacy of climate change "that is occurring far faster than anyone expected" helped to make his letter "a good, sobering document for the investment industry and the world."

Mr. Williams said the board doesn't have a ESG investment policy, but fund officers increasingly are focusing on the impact of climate change, particularly rising sea levels given Florida's ocean coast.

Florida SBA manages a total $215.1 billion, including $169.6 billion for the Florida Retirement System. The board's total investment with BlackRock is $14.5 billion.

BlackRock is preparing for investor reallocation to more sustainable portfolios with a series of changes across the firm's investment and technology platforms, according to a letter to BlackRock clients by the firm's global executive committee released Jan. 14.

Among the sustainability enhancements BlackRock plans are:

Sustainability will become an integral part of portfolio construction and risk management for actively managed portfolios and solution-based funds.

BlackRock will divest from publicly traded companies that derive more than 25% of their revenues from thermal coal production by mid-year 2020.

The number of ESG ETFs it offers will be doubled to 150 over the next few years, including sustainable versions of some of the firm's flagship index funds.

BlackRock will expand its range of actively managed sustainable strategies, including those focused on the global energy transition and impact investing funds.

Measurement and risk analysis of ESG factors will be integrated into Aladdin, BlackRock's risk management and investment technology platform..

Mr. Kushel said BlackRock will continue to manage passive funds based on market indexes but also will offer three sustainable versions of the funds.

One version will apply an exclusionary screen to an index to remove companies that produce weapons or have poor environmental records, among other factors.

The second incarnation is an ESG-optimized fund that will improve the sustainability characteristics of the index with "restrained exclusions," Mr. Kushel said.

The ESG-optimized strategy will be particularly helpful for pension funds with portfolios that are tied to index benchmarks because the strategy "will improve the portfolio's sustainability, with lower tracking error," Mr. Kushel said.

The third sustainable approach will specifically target and invest in companies in the index that meet sustainability standards.

Though it's early in BlackRock's progression to fully integrated sustainable investment, some of the firm's large institutional clients are supportive of BlackRock's move.

"I stand with Larry Fink and fully support his comments. Climate change is the single-biggest long-term risk to humanity, corporations, investors and governments. We all need to adapt to a new future," said Christopher J. Ailman, CIO of the $254.1 billion California State Teachers' Retirement System, West Sacramento, in an email.

CalSTRS, which implemented a sustainable and stewardship investment strategies program as well as a Green Initiatives Task Force, has $3.8 billion invested with BlackRock in multiple strategies.

University of Texas/Texas A&M Investment Management Co., Austin, hired BlackRock in December to manage $1 billion as a strategic partner in publicly traded equity and fixed income.

T. Britton Harris IV, UTIMCO's president, CEO and CIO, said in an email that BlackRock's view is that the coming reallocation of capital will include an increase in investment in renewable energy sources, such as solar and wind power over the coming decades.

UTIMCO doesn't have an ESG investment policy, but many of the firms hired to manage endowment assets consider ESG factors in their investment processes, said Karen Adler, a University of Texas spokeswoman, in an email.

"These firms recognize that by implementing business practices that are environmentally sustainable, they can also improve the profitability and long-term competitiveness of a business. By working with these (money management) firms, UTIMCO is supporting EGS initiatives," Ms. Adler said.

UTIMCO manages a total of $50.5 billion, of which $36.6 billion is managed in the system's two educational endowments.