The world is awash with upward of $18 trillion in passive index funds that are sustaining “business as usual” while the earth’s atmosphere overheats.
Later this month, a 175-square mile Carmichael coal mine will open for business in Australia. The huge open pit is owned by Adani, India’s largest thermal power producer. The Carmichael mine ignited furious opposition in Australia. The project will dig up the ancestral lands of indigenous people. Adani will then ship the coal over one of the world’s most valuable and sensitive natural wonders — the Great Barrier Reef. Once in India, the coal will be burned for power, releasing climate-changing CO2, or to make plastic. It is, in the words of Australian climate campaigners, an “unconscionable carbon bomb.”
This and many of Adani’s other coal and gas projects have made it a hot target for activists and investors worldwide. It cost Adani $11 billion to build the Carmichael mine because international banks refused to finance the project for climate change and ESG reasons. So why does BlackRock, whose CEO Larry Fink has positioned himself as a leading climate thought leader, manage more than $1.2 billion in Adani equity and bonds?
In two words, index investing. Upward to $18 trillion in stocks and bonds can be found in what are known as “passive index funds.” They are the world’s fastest-growing and most popular forms of investing. Check your 401K or pension and you probably have an index fund that follows the S&P 500, an index of 500 of the leading companies in the U.S.
Why are they so popular? They are a low-cost and convenient way to give millions of ordinary investors access to a diversified portfolio of stocks and bonds through their pensions or private accounts.
They are also immensely profitable for the world’s largest fund managers like BlackRock, State Street and Vanguard, the “Big Three,” and for the companies like MSCI, S&P Global and the FTSE Russell, that build the indexes. For companies in the index, it ties up billions of dollars of their stock that are out of reach for classic “active” money managers who can pick and choose stocks and bonds.
But what is great for holy trinity fund managers, indexers and companies, is not great for the climate. The major problem with passive index funds is, well, they are passive. This means index fund managers like BlackRock and Vanguard have no choice but to buy every stock — and sector — in an index. That means everything from relatively climate-friendly biotech or software stocks to many of the world’s largest carbon polluters — like Adani.
Why does BlackRock, whose CEO Larry Fink has positioned himself as a leading climate thought leader, manage more than $1.2 billion in Adani equity and bonds?
The result is trillions of dollars in shareholder power is sidelined. The big three asset managers, for example, constitute the largest shareholder in 88% of the S&P 500 firms, and own as much as 20% of the S&P 500 — but with little power to actually influence the companies they own. So, unlike an “active” stock-picking fund manager, they do not have the discretion to buy and sell a stock at will. You own one, you have to own them all. At best, they can cherry-pick and engage in relatively toothless “proxy” fights and vote on shareholder resolutions. At worst, they simply pass the buck, or as BlackRock CEO Larry Fink said in his 2021 CEO letter, “it is their money we manage, not our own.”
Passive indexing is a “win-win” for the fund managers, indexers and companies. The fund managers and indexers have experienced huge growth with the passive boom. For the past decade, BlackRock has been the biggest winner –– rising from a sleepy Manhattan bond and risk shop to the world’s largest asset manager. More than $5.7 trillion of its $8.7 trillion in assets under management in 2020 were index ETFs or other forms of index funds. The indexers, in return, get huge fees from BlackRock and the other fund managers. And for companies, it means less of their stock can be subjected to individual decision-making –– be that an activist shareholder or a climate activist looking to divest.
BlackRock says this is all changing as they seek to “democratize” the process. Next year they will give their largest institutional investors more independence to act on their shares. However, that activism is limited to proxy voting, not the independence to buy and sell a share of stock. They are locked in an index.
The asset managers also point to a boom in so-called ESG, impact and sustainability funds. The numbers vary, but MSCI claims that the 20 largest ESG funds make up 13% of all global equity. But this number is highly suspect because there is no common standard for what companies should be in a fund. Almost any ESG fund will have large fossil fuel companies in the index; it will just be “weighted” or a little less than a non-ESG index. Many funds are also simply renamed with a snappy ESG marketing name –– a practice that has been banned in Europe.
As the global leader in index funds stuffed with fossil fuel companies, mining interests and other large carbon emitters, it’s little surprise that a growing number of critics are questioning BlackRock and Larry Fink’s carefully curated “climate cred.” Barely a day goes by that he is not issuing smooth-sounding statements on climate change, ESG and sustainability.
How can you make large profits that are increasingly at odds with that purpose?
And herein lies the problem. How can you make large profits that are increasingly at odds with that purpose? Climate futurist Alex Steffen has coined the term “predatory delay” — that is, extracting profits through destructively unsustainable practices. In the case of the trinity of fund managers, indexers and companies, it means they can get away with incremental, mostly non-binding, shareholder activism while seeming to be responsible and concerned about issues like climate change. In other words, “business as usual.” How else do you explain BlackRock leading a consortium that recently agreed to purchase $15.5 billion of Saudi Arabia’s natural gas pipelines?
Despite the high-minded marketing messages, the vast majority of BlackRock managers are not paid to think about climate change. They are focused on returns — both fund returns and quarterly returns for the company. How do I know? I worked in this hyper-marketing environment, where climate change was rarely discussed, and if it was, it was a new product idea. But passive index growth was celebrated. We were having such a good time minting money from ETF index funds that we even created a “trillion-dollar” bespoke suit that my old boss and former head of iShares, Mark Wiedman, wore at a party to celebrate surpassing $1 trillion in IShares ETF assets. For a long time, that suit could be found in BlackRock’s mini-museum a few feet from Larry Fink’s office. Meanwhile, the senior corporate communication team that I was also part of was working overtime developing smooth-sounding sustainability messages and reports.
The climate activist organization BlackRock’s Big Problem says Fink is “Big talk. Little action,” adding “despite big promises, BlackRock continues to pour money into companies that endanger our planet.”
So which Larry Fink should we listen to? Larry the financially savvy, quarterly-focused CEO who boasted at his last earnings call in October that, “our long-term flows were great”? Or Larry the climate champion, who in his CEO letter earlier this year said, “no issue ranks higher than climate change on our list of clients’ priorities. They ask us about it every day.”
Is Larry reimagining a new and sustainable climate economy? Or is he guilty of predatory delay? The answer will be a critical element of whether the world can slow the growth of global warming.