Speaker 1: Wegner Trains. I'm Joel Webber and I'm Marriic Bell Tunis.
Speaker 1: We got a couple of guests and we have a
Speaker 1: theme that we've hit on before and we're gonna come
Speaker 1: back to because I think it's actually a really important one.
Speaker 1: It is there's a lot to unpack with this. There's
Speaker 1: layer upon layer. I've been in it for like the
Speaker 1: past few months and it's uh, there's so many dimensions
Speaker 1: and conflicting pieces of information and a little hypocrisy. And
Speaker 1: I were going to dive into it today and try
Speaker 1: to get further than than we did in the last one.
Speaker 1: And it's not your personality that we're talking about. We're
Speaker 1: talking about e s G. It's pretty good, like you're
Speaker 1: on today, Environmental Social Government Governance. Uh. E s G
Speaker 1: assets where are they? Uh, they're underwhelming at least in
Speaker 1: e t f S maybe about twenty billion two billion,
Speaker 1: that's about point five percent of the assets compared to
Speaker 1: the press they get. That's not a lot because it
Speaker 1: gets a lot of press. It does get a lot
Speaker 1: of press. And but there's well we want to do
Speaker 1: is breakdown into two levels today, just two things. First
Speaker 1: is looking at the high level black Rock and Vanguard
Speaker 1: have a lot of voting power. Larry Fink came out
Speaker 1: talking about wants to get more green with things, So
Speaker 1: we'll talk about Yeah, that's a huge announcement. Yeah, they're
Speaker 1: the two biggest uh for almost every SMP five under company,
Speaker 1: they're the two biggest voters. Uh. There's some stuff to
Speaker 1: unpack with that. That's like the macro level. Then we'll
Speaker 1: shift to the micro level, which is, Okay, there's all
Speaker 1: these E S G tfs, how do you make sense
Speaker 1: of them? What are the pros and cons? And we'll
Speaker 1: sort of try to go through, uh, you know, how
Speaker 1: to do due diligence on those. And to help us
Speaker 1: do that, we've got any Masa from Bloomberg News regular
Speaker 1: Graham Sinclair who's on Twitter as at E S G
Speaker 1: Architect he's been on the on the show before and
Speaker 1: the first time, or a Shahem contractor who's an analyst
Speaker 1: with Bloomberg Intelligence. This is also a big week at
Speaker 1: Bloomberg and a perfect one for this episode because we've
Speaker 1: launched a new vertical called Bloomberg Green Go to Bloomberg
Speaker 1: dot Com slash Green, which is going to be the
Speaker 1: new go to destination for all kinds of great stories
Speaker 1: about climate change, all back by data. There's some amazing
Speaker 1: stories already and the tools are just going to be sensational.
Speaker 1: You can follow us on Twitter also there at climate
Speaker 1: this time on Trilliance, everything is E S. G. Annie.
Speaker 1: How big of a deal was this black Rock announcement
Speaker 1: or what was it? What was your joke? I called
Speaker 1: it the pr coup. It definitely drew a lot more attention,
Speaker 1: even a lot more attention than usual. What was the announcement?
Speaker 1: So the announcement that happened was Larry Fink came out
Speaker 1: with his annual Letters to See letter to CEOs, and
Speaker 1: he generally uses this as a way to come up
Speaker 1: with some big message for the year. In the past,
Speaker 1: he said you should pursue purpose and profits at the
Speaker 1: same time. This year he decided to go big with
Speaker 1: this message on climate change, and he told CEOs that
Speaker 1: every single business is going to be affected by climate
Speaker 1: change and they should all be really thinking about that theme.
Speaker 1: And alongside that message, he put out this note to
Speaker 1: clients that laid out exactly how black Rock will address
Speaker 1: climate change in its own business, and that includes both
Speaker 1: active and passive products. Let's break this down real quick.
Speaker 1: What really is going on here? Of course there's a
Speaker 1: nice letter, he cares he's been under pressure a little bit.
Speaker 1: But what are they actually doing that will is real.
Speaker 1: So they laid out a couple of things that they
Speaker 1: will do that our concrete in their active funds they will, oh,
Speaker 1: they will divest from thermal coal producers for example. So
Speaker 1: that's one step on the passive side, though, it's where
Speaker 1: it gets a lot more tricky, really tricky because as
Speaker 1: an index provider and player like, they basically have to
Speaker 1: do what the index tells them to do. Yeah, and
Speaker 1: this has always been black Rocks kind of push back
Speaker 1: on M E. S G themes. They've said, well, we
Speaker 1: can only do so much because we're a provider of
Speaker 1: passive products. We don't dictate what's in an index. And
Speaker 1: we're a fiduciary. So when a client tells us to,
Speaker 1: you know, put a certain amount of money in an
Speaker 1: S and P five hundred tracking fund, we have to
Speaker 1: do that. We can't play around with, uh, what's in
Speaker 1: that index. So so this is a company that has
Speaker 1: two thirds of its au M in passive products, it
Speaker 1: does have some ideas for what to do on the
Speaker 1: passive product side when it comes to E S G.
Speaker 1: So they're going to double their lineup of M E
Speaker 1: S G E T F s for example, to A
Speaker 1: D and fifty products. The question is will the investor
Speaker 1: money follow? And that's really what we're gonna hit in
Speaker 1: the second is there's now going to be hundreds of
Speaker 1: E S G T F s. Um Let's go to
Speaker 1: the active divestment and I want to bring in Shaheen.
Speaker 1: Shaheen talked about you analyze the coal companies like Peabody,
Speaker 1: there's a couple of them that black Rock is going
Speaker 1: to pull out of in their active mutual funds. Can
Speaker 1: you talk about exactly what we're talking about here in
Speaker 1: terms of their ownership, what percentage that is active? Of course,
Speaker 1: so this message that black Rock puts across, first of all,
Speaker 1: is a strong message, but it has very limited impact
Speaker 1: because at the end of the day, as you mentioned,
Speaker 1: black Rock is a large passive investor. So about if
Speaker 1: you actually look at the data about of black Rock's
Speaker 1: holdings and coal companies are passively hell, so these will
Speaker 1: remain untouched just in ninety just you know, eat for
Speaker 1: mutual fund data, so not it's inceditional money that could
Speaker 1: change things, but still largely undoutched Graham E s g
Speaker 1: is your whole world? What did you think of Larry
Speaker 1: Fink's message? I'd start very quickly by getting back a
Speaker 1: year and a fantastic interview at Davos, where Larry Fink
Speaker 1: was kind of grilled when he came out with his
Speaker 1: purpose letter, and remembering too, for your audience, he had
Speaker 1: already done three years before that where you focus along
Speaker 1: on a lot on long term investing. So I just
Speaker 1: saw that as the next logical step, although given some
Speaker 1: of his comments from January at all surprised on haw
Speaker 1: far it come. Subsequently, yesterday there was a great interviewer
Speaker 1: on Bloomberg Live. We unpacked some of his reasoning. You
Speaker 1: went fishing in Alaska and a whole bunch of stuff
Speaker 1: happened in December. For me, very quickly, I need to
Speaker 1: drill down to the footnotes and look at the details.
Speaker 1: I'm checking the receipts. Yeah. First of all, it's the
Speaker 1: distinction between the passive and active sides of their business. No,
Speaker 1: don't get me wrong. According to their self reporting a
Speaker 1: hundred billion and active last year, they've got a decent
Speaker 1: sized business. An you wanted to love that business, but
Speaker 1: it's still the smaller part of what black Rock is
Speaker 1: famous for. Um sercondly, if you look at the line items,
Speaker 1: it's thermal coal, but it's or more in revenue. So
Speaker 1: there's enough wiggle room there for businesses that are kind
Speaker 1: of changing the shape of their business. For me, the
Speaker 1: bigger part of what they're saying, including comments by their
Speaker 1: vice chairman and and other people who are representing them,
Speaker 1: is that these words around finance has fundamentally changed. Climate
Speaker 1: risk is on a par with every other thematic sick
Speaker 1: and concept that we're going to be looking at. So
Speaker 1: I think philosophically, as a house to be sending those
Speaker 1: messages is almost more important than saying them will call
Speaker 1: it or ten or eighty or what have you. And Annie,
Speaker 1: let's talk about if you are holding a shares or
Speaker 1: Vanguard Passive fund. You're going to hold Exxon, but you're
Speaker 1: gonna hold Apple, You're gonna hold all of it. Right.
Speaker 1: You wrote something before the black Rock article about Vanguard
Speaker 1: and black Rock and voting. They are going to have
Speaker 1: some some power in their voting, and can you talk
Speaker 1: a little bit about any plans they have to change
Speaker 1: how they vote on some of these issues that come
Speaker 1: up with these companies. That's right. We wrote in our
Speaker 1: story last year that the scrutiny around the voting practices
Speaker 1: of black Rock and Vanguard has really stepped up in
Speaker 1: the past couple of years. And you see nonprofits like
Speaker 1: Majority Action running analyzes showing that UM they tend to
Speaker 1: vote relative to their asset management peers. They tend to
Speaker 1: vote more in line with management at UM. Fossil fuel companies,
Speaker 1: for instance, tend to vote against shareholder proposals that are
Speaker 1: around UM climate change type issues. So the big question,
Speaker 1: while the activist community has been happy that you have
Speaker 1: this symbolic message coming from Larry think, the big question
Speaker 1: is will they change their voting practices accordingly. And we'll
Speaker 1: have to wait for the next proxy season to really
Speaker 1: see how it will affect their voting practices. And what
Speaker 1: about the investor reaction, because that's obviously going to be,
Speaker 1: you know, the one that they're you know, black Rock
Speaker 1: is gonna really be listening to Yeah, and not everybody
Speaker 1: lives in Manhattan and agrees on all these issues, right,
Speaker 1: take guns for example, yet or Berkeley. UM. There's a
Speaker 1: couple of little hot spots there, phone places to go,
Speaker 1: but not everybody lives there. Their investors are all over.
Speaker 1: They get investors in Texas, Alabama. That's a really good point,
Speaker 1: right Like you, if you're black Rock, you basically are
Speaker 1: trying to create like this massive vanilla product that every
Speaker 1: but he can use you like the president in a way,
Speaker 1: you have to take in all these constituents, a certain president,
Speaker 1: a certain type of president. But so how does it
Speaker 1: That's true? Black Rock has just by virtue of being
Speaker 1: black Rock, it has so many different kinds of clients.
Speaker 1: And you're absolutely right, not every type of client is
Speaker 1: going to be happy with this message that Think is
Speaker 1: even sending or even changes behavior accordingly. So that comes
Speaker 1: back to the idea that there's only so much black
Speaker 1: Rock can do, especially when it comes to index products.
Speaker 1: They can offer all kinds of index products that have E.
Speaker 1: S G values. The question will be whether investors respond
Speaker 1: to that. And um, you know, Think has said that
Speaker 1: they did this, they came up with this, these changes
Speaker 1: related to climate change as a result of client interest.
Speaker 1: But we still have to see to what extend the
Speaker 1: assets follow That was really interested in the comments when
Speaker 1: he did the blue book, Clive interview from Davos. He
Speaker 1: said maybe ten maybe of his investor base, and he
Speaker 1: mentioned clearly global investor base. We're asking these questions. So
Speaker 1: this clearly demand, you know, when one in five clients
Speaker 1: are saying, hey, what do we do? And to be clear,
Speaker 1: they didn't say you must do a B or C.
Speaker 1: They said this is a big ticket item. You know,
Speaker 1: in my view, climate change is overshadows all other business
Speaker 1: strategies for the foreseeable future. But these investors were saying,
Speaker 1: you're black Rock, You're the experts and an investment especially
Speaker 1: you've been telling us about long term investment and corporate
Speaker 1: governance and purpose and so on. We've got this big
Speaker 1: ticket item. We need help. You're on go to vendor.
Speaker 1: What's the plan here? Are you going to do for us? Exactly? Well,
Speaker 1: I mean, let's just how much does this really matter
Speaker 1: black Rock whether they buy the stock of this peabody
Speaker 1: or sell it isn't really what what's going to get
Speaker 1: changes consumers demanding or changing their ways and not demanding
Speaker 1: oil based products or coal and or regulation. Aren't those
Speaker 1: really the way things? Because let's say you don't, let's
Speaker 1: say black Rock divest from Peabody isn't another investor going
Speaker 1: to maybe make out on that because now the stocks
Speaker 1: undervalued because of this artificial reason they're selling. Look, they'll
Speaker 1: definitely be pricing pressures. There's some commentations already appointed to
Speaker 1: the diversions between oil price and the price of the
Speaker 1: energy sector as the first inklings of the long term
Speaker 1: amount of money out there. There's institutional money out there.
Speaker 1: They're not so keen to hear the story about hey,
Speaker 1: they'll be oil forever and we're the best producer. We'll
Speaker 1: find you another field and executed most efficiently. So there's
Speaker 1: already you know, at the margin. Yes, it will matter
Speaker 1: when a significant investor says, we've got all these opportunities,
Speaker 1: you're over here. You've got too many complications, you've got
Speaker 1: too much baggage and too many issues. I'm going to
Speaker 1: put overweight in this sector. Yeah, but again that just
Speaker 1: makes the price the stock go down. They can still
Speaker 1: make a ton of money because people can still keep
Speaker 1: demanding oil flying all over the place, Like, isn't that
Speaker 1: the route? Isn't if we're gonna do a root canal here,
Speaker 1: don't we need to get to demand? Oh? Absolutely, but
Speaker 1: don't divorce investor demand from consumer demand. There's all these pieces,
Speaker 1: these all stakeholders in the community. So when the regulators say, well,
Speaker 1: you can no longer pollute here, then that's going to
Speaker 1: change the cost of doing business. When you've got consumers
Speaker 1: are saying I don't like this product and it's got
Speaker 1: too much sugar, and it's got too much salt, and
Speaker 1: it's got too much hydrocarbons in it. Change your product mix,
Speaker 1: then they'll change it. But the voice of the investor
Speaker 1: is a very significant, long term strategic voice. So one
Speaker 1: comment at a board meeting from an investor is worth
Speaker 1: I don't know how many thousands of consumer investors, but
Speaker 1: it does remind me of a question I asked in
Speaker 1: two thousand four, two thousand five of Hannah Jones, who's
Speaker 1: sending up sustainability at Nike. I know one of your
Speaker 1: favorite sustainability topics, Eric, and I asked that fundamental question,
Speaker 1: are you more afraid of the activist consumer or the
Speaker 1: activist investor? And the answer was, I'm going to say investor. No. Unfortunately,
Speaker 1: the activist consumer who triggers all the other parts of
Speaker 1: the puzzle. Right, So the so, for example, as you're
Speaker 1: that set up, I almost debate. Yeah, you're very good.
Speaker 1: We've done that before. They're talking about table stakes. I'm
Speaker 1: here to play. It's a land worth. We spoke about
Speaker 1: NGOs and the influence they have right as you saw. Awesome,
Speaker 1: small little ngo out on the West coast, San Francisco, underpaid.
Speaker 1: They do a ton of research. They tracked proxy voting.
Speaker 1: They've been tracking Vanguard and Black Rock of the proxy season.
Speaker 1: February the report will come out. They've basically called those
Speaker 1: big fund houses outliers and being so poor at voting
Speaker 1: their proxies. Now, some people will argue, yeah, we have
Speaker 1: conversations behind the curtain and we have cups of tea
Speaker 1: over here, but it doesn't really matter what the no.
Speaker 1: It matters at the end of the day, a vote
Speaker 1: goes through and if Vanguard or State Street or black
Speaker 1: one of the huge houses, especially in the passive side,
Speaker 1: aren't voting those proxies to deal with in this case,
Speaker 1: they're looking at executive pay, which is way out of whack,
Speaker 1: and then then we've got a big problem systemically to
Speaker 1: land with. In Davos. Of course, it's going to be awkward.
Speaker 1: You have Larry Fink speaking and his colleagues and so on.
Speaker 1: He's probably gonna be shaking hands with the cfs a
Speaker 1: hundred biggest companies in the world. It's gonna be a
Speaker 1: little awkward. And he says about that pay package last year,
Speaker 1: you know, we really need to dial that down. But
Speaker 1: that's the role of the investor. And you know, I
Speaker 1: don't know if you disagree on executive pay, but it's
Speaker 1: clearly out of kilter without companies. That's been one of
Speaker 1: the other things that has been, uh you know, a
Speaker 1: talking point about how passive let society down. I guess right, well,
Speaker 1: let me rip off of this with what Droll said,
Speaker 1: because as somebody who has tried been tracking passive and
Speaker 1: is so sensitive to how brutal investors are about driving
Speaker 1: their cost down. Everybody wants all their investments for like
Speaker 1: three or four basis points now, I mean, and now
Speaker 1: they want all this on top of it, the media
Speaker 1: is dumping on them. I kind of feel a little
Speaker 1: for them because how much And they build out a
Speaker 1: corporate governance team that could look through all these statements
Speaker 1: and vote in certain meticulous ways that are aligned with
Speaker 1: their investor when they're being squeezed to compete with Vanguard
Speaker 1: or vanguard itself at two three basis points. I mean,
Speaker 1: there's just not that much money. Yeah, there's not a
Speaker 1: lot of wiggle room there. And black Rock really does
Speaker 1: promote its stewardship team as part of its whole effort
Speaker 1: to like engage with companies. They say behind the scenes,
Speaker 1: they say, this is the biggest stewardship team anywhere. It's
Speaker 1: forty five people for you know, thousands of companies worldwide.
Speaker 1: So that's where you get critics that say, how can
Speaker 1: you possibly meaningfully tackle these issues behind the scenes with
Speaker 1: so many companies to cover, um, you know, even with
Speaker 1: a team that big. So that's something that they've come
Speaker 1: under fire with on the activist side. But back on
Speaker 1: the pr side, I would really say that Fink has
Speaker 1: been followed around by activists and and there's been this
Speaker 1: increasing drumbeat of adgetation. So I think that as far
Speaker 1: as this message goes that he sent it will at
Speaker 1: least help, uh, you know, offer an olive branch to
Speaker 1: those kinds of protesters who are you know, are showing
Speaker 1: up outside is speaking engagements outside Black Rock offices. And
Speaker 1: I think that by sending this message, black Rock is
Speaker 1: at least trying to say hey, like, we're trying to
Speaker 1: be on your side, and that feels to me more
Speaker 1: like activist consumers than activist investors. Right, So Graham, maybe
Speaker 1: maybe you're ouno upthing there. Okay, So another place that
Speaker 1: pressure could come down is on the index providers. Any
Speaker 1: what about that? That's right? One other piece of the
Speaker 1: passive um plan that think laid out for climate change
Speaker 1: is to pressure the index providers. Those are like the
Speaker 1: m s c I s of the world to create
Speaker 1: black Rock basically basically almost licenses. Yes, there are a
Speaker 1: customer of m s c I s. They use those
Speaker 1: M s c I indexes for their index products, and
Speaker 1: and this is where they said they'll they'll start to
Speaker 1: apply more pressure to the index ers to create more
Speaker 1: sustainable UM indexes, which would allow them to make more
Speaker 1: sustainable products. Does that also mean that there might be
Speaker 1: more self indexing, because that's another place that black Rock
Speaker 1: could say, Hey, we can just do this ourselves, we
Speaker 1: don't even need you. That will be really interesting to watch.
Speaker 1: They've always raised like there could be problems with self indexing.
Speaker 1: We don't. We don't want to go too far down
Speaker 1: that road necessarily, but it will be an interesting pope
Speaker 1: to watch, yeah, exactly like it will. It will be
Speaker 1: really interesting to see if if they decided to pursue
Speaker 1: that more if the index providers don't fall in line. Well,
Speaker 1: you know, M s c I, S and P. They
Speaker 1: have a whole suite of different types of E s
Speaker 1: G indexes. That's not really the issue. The issue is
Speaker 1: the main indexes, like the SMP five hundred. Do you
Speaker 1: ever change that because that's beta and I think a
Speaker 1: lot of people probably won't don't want that changed, but
Speaker 1: they're good news is there are options. You could just
Speaker 1: use something that's a little like barely um it's like
Speaker 1: the SMP with a little less fall so fuel, and
Speaker 1: then you keep going into waves till you're down to
Speaker 1: maybe something that's really aggressively E s G. But I mean,
Speaker 1: one thing that's really interesting is back when M S
Speaker 1: C I and the index providers were trying to come
Speaker 1: down and exclude UM dual class shares UH share companies
Speaker 1: with dual class shares from indexes, black Rock actually came
Speaker 1: out and said, it's not on the index providers to
Speaker 1: say what the investable universe should be. And so this
Speaker 1: seems like a bit of a reversal in that way.
Speaker 1: So just one point to add on sort of investorsis
Speaker 1: consumer demand is don't underestimate the impact that an investor
Speaker 1: has on a company's cost of capital. I mean, that's
Speaker 1: what's happened to Cool. It's this mix of demand pressure
Speaker 1: but also investors in short as saying they're not going
Speaker 1: to underte such assets. You guys, I'd like to pick
Speaker 1: up on what Annie was speaking about around the black
Speaker 1: Rock announcement. There's much to be admired about it. It's
Speaker 1: signaling it's important. They're going to make internal changes. That's great.
Speaker 1: They've got forty five heads. Larry actually promised to think
Speaker 1: I promised in January last year, there'll be seventy one.
Speaker 1: They're still hiring, you know, throw your resume there. But
Speaker 1: on I think the comment around the indexes, uh, that's
Speaker 1: a bit soft because, as Eric pointed out earlier, indexes
Speaker 1: will build you whatever you want. That's my business. I mean,
Speaker 1: st architect, someone walks through the door, they say, build
Speaker 1: me an index. The shape of the strategy that looks
Speaker 1: like this, I'm going to figure it out right now.
Speaker 1: I'm working at Harvard on an Arctic strategy. How we're
Speaker 1: going to build an Arctic strategy using five sectors in
Speaker 1: the geography. So the comment on the indexes index construction vendors,
Speaker 1: I don't really buy that, but it is very, very
Speaker 1: significant that a major player is saying this is core
Speaker 1: to what we're doing and it's going to affect what
Speaker 1: we're doing across the house. Now, how do we check that?
Speaker 1: As any suggested at the end of the proxy season,
Speaker 1: don't you worry every NGO that's tracking this and any
Speaker 1: cynic like some of the people in the room here
Speaker 1: again and be saying so what so how did it
Speaker 1: play out? And then there's also going to be the
Speaker 1: aspect of what happens in the marketplace. I don't know
Speaker 1: if you saw the news about a quick spike and
Speaker 1: the E t F inflows the day after the day
Speaker 1: of the announcement, I don't know if it was time.
Speaker 1: If there's a partner going in with money, well, I
Speaker 1: know what happened there. Yeah, this wasn't a bunch of
Speaker 1: millennials who got excited about Larry Fink's letter and all
Speaker 1: bought into E s G because they were excited. Was
Speaker 1: the balance sheet money? Well, black Rock has E t
Speaker 1: F models and they just put E S G E
Speaker 1: t F s into the emerging markets and the U
Speaker 1: S slug and that right, there was billion dollars. So
Speaker 1: that's black Rocks doing it still counts, but that's not different.
Speaker 1: That's different. That said, we did look, there was about
Speaker 1: twenty E S G T F that have taken in
Speaker 1: money this month. So there's the grassroots is there. It's
Speaker 1: just tiny little piece of grass. Black Rock moving in
Speaker 1: that kind of money is Mortalizer, Intertalizer. So here's why strategic.
Speaker 1: It's a whole new field. Frankly, more than that is
Speaker 1: because one of the promises about a hundred and fifteen
Speaker 1: a t S is that basically cloning you want it?
Speaker 1: Do you want it green or brown? So that is
Speaker 1: a big deal. When you go and buy your cherios.
Speaker 1: How many types of cherios are there? I'm a parent,
Speaker 1: I know you are. How many types of cherios? Only one?
Speaker 1: That's idea like dor coal position with Bloomberg, we need
Speaker 1: to be more in minded. I think coke is a better.
Speaker 1: There's diet coke, zero coke, cherry coke. Yeah, and so
Speaker 1: these are all good. They're gonna be all these versions
Speaker 1: of the SMP. Excuse me, there are twenty flavors of cherios,
Speaker 1: and there's one type of cheer thank you, especially because
Speaker 1: General General Mills back the Beast. Remember do you remember
Speaker 1: the cheerios box? Yeah, because that was an important social missage.
Speaker 1: That's why landing with there'll be clones of everything that's
Speaker 1: that's awesome. But then what happens next, that's what we're
Speaker 1: watching and who cares? Like, are people gonna uh migrate
Speaker 1: from the SMP to the SMP fossil fuel? So far,
Speaker 1: not too much. And I think that brings us to
Speaker 1: our second part of the conversation. And just on that,
Speaker 1: I've already heard whispers from Hana worth Side who's saying
Speaker 1: he's seen some of the black Rock models that he's
Speaker 1: got clients in have already flipped over that was the
Speaker 1: money that you're So as those play out, as everyone
Speaker 1: does their quickly updates, that's going to be very interesting
Speaker 1: to watch. Okay, So we started by saying that there's
Speaker 1: relatively little assets center management in this space, Graham, how
Speaker 1: many more products do you think we're about to see
Speaker 1: enter the field and what's that going to do from
Speaker 1: an a N standpoint? So, last time I was visiting
Speaker 1: with you, gentleman I said, any shop is trying to
Speaker 1: launch E T F strategy that it's probably the asset
Speaker 1: gathering for will continue to be maybe even because of
Speaker 1: this announcement, they're going to rampant and push it forward.
Speaker 1: So any shop is looking to roll E T S
Speaker 1: if they've got any inkling of the marketing nows and timing,
Speaker 1: they will figure the trend and map two. We need
Speaker 1: the E S T version of whatever we're going to
Speaker 1: roll out before E M growth. What have you choose
Speaker 1: your thematic? So your phone's ring so exactly um um.
Speaker 1: I'd just like to remind the team though again E
Speaker 1: s G. Environment Social Governance. There's environmental, social and governance
Speaker 1: factors in every investment decision. And bring it all back
Speaker 1: to this is what they put on the label. That's
Speaker 1: a marketing decision. Every investment on planet Earth relying on
Speaker 1: humans and the rule of the law has e s
Speaker 1: G in it. What Black Rock has done and helps
Speaker 1: realize and from the front page and have us talking
Speaker 1: about today is they're just reminding people that it's in
Speaker 1: there and now we're going to take it seriously. The
Speaker 1: more interesting question is, especially if you're having a grumpy afternoons. Hey, guys,
Speaker 1: what did you do do for the last twenty years? Lord
Speaker 1: Stearn did his paper in two thousand and seven about
Speaker 1: the cost of climate change and how we're going to
Speaker 1: adapt for that. If you any kind of long term investor,
Speaker 1: you've been watching this play out and Larry Frank talks
Speaker 1: about were institutional investors. We're trying to pull forward risk
Speaker 1: and deal with it now so we can mitigate through it.
Speaker 1: Many questions have to be asked, is it well we
Speaker 1: saw this coming ten fifte years ago. So the solution
Speaker 1: is there's all these alternatives for people who want to
Speaker 1: do it right. So we've got if you want to
Speaker 1: numbers here, it's about hundred number s gts with black Rock.
Speaker 1: There could be one fifty by the end of the year.
Speaker 1: All but with the hundred there's only about twenty billion assets.
Speaker 1: That's two million per e t F. Just to give
Speaker 1: an idea of how low that is. The average is
Speaker 1: about one point one billion for all ets, but categories
Speaker 1: like growth value like growth there's four billion per e
Speaker 1: t F. So two dred million tells you there's too
Speaker 1: much product for the assets now and now there's gonna
Speaker 1: be more product there's gonna be more products, so she
Speaker 1: why don't you talk about um all the product out there?
Speaker 1: Part of sheen and my job is to sort of
Speaker 1: sift through them. What's your take on just how good
Speaker 1: of a job these products do? Sure? So that that's
Speaker 1: a that's a great question on sort of these assets
Speaker 1: being very small, and I guess the E T F
Speaker 1: would when it comes to E S. She is getting
Speaker 1: divided into two things. One is these large as that
Speaker 1: managers like black Rock One is these small thematic niche strategies.
Speaker 1: And that's where it gets interesting, because what's interesting is
Speaker 1: this sergeant assets. So it's it's the delta. Now assets
Speaker 1: have doubled, but with that are going to come it's
Speaker 1: challenges like you mentioned, it's going to be more liquidation,
Speaker 1: more sort of the big expansive guys crowding out these
Speaker 1: small ones like you mentioned. So we saw that last
Speaker 1: year and we think we're going to see it continue.
Speaker 1: I will say that one thing that's helped E S.
Speaker 1: G s's double last year was a lot of them
Speaker 1: got cheap vangarded black Rock Wall coming under twenty basis
Speaker 1: points like the magic number UM and that almost all
Speaker 1: the money goes to those because I do think to
Speaker 1: Graham's point is like, if you put a green product
Speaker 1: and a brown product next to each other and you
Speaker 1: play up what's in it? I do think that the
Speaker 1: consumer is gonna say, it's pretty easy for me to
Speaker 1: take the green, especially when cost is flat. Okay, let
Speaker 1: me challenge this. This is my big thing. I've been
Speaker 1: on this like a dog on a bone for the
Speaker 1: last three months. What's in it? What isn't in it? Okay? Okay.
Speaker 1: So we looked at s U s A. This is
Speaker 1: the M s c I E s G Social Index
Speaker 1: that this one has been around fifteen years. So it's
Speaker 1: the only s G t F one of a couple
Speaker 1: that have been around a long time. It's trailed the
Speaker 1: SMP by about thirty five percentage points. Why, well, it
Speaker 1: tracks the hundred best scoring E s G stocks. That's fine, right,
Speaker 1: But it doesn't have Amazon, doesn't have uh Netflix MasterCard.
Speaker 1: So there's a lot of hot hot shot. Those of
Speaker 1: all returned over a thousand percent in the past ten years.
Speaker 1: So and this is something I find through and through
Speaker 1: um take something, and there's many other examples. You'll look.
Speaker 1: You'll be like, why is Nike right in the top ten.
Speaker 1: Yet Berkshire Hathaway is in literally none um or why
Speaker 1: is Facebook in here? Um? But then you have a
Speaker 1: company like um, I don't know that you might. Netflix
Speaker 1: isn't and there's a lot of questions on what gets
Speaker 1: in and what gets out? Graham, I mean, what do
Speaker 1: you think of this? I mean, is this going to
Speaker 1: be baffling to people? Because you have to recognize most
Speaker 1: people have images of companies. I don't argue Apple's image
Speaker 1: isn't that great, but that's in all that makes it
Speaker 1: into most of them. Also as an investor, like I
Speaker 1: don't want to miss out in a thousand percent returns
Speaker 1: as part of an Indian who doesn't want Amazon. But
Speaker 1: Amazon is like bad, like they have their are in
Speaker 1: the dirty dozen, right Gene, So they get excluded from
Speaker 1: a lot. So, uh, there's no easy answer. It's complex.
Speaker 1: So picture graphic equalizer. Yeah, your music, guys, that's why
Speaker 1: I listen to trillions, It's for the music references. So
Speaker 1: it's it's complicated like an equalizer. Even song are you
Speaker 1: thinking about right now? How soon as now? As soon
Speaker 1: as we'll take awesome guitar intro? You hear that at
Speaker 1: any club? Anywhere around the world. You know what's coming,
Speaker 1: It's it's coming. Um So, so E s G in
Speaker 1: itself is a simplification so we can put a handle
Speaker 1: on this complexity of sustainability. Why is why is it complex?
Speaker 1: Because the world is complex? Ione just calm down, Okay,
Speaker 1: any investment decision, you're just trying to make a simplification
Speaker 1: by hold cell decision based on the complexity of many
Speaker 1: things you can put your money into, yeah, including your
Speaker 1: kid's career. So so when it comes to environment social
Speaker 1: governance factors, there's always going to be complexity in the
Speaker 1: same way that your motive vehicle is complex. For example,
Speaker 1: all your iPhone is I bet their features on your
Speaker 1: iPhone you haven't even found yet. Yeah, so does it
Speaker 1: do what you needed to do? Is going to be
Speaker 1: one of the fundamental questions that are asked. This is
Speaker 1: why we love E t S as a methodology. Big fan.
Speaker 1: I'm a big fan of E t S as a technology.
Speaker 1: They help they roll things back to the acid allocator
Speaker 1: level where you can make some of these investment decisions
Speaker 1: and then implement them at lowest cost, with greatest diversity
Speaker 1: and great transparency, which is a core tarrant of anything
Speaker 1: around s G. You said that better than Erica. It's
Speaker 1: pretty good. Yeah, but not, I mean, thank you. I'm
Speaker 1: the South African clone. You know something happened over the Atlantic.
Speaker 1: I'm not clear. It was very well eloquently put. Thank you.
Speaker 1: We'll try so. So, when we think of a motor vehicle,
Speaker 1: some people just want something to get you from A
Speaker 1: to B. Okay, I want to get from A to
Speaker 1: B with zero tail pipe emissions, so I'm able to
Speaker 1: get in a different direction. I want automated. I want
Speaker 1: the best software on the and it I have that
Speaker 1: unable to buy that particular vehicle. So there's gonna be
Speaker 1: some humans who just and their advisors, frankly, because the
Speaker 1: first sale is to the advisor, who are just going
Speaker 1: to say, you want global exposure. Great. I know this
Speaker 1: is important to you have a childhood special needs what
Speaker 1: have you? Or your dad was treated poorly at the factor,
Speaker 1: what have you. It's very important to hear about fair
Speaker 1: wages or you know, a childhood education so on. You
Speaker 1: know that there's a tilt for that, and the tilter
Speaker 1: is blah blah, particularly E t F. So I think
Speaker 1: that I think of it there in terms of the
Speaker 1: opportunities that are available. And one of my favorite things
Speaker 1: that I know Eric is looking to track and maybe
Speaker 1: it will be a future episode for you, is the
Speaker 1: E t F Graveyard like the Ben and Jerry's grave
Speaker 1: food graveyard up in Vermont, And there's going to be
Speaker 1: a long list of these E s G branded E
Speaker 1: t fs that no longer no longer live. There's a
Speaker 1: graveyard for in Jerry flavors. Oh you gotta come, yeah,
Speaker 1: but what does that look like? Oh, it's just you know.
Speaker 1: First they'll talk about it, then they'll take you. But
Speaker 1: let's there's all. I'll show you up there, zero tell
Speaker 1: pipe permissions. We'll get you up there on a given day.
Speaker 1: There's also a great interview. He drove a tesla and
Speaker 1: took a train, so he went full Gretta to get
Speaker 1: here and I appreciate that. No planes and um, but
Speaker 1: Alec Boland does this great interview on here's the thing
Speaker 1: with Ben and Jerry's where they explain some of how
Speaker 1: that came to be. It's a great episode. I'm always
Speaker 1: here for the E t F grade. Um, let's just
Speaker 1: talk about this. There's she in two camps of E
Speaker 1: S G. There's one where they just try to carve
Speaker 1: out a little bit and keep you close to the
Speaker 1: S and P, which I think is probably better if
Speaker 1: you're looking to clean up your portfolio sleep at night
Speaker 1: kind of deal because it won't deviate too much. But
Speaker 1: then there's one that aggressively go after E. S. G.
Speaker 1: It is kind of hard sometimes to tell the difference
Speaker 1: based on the name. Can you talk about this and uh,
Speaker 1: you know the idea that you're supposed to like replace
Speaker 1: your whole equity position with one of these products, which
Speaker 1: is why I really stressed due diligence, because if you're
Speaker 1: thinking of selling your Vanguard five hundred to buy one
Speaker 1: of these, man, you better know what you're doing and
Speaker 1: really look through the holdings. Yeah. So so that's an
Speaker 1: interesting point. So there are two sort of schools of
Speaker 1: thoughts with investors, one who just want tracking, who just
Speaker 1: want minimal tracking error. And that's where different kind of
Speaker 1: strategies come in. Just so, for example, a low carbon
Speaker 1: index is literally almost going to replicate your main parent index. Actually,
Speaker 1: the government pension the chief investment officer said, okay, low
Speaker 1: tracking error. I can stomach that. I don't mind moving
Speaker 1: a bunch of my money into that. But then you
Speaker 1: have the flip side, people who actually truly believe that
Speaker 1: she is going to outperform. They don't want that minimal
Speaker 1: tracking at it. They actually want that tracking error. So
Speaker 1: it depends on the strategy, the school of thought, all
Speaker 1: these different things. But what we see lower tracking arrow
Speaker 1: typically it is cheaper, So potentially money is going to
Speaker 1: flow into these cheaper things. Of the potential audience for this,
Speaker 1: where do you see more of it the people who
Speaker 1: want to just clean up their portfolio and track the
Speaker 1: market pretty much, just maybe carve out some of the
Speaker 1: carbon and whatnot, or do you see people really putting
Speaker 1: more money in because they think, really, this is gonna
Speaker 1: be the way to outperform. I think in the short
Speaker 1: term you're gonna get a lot of people moving from
Speaker 1: a dB they want to go to the less brown versions.
Speaker 1: I also think there's a huge untapped demand almost Model
Speaker 1: three style four K reservations within a week. There's a
Speaker 1: huge untapped demand for investors who can investment houses who
Speaker 1: can say I've got this new widget and it's heading
Speaker 1: in this whole new direction, and we've set it up
Speaker 1: and here's the entry point, and you don't need a
Speaker 1: huge ticket size. We've kept cost low. I think this
Speaker 1: huge unmet demand for any investment houses who can figure
Speaker 1: that all the way down frankly to a little piece
Speaker 1: of an impact fund in in some way, more people
Speaker 1: want urgent answers. It's a question of speed and the
Speaker 1: reframing of what's happening in the climate space. For example,
Speaker 1: it's not is it real? Everyone knows it's real. Check
Speaker 1: the science. If you can't read, it's not my fault.
Speaker 1: It's a question of speed. Either going to be slow
Speaker 1: and then we'll still miss it, or you're gonna be fast.
Speaker 1: We're gonna hurry up and get there and we're gonna
Speaker 1: have to hustle because we're already late and behind agile.
Speaker 1: So there's more, there's more need, and there's more opportunity.
Speaker 1: I would say this unmit demand for new and aggressive
Speaker 1: green strategies. So I want to bring that back to
Speaker 1: a thing that you brought up the last time we
Speaker 1: had you on, which was the amount of alpha that
Speaker 1: might be trapped in these strategies and the potential for
Speaker 1: investors to get on that. Talk about how an investor
Speaker 1: might approach alpha through the E s G lens Alpha
Speaker 1: through their E s C lens. The first appreciation of
Speaker 1: that is understanding you're comparing apples and oranges always and
Speaker 1: from the beginning, because you're adding a new factor, third
Speaker 1: dimension risk return. Now we're looking at impact. So we're
Speaker 1: adding a third dimension to how you look at investments.
Speaker 1: So even before you start your due diligence and lead
Speaker 1: yourself down to executing on whatever fund technology you're looking
Speaker 1: to do, you're looking at things differently, which means if
Speaker 1: there is a conventional index out there, your answer, your
Speaker 1: number may be wrong over time. So for example, UM
Speaker 1: the I shares KLD ticket that changed in seventeen, that
Speaker 1: that Eric s USA, Yes as yours that that changed
Speaker 1: in seventeen. That actually began as this experiment on Way
Speaker 1: one May, Cambridge, mass where there was a shop that said, hey,
Speaker 1: what if we tracked a different group of companies and
Speaker 1: how would we do it? They took the five hundred
Speaker 1: cutter to two fifty, UM rolled it up to four
Speaker 1: hundred total companies. And that's why some of the companies
Speaker 1: the constituents are so different because they make active index
Speaker 1: selection decisions on this company less better than this company,
Speaker 1: therefore you out. So so we had an index that
Speaker 1: tracked over time. Now, in some periods that outperformed the
Speaker 1: five hundred and some periods that underperformed. There was immediately
Speaker 1: a mismatch because there's four hundred companies place five hundred. Yeah,
Speaker 1: So fundamentally, when it comes to E s G LPHA,
Speaker 1: there's going to be periods of outperformance and underperformance. Any
Speaker 1: E s G product last year that did not have
Speaker 1: excellmobile looks fantastic. If it had some of the solar
Speaker 1: and wind assets, they look fantastic last year. I'm not
Speaker 1: gonna predict what happens going forward, So I like to
Speaker 1: shatter the myth you're gonna underperform because of E s G.
Speaker 1: You may outperform, you may underperform. There's a whole lot
Speaker 1: of factors that go into that performance argument, but the
Speaker 1: thing that definitely shatters look at s G factors, including
Speaker 1: that in your investment decision, developing the strategy is going
Speaker 1: to lead to underperformance. That was a myth. You need
Speaker 1: to shadow that. So I'll just add to that level
Speaker 1: of nuance that is that it's not about outperforming under
Speaker 1: In fact, we do see that E SG tends to
Speaker 1: outperform during market downtourn So it's got this risk mitigation
Speaker 1: angle to it, but it underperforms during a bullmarket. So
Speaker 1: to your point, Rik on Amazon and all the sound
Speaker 1: of performance, it's not the opportunity side. Although when it
Speaker 1: comes to clean energy and things, we are moving towards that,
Speaker 1: but traditionally it's been more of a risk mitigation. Yeah.
Speaker 1: And that um, in s USA's case, the ball was
Speaker 1: about the same, but that was only a hundred stocks.
Speaker 1: But yeah, I mean I've heard that, and we try
Speaker 1: to track the Stannard deviation. That's another field you can
Speaker 1: look at if you're looking at one of these things.
Speaker 1: But one other thing I have and and this is
Speaker 1: just brings up some of my tweets about Davos and
Speaker 1: the private jets and all this is, you know, if
Speaker 1: you don't I pulled people. Um, you know, some people
Speaker 1: are are okay not owning an Amazon. They're like it's
Speaker 1: worth it. But then of the people who weren't okay,
Speaker 1: who were who are okay not owning Amazon, only a
Speaker 1: fifth of them were willing not to shop there. Four
Speaker 1: fifths we're going to not own it and yet shop there.
Speaker 1: Help me with the hypocrisy, because there's that then there's
Speaker 1: just you still drive your car. You you're not going
Speaker 1: to stop your vacations the Disney World. Um, how much
Speaker 1: of this is just like the organic avocado that you
Speaker 1: pay double for a Whole Foods. It's really just to
Speaker 1: feel good without having to do much, which is frequently
Speaker 1: called slacktivism. Am I the bad guys? I'm sorry, it's
Speaker 1: just it's my observation. Go Eric, Eric is the number
Speaker 1: one guy. I wanted a cocktail party. Here's my date,
Speaker 1: throw me out the window. Yeah, that's fine. So I
Speaker 1: think that that is some amount of sort of what
Speaker 1: do you what? What do you feel good effect? Feel
Speaker 1: good effect about ativism? Fa activism? Okay, but there are
Speaker 1: those two schools of thoughts. At one school who thinks that, yes,
Speaker 1: she is just a better investment. It's a resmit against
Speaker 1: So they don't care about their personal life or what
Speaker 1: they do. They just see it as an investment objective.
Speaker 1: It's like saying, as a value investor, would you only
Speaker 1: shop discounted items. It's it's like that in that case
Speaker 1: I made. It's more for the people who were supposed
Speaker 1: to be cleaning up, like the you know, sleeping at
Speaker 1: night kind of thing. Tune. Pickens was pitching wind energy
Speaker 1: for accident. Texas is the biggest wind energy state in
Speaker 1: the US. I mean, there's so many opportunities, there's so
Speaker 1: much work we have to do around climate and sustainability. Yes. Absolutely,
Speaker 1: humans make a terrible mess of this one planet we
Speaker 1: live on. I would love to see them aligning better
Speaker 1: what they say with what they do. I want what
Speaker 1: they do to be less brown, more green. I want
Speaker 1: fewer suv s, more bicycles, all those things heading in
Speaker 1: a direction. Please be at my cocktail parties and ask
Speaker 1: us all good questions, because I agree with Eric. You know,
Speaker 1: if you go to the car park, someone will walk
Speaker 1: in and they'll buy the organic groceries out to the suv,
Speaker 1: which by the way, was idling because they wanted to
Speaker 1: be warm when they came in. That's a feature that
Speaker 1: mates will handle by. And and so where tom Yorke
Speaker 1: going on like world tours with all the equipment they
Speaker 1: got a log around. Okay, no, but in fairness Chris
Speaker 1: Martin said, we're not touring this album. I like that.
Speaker 1: That was That's why I like Greta. Greta took She sailed,
Speaker 1: But like Larry Fink, doesn't have time for that. And
Speaker 1: that's where I think some of the hypocrisy. It's tough
Speaker 1: for me not to see it. I can't unsee that.
Speaker 1: Eric at a cocktail party, what's the curving footprint of
Speaker 1: this vodka? And in America, if they got a one
Speaker 1: more cocktail party and they said of me in plastic
Speaker 1: containers like I'm nineteen again, I'm just gonna throw his
Speaker 1: sefort not just on the plastic factor. She he Graham.
Speaker 1: How should consumers go about due diligence questions in this space? So?
Speaker 1: I think there are so many different ways to do yesday,
Speaker 1: it's it's hard to pick one certain way. I do
Speaker 1: think the market is moving towards what one calls materiality,
Speaker 1: which is actually looking at what esgu metrics are financially materials.
Speaker 1: So that's how I would do it, if I were
Speaker 1: to do it right now. Every consumer should check their
Speaker 1: portfolio and say in what can you have access to?
Speaker 1: You have so many more options and all of those options,
Speaker 1: there's a green option where you don't just have to
Speaker 1: choose the brown option, and all the way to what
Speaker 1: have you aggressive? You want to do? You want to
Speaker 1: sail across the Atlantic there's a company that's trying to
Speaker 1: launch sailboats again. So all the way from less brown
Speaker 1: to most green, there's opportunities. You need to speak to
Speaker 1: your advisor because the other gap in us as the
Speaker 1: intermediaries underinformed and they're behind the curve on what's actually available. Annie, Sheheen, Graham,
Speaker 1: thanks for joining us and Tracks thanks thanks for listening
Speaker 1: to Trillions until next time. You can find us on
Speaker 1: the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and
Speaker 1: wherever else you'd like to listen. We'd love to hear
Speaker 1: from you. We're on Twitter, I'm at Joel Webber Show,
Speaker 1: He's at Eric Call Tunas. You can find Annie at
Speaker 1: Antonia b Massa, Shaheen at Shaheen Underscore c and Graham
Speaker 1: at E S g Architect. This episode of Trillions was
Speaker 1: produced by Magnus Hendrickson and edited by Gerald Dillard. Francesca
Speaker 1: Levy is the head of Bloomberg Podcast Bye