BlackRock’s ESG fund business soaring

BlackRock has often found itself at the receiving end of ESG-related outrage, prompting chief executive officer Larry Fink to declare the label too “weaponised” to use. — Bloomberg

NEW YORK: Despite a barrage of Republican attacks, lacklustre returns and diminishing client interest in the United States, BlackRock Inc has been quietly expanding its dominance in environmental, social and governance (ESG) investing.

The world’s largest asset manager has posted net ESG inflows every quarter for the past two years, a period that marks one of the toughest ever in the two-decade history of ESG investing.

In all, BlackRock’s ESG-related assets under management swelled 53% from the beginning of 2022 through the end of last year, according to data provided by Morningstar Direct.

Over the same period, the wider ESG fund market grew only about 8%. The money manager now oversees roughly US$320bil of ESG funds, more than any other investment firm in Europe, the United States or globally.

BlackRock declined to comment on the figures, which are based on Morningstar’s own assessment of sustainability metrics and exclude excludes money market, feeder and funds of funds.

According to its websites, BlackRock manages US$665bil via its sustainable investing platform, and integrates what it considers to be financially material ESG data into firm-wide investment processes.

“BlackRock has been the biggest contributor of inflows into ESG funds over the past five years, including the past couple of years,” said Hortense Bioy, Morningstar’s global director of sustainability research.

And that’s “despite the ESG backlash in the United States.”

That backlash has been increasingly aggressive, as the Republican party seeks to characterise ESG as woke, anti-capitalist and even anti-American.

BlackRock has often found itself at the receiving end of ESG-related outrage, prompting chief executive officer Larry Fink to declare the label too “weaponised” to use.

That followed warnings in which he said the debate around ESG had become “ugly” and “personal.”

“We can expect the ESG backlash in the United States to continue until the election,” Bioy said. “And perhaps also beyond, depending on the outcome of the election.”

To complicate the narrative for ESG’s proponents, the macroeconomic forces that have prevailed since the end of the pandemic, including high interest rates, have proved a poisonous cocktail for many of the green stocks that traditionally fill ESG portfolios.

Last year, the S&P Global Clean Energy Index slumped 20%, while the S&P 500 rose 26%, including reinvested dividends.

But ESG is more than just wind and solar.

The three BlackRock funds that saw the biggest asset growth last year, according to Morningstar, all counted Microsoft Corp and Apple Inc as their two biggest holdings.

In the United States, Morningstar estimated in September that the most popular ESG strategy is called climate transition, which is supposed to dedicate capital to making not-so-green assets greener.

The climate-transition fund that attracted the biggest inflow is BlackRock’s iShares Climate Conscious & Transition MSCI USA ETF (USCL@US), whose top holdings are Nvidia, and Microsoft.

The wider ESG fund market, meanwhile, suffered a stinging blow in the final three months of 2023 with the first-ever net client outflows.

The retreat was led by the United States, where redemptions were too big for European inflows to offset.

As the global fund market lost US$2.5bil of ESG client cash last quarter, BlackRock had net inflows of US$4.7bil, led by its European business and index-tracking strategies, according to Morningstar.

BlackRock saw US$5.6bil in new money flow into passive ESG strategies, more than making up for the roughly US$900mil that flowed out of active strategies, net, Morningstar said.

For ESG globally, index-tracking investing is starting to supplant active management. Even in Europe, the biggest market for ESG investing by far, the trend was striking.

Passive ESG funds brought in US$21.3bil last quarter, while clients in actively managed ESG funds withdrew almost US$18bil, according to Morningstar.

The development is all the more noteworthy because ESG was always supposed to be uniquely suited to active management, due to the extra layers of analysis thought to be required to screen for things like climate and biodiversity risk.

Bioy said the latest flow figures show the “disappointing reality” that managers pushing active ESG strategies “failed” to prove to clients that they should be entrusted with their money, despite sitting in a “corner of the market where it’s easier for them to prove their worth.”

For now, active ESG strategies continue to outnumber index-tracking products in both Europe and the United States.

But the latest flow data suggests that dynamic may shift. Morningstar notes that 85% of BlackRock’s ESG fund products are now in passive strategies.

And Bioy also points out that BlackRock’s growth in ESG has coincided with a decline in the number of ESG resolutions it supports.

In Europe, meanwhile, competitors are taking note. Amundi SA, Europe’s largest investment manager and the world’s No. 3 in ESG, targets having 40% of its index-tracking extra-traded funds become ESG products in 2025. At the end of last year, that ratio was 33%.

In all, the “disappointing” results produced by active ESG managers have “compelled investors to shift to passive, low-cost” strategies, according to Morningstar. — Bloomberg

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