Greetings, Agents of Impact!
Signals: Ahead of the Curve
With indexes and stewardship, BlackRock pledges to retool passive investing for climate action. Sustainability, and in particular climate risk, is disrupting asset management. “In the near future, and sooner than most anticipate, there will be a significant reallocation of capital,” BlackRock’s Larry Fink writes in his annual letter to CEOs. Fink put climate at the center of changes in the way it will manage the $7 trillion in assets in its care. The reforms reflect the pressure BlackRock and other major asset managers face from large institutional asset owners – and in particular the world’s largest, Japan’s $1.7 trillion Government Pension Investment Fund – which increasingly see global warming as a systemic risk to financial markets worldwide (see, “Universal owners push asset managers to push corporations toward sustainability in 2020”). In its actively managed portfolios, BlackRock committed by mid-year to eliminate holdings in companies that generate more than a quarter of their revenues from thermal coal production. But the bulk of the assets held by BlackRock and other major asset managers, such as Vanguard and State Street, are primarily invested through passive index funds that track the broader market. Such indexing has enabled passive managers to claim they can’t take more dramatic action, such as divestment, when portfolio companies resist pressure to assess, disclose and mitigate their climate risks. But as Fink’s letter makes clear, passive ownership is passive no more. “We are on the edge of a fundamental reshaping of finance,” he writes.
- Change the index, change the market. The most consequential change outlined by Fink is a move from traditional market cap-weighted indexes, which by default reward the largest companies, to indexes weighted on the basis of environmental, social and governance, or ESG, factors, as clients such as GPIF have demanded (see, “Passive investors are actively tilting stock indexes toward sustainability”). In a second letter to clients, Fink said BlackRock will offer sustainable versions of its flagship model portfolios. “Over time, we expect these sustainability-focused models to become the flagships themselves.” As The New York Times’ Andrew Ross Sorkin suggested, in five to 10 years, “there will be a different version of the S&P 500, there will be a different version of Dow Jones.”
- Putting ‘teeth’ into stewardship. BlackRock has been under fire from protesters over its votes against many climate-related shareholder resolutions. But the real impetus for Fink’s tougher stance may have been institutional clients that expect BlackRock to more aggressively “steward” their assets from risk (see, “Japanese pension fund pushes asset managers to get tougher on sustainability“). Fink put companies on notice that they will be held to account if they don’t adopt reporting frameworks such as the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosures, pronto. “We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink wrote. As You Sow’s Andrew Behar welcomed Fink’s embrace of the model of corporate governance that shareholder advocates have used for decades. “But now with over $6 trillion in assets, the model has teeth!”
- Peer pressure. Fink’s letter raises the stakes for other financial institutions as well. “Today’s news could mark the start of a real turning point on Wall Street and lead other major players, including Vanguard, State Street and Fidelity, to follow suit,” said Environment Defense Fund’s Fred Krupp. Activist and writer Bill McKibben, leader of 350.org, told ImpactAlpha that Fink’s letter is “a BFD” and said, “I think Vanguard and State Street have to match or better, and soon. It seems like “worse for the planet than BlackRock” is not a great slogan.” BlackRock, along with JPMorgan Chase and Liberty Mutual, are top targets of McKibben’s new campaign, Stop the Money Pipeline. BlackRock’s move, he said, “certainly makes all the people gathering to take on Chase more confident of ultimate success!”
- Time for leadership. On CNBC’s Squawk Box, Fink said this was his hardest letter to write yet. “We don’t have a Federal Reserve to stabilize the world like in the five or six financial crises that occurred during my 40 years in finance,” he said. “This is bigger. It requires more planning. It requires more public-private connections to solve these problems… I do believe many of these problems could be solved, but the actions have to begin now.”
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Dealflow: Follow the Money
Benefit Corp. Electric Playhouse raises $5 million for immersive entertainment in “third spaces.” The Albuquerque-based company is the latest creative economy upstart to seize on the growth of immersive experiences with an interactive dining, gaming and entertainment center in west Albuquerque. The 24,000-square-foot space, in a designated Opportunity Zone, formerly housed a Staples office supply store. Electric Playhouse is looking to convert more abandoned retail spaces into “desirable social places to convene – the so-called third place,” says Drew Tulchin, formerly of Santa Fe-based Meow Wolf (see, “Santa Fe funhouse Meow Wolf raises $17.5 million to expand its creative economy”). A Public Benefit Corp. and newly minted B Corp., Electric Playhouse aims to create close to 100 local jobs and be net-zero emissions within five years. Its Series A round was funded by New Mexico and national angel investors, venture capital firms and family offices. Check it out.
Chicago’s new Chingona Ventures will invest in diverse businesses (and founders). Fresh off five years at Chicago’s MATH Ventures, Samara Mejia Hernandez saw an opportunity to create an alternative to what she says is “undifferentiated capital” going to “undifferentiated investments” in the Midwest and beyond. Her firm Chingona (slang for “badass woman”) will invest between $100,000 to $250,000 in up to 30 early-stage businesses over three years. Initial investments include Tiny Organics, a New York-based baby food startup that is expanding to the Midwest, and Career Karma, a San Francisco-based coding education and coaching platform. Chingona is not solely focused on diverse founders, but its portfolio companies tend to skew that way: Tiny Organics’s founders are women and Career Karma’s co-founder and CEO is Black. “If we got more of these voices, the tech ecosystem, and I believe returns, would look very different,” Hernandez told ImpactAlpha. Read on.
Codagenix announces $20 million Series B for drug development. The deal was led by life sciences investor Adjuvant Capital with participation from Euclidean Capital and Topspin Partners. The Farmingdale, N.Y.-based biotech company will use the funds to support clinical development of its flu vaccines and breast cancer therapies.
Agents of Impact: Follow the Talent
Beth Fosterjoins Autodesk Foundation as portfolio and investment manager in San Francisco… Man Group namesRobert Furdak as chief investment officer for environmental, social and governance (ESG)… Co-op Cincy is looking for a financial analyst and co-op business developer in Cincinnati… Impact investor SEAF is hiring a human resources coordinator (not a COO, as indicated in yesterday’s Brief) in Washington, D.C… Jan. 19 is the last day to apply for Start.coop’s 2020 accelerator cohort… ThePLUG Live Summit takes up trends shaping the Black innovation economy on Feb. 18 in New York… Save the date: The Impact Engine is convening the Chicago Impact Investing Showcase on Mar. 8.
Thank you for reading.
– Jan. 15, 2020