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Disclaimer: I worked for BlackRock for about 3 years on an investment team (but its been a while and I don't have a dog in this fight) BlackRock is a very simp
by wtvanhest 7y ago
Disclaimer: I worked for BlackRock for about 3 years on an investment team (but its been a while and I don't have a dog in this fight)
BlackRock is a very simple business to understand. First, they only investment money on behalf of their clients and they take investment fees for making decisions on behalf of their clients (investing their money).
They break the business in to two parts:
Alpha: old school mutual funds, new school quant funds, real estate etc. Anything where managers get paid big bucks to make investment decisions on behalf of clients.
Beta: passive investment vehicles that blackrock tries to deliver for the lowest price with lowest tracking error (i.e. deliver as close to what the index returns as possible).
What BlackRock is doing here, is a VERY, VERY big deal. They are allowing clients to now pick passive investment strategies which exclude coal or other businesses that people find morally objectionable. What that means is that if you care about the environment you can move your money to these new passive investments. As more and more people do it, it will decrease demand for equity in those companies and increase their cost of capital.
On the active side, they already had that feature, and many of their clients already ask BlackRock to exclude investments from their active portfolios and were willing to accept less return. (BlackRock has offered that for a very long time).
I find very few things interesting that asset managers do, but I am going to look at all my passive investments and try to get them moved over. I bet passive funds without coal etc. will outperform while more and more people move money from vanilla S&P500 to S&P500 without coal.
Eventually those coal companies may fall out of indexes all together which will really increase their cost of capital.
Brilliant move by Fink, and I applaud it.
- gerdesj 7y agoTa for the considered comment. Your stated opinion gybes very well with my assessment of the state of things and you come from a very, very different part of the world to me, both physically and workwise.
- Jarwain 7y agoI feel like you were looking for the north American slang word "jive"
- deleted 7y ago[deleted]
- monktastic1 7y agoTIL that "gybe" is an alternate spelling for "gibe," but only in the sailing context ("to shift your sail from one side of the vessel to the other"). "Gibe" also means to heckle. "Jive" has to do with music. The word your parent wanted is "jibe." https://www.chicagotribune.com/lifestyles/ct-tribu-words-work-spellcheck-11101020101110-story.html https://www.chicagotribune.com/lifestyles/ct-tribu-words-wor...
- gerdesj 7y agoI probably, wanted "dovetail". I know I have heard and used a word that sounds like jibe in this context but given I was a sailor, I would automatically make that into gybe. Jibe is probably correct. There are two main ways of changing a sailing boat's direction. I wont discuss them (its complicated) but tack and gybe are the keywords.
- atombender 7y agoI'd love to be able to buy something that was exactly like VTI but scrubbed clean of oil, coal, gas, and other sources of environmental damage. There are some specialized ETFs like KRMA, but I don't know anything that has environmental criteria that also follows the total market or some large cap index.
- koolba 7y agoCreate it synthetically by shorting the things in which you do not want to invest.
- lvturner 7y agoWouldn't the loan fees on the shorts disrupt that plan though?
- koolba 7y agoIf the stock is readily available the short fees are next to nil. Only hard to borrow securities have impactful loan fees. In the common case you get paid to short as it’s a rebate on potential interest for the principal.
- scottlocklin 7y ago> As more and more people do it, it will decrease demand for equity in those companies and increase their cost of capital. If I had to guess, Chevron, Exxon and Aramco doesn't have too many problems with cost of capital. All you're doing is making them cheaper for people like me who don't invest based on moral posturing.
- zentiggr 7y agoWhile I don't have money in markets directly, I think overall I'm happy with the idea of concentrating those who "don't invest based on moral posturing" into investments in dying industries (going to happen, just the time frame that's not determined yet). Slide your money over into that sinking ship, and right along with your whole cohort, we'll watch those businesses fall out of favor or even run out of capital completely, and we won't feel a thing for your losses. Not this week, not this month, not this year, but soon enough. I don't even care if the door hits you in the a on the way out.
- frockington1 7y agoI don't think they are going to roll over and accept fate as a dying brand, big oil companies are some of the largest investors in alternative fuels. Also, that 5% yield is looking real nice at the moment
- zentiggr 7y agoIf the companies affected shift away from fossil fuels, that's excellent as well. I'm not worried about the entities per se, just the emission reduction and overall environmental track record. If ten years from now, a much healthier Exxon is a part of the non-fossil economy, so much the better.
- jeffreyrogers 7y agoThe importance of oil and gas will obviously decline over time as the cost of extracting marginal deposits will push demand down, but a lot of the current climate change posturing is just that, posturing. People in the developed world love their high-carbon lifestyles and there is no viable alternative to oil/gas in the near to moderate term that will allow those lifestyles to be maintained at current levels. Oil and gas companies aren't going out of business any time soon, and I expect them to do quite well over the next decade or so, as climate activism causes them to reduce investment in future production, leading to future price increases. Also, to preempt some criticism: I'm not saying AGW isn't real. I'm saying we won't stop using fossil fuels despite AGW because there is no other way to maintain our populations and living standards at such high levels, at least without a complete overhaul of the entire economy (everything depends on oil and gas in our globalized world).
- skybrian 7y agoHow does that work? Is BlackRock starting new passive funds? The news stories I've seen don't say anything specific about what they're doing.
- _-___________-_ 7y ago"Eventually those coal companies may fall out of indexes all together which will really increase their cost of capital." This seems to contradict your expectation that "passive funds without coal etc. will outperform". If the cost of capital for coal companies is higher then the return for investors in those companies is also higher.
- dx034 7y agoOnly if they can collect enough capital to fund projects. Esp multi-billion dollar projects could be harder to fund with less support from the market, destroying parts of the business altogether.
- michaelg7x 7y agoSurely China will pony-up for more coal?
- bamboozled 7y agoWhy would China care where their power comes from ? If renewables are cheaper, then they’ll use them. That’s it.
- michaelg7x 7y agoQuite so. I'm not sure China cares there's an environmental cost associated with coal. With no other buyers, won't that make dirty coal the cheapest?
- rafiki6 7y agoChina has a major public health and pollution issue they are actively and constantly trying to remedy. The thing is everyone is making environmental investing out to be some "moral" approach, when in reality there are real and expensive repercussions and associated long term costs with using something like coal. It might be cheap immediately, but that doesn't mean it benefits society and when it adds stress to a public health system, or causes environmental damage which requires constant government intervention to clean up messes, then it's not a great idea to go for the supposedly "cheapest" option. China has the highest output of carbon in the world, but also the largest population. They aren't net producers of energy that releases CO2. They are net consumers. That's a big and important distinction. That means they don't have any vested interest in CO2 producing energy sources and if the market can adjust to provide them energy without over producing Co2 they will respond without the costs being prohibitively more expensive they'll be all about it. China is one of the largest consumers of Solar energy for e.g.
- conanbatt 7y ago> I find very few things interesting that asset managers do, but I am going to look at all my passive investments and try to get them moved over. I bet passive funds without coal etc. will outperform while more and more people move money from vanilla S&P500 to S&P500 without coal. Isn't it exactly the opposite? If capital for oil becomes more expensive, it means the producers need to pay more for it. Thus being an investor on them is more profitable. I remember a long time ago reading an article on how Vice stocks do well precisely because of this effect, but I don't know if it resisted time. In the end, if oil stocks give a higher profit, then supposedly rational actors will compensate the objectors behavior by allocating more of their portfolio to oil, making the effect neutral, but more people exert their own preferences.
- dd36 7y agoI think demand for fossil fuel free holdings is more of a risk reduction strategy greenwashed as something more.
- rcMgD2BwE72F 7y agoIt could be legal too. Imagine an organization whose members voted to ban its management from investing in any fossil fuel (no matter the motives). Or a country whose law forbid any investment in some particular resources (e.g at some point, we could ban coal like we ban some drugs and weapons).
- mikro2nd 7y agoI think you're right for most cases. And that's OK. We still end up with an investment climate that's fossil-investment-averse, and that's good for the atmosphere/ocean in the long run[1] conducive to H. sap's continued existence. i.e. People doing the right thing for the wrong reasons is just fine. The right thing ends up being done. [1] for some value of 'long'...
- pytester 7y ago>People doing the right thing for the wrong reasons is just fine. It's not laudable though.
- murph-almighty 7y agoI'll take "alive" over "laudable" any day of the week. I understand the desire to dig into intentions here but we're not losing if we invest less in coal.
- pytester 7y agoPotentially we are if an even more polluting investment becomes more profitable and they go for that. Gas, for instance, usually emits less CO2 but emits a lot more methane, which is ~90 times more warming. This is what coal is typically being replaced with. I'd like to know what is the point of giving investors a pat on the back for engaging in selfish behavior? It's like thanking a full tiger for not eating you.
- blago 7y agoOr less environmentally-conscious investors will step in, take advantage, fill the gap, and keep the equilibrium. Obviously, there is a line where decrease demand for equity will not be compensated but we don't know where it is and whether we'll reach it.
- mikorym 7y agoThis was also my thought. I think the only fail-safe strategy is if renewables are cheaper than coal (or more convenient / popular from the consumer's side).
- Al-Khwarizmi 7y agoExcept that even from a totally selfish standpoint, coal is a walking corpse anyway, the growth is clearly in renewables. Even if I didn't care at all about environment, I would prefer the coal-less products. Maybe some investors will profit from coal in the short term, but many will be left holding the bag.
- OJFord 7y agoIf that were so obviously the case it would tank without any intervention or 'class action'.
- jmcqk6 7y agoWell if you take a look at coal performance in the US, that's pretty much what is happening.
- snaky 7y agoWhat if you take a look at coal performance in China, Asia and Africa?
- Al-Khwarizmi 7y agoI think it will indeed tank in the next few years, and to be honest, my bet is that the main reason for the "intervention" by BlackRock is also that they believe it to be the case. I don't believe it's just a matter of public image, let alone morals. Time will tell.
- dharma1 7y agoThe active ESG funds are a bit pricey in terms of fees so this is great indeed. Is there an ETA for the fossil fuel free index funds?
- mikorym 7y agoThere is one issue that I can see with this, which is when the stock is valued near to some calculated future value of dividends. The price of a stock can go down while the dividend remains constant. Hence, some will take up coal stocks that now have a high dividend for the value of the stock; essentially a discount (which may in this way be naturally corrected). However, in terms of capital available to a company, often a company needs enthusiastic investors (Uhm... WeWork anybody?) that generate funds for large capital expenses. Since you worked at BlackRock, I'll take your word for it that the former will not take preference over the latter. I'm too young to have money to invest and don't know enough about the nuances for big time issuer companies to know the exact impact of Fink's [1] move. [1] The CEO of BlackRock https://en.wikipedia.org/wiki/Laurence_D._Fink https://en.wikipedia.org/wiki/Laurence_D._Fink
- buboard 7y ago> As more and more people do it, it will decrease demand for equity in those companies and increase their cost of capital. And what will happen if those investments fail?
- unixhero 7y agoThanks for your brilliant commentary here.
- deleted 7y ago[deleted]
- tozeur 7y agoCouldn’t one argue that the only reason BlackRock is willing to exit coal positions because most lose money? Perhaps it just happens to align with investors ethical desires for once?
- perl4ever 7y ago"They are allowing clients to now pick passive investment strategies which exclude coal or other businesses" I don't think this would be new in the world of index funds, but it also seems like not what is being reported. According to the link active funds are having coal removed, and the rest is breathless speculation.