Comment by nostromo | Hacker News Reader

Comment by nostromo | Hacker News Reader

Matt Levine, as always, provides the most honest and direct commentary about this. Here's the start, but the whole piece is interesting, as pointed out by a reply.

https://www.bloomberg.com/opinion/articles/2020-01-14/blackr...

> Will BlackRock’s decision to send a strongly worded letter about environmental sustainability reshape how corporate America does business? Well, I remember two years ago when Larry Fink sent a strongly worded letter about how companies needed to make society better, and that too was supposedly “likely to cause a firestorm in the corner offices of companies everywhere,” and now, uh, same society really.

> Now BlackRock will send a strongly worded letter to CEOs about the environment. It will arrive on the desk of the CEO of, I don’t know, giant state-owned oil company Saudi Aramco? A company where, according to Bloomberg data, BlackRock is the largest outside shareholder. A company that did a bond offering last year—after the Saudi government murdered and dismembered Jamal Khashoggi, after Fink sent that letter about making society better—in which BlackRock was also a big investor. “We wanted the Aramco bond to be much bigger,” Fink said, way back in April, when his public-relations goal was to butter up Saudi Arabia. Now it is January, and his public-relations goal is to butter up environmentalists, so BlackRock “will make investment decisions with environmental sustainability as a core goal.” Next time a big oil company is looking for money, presumably that will change again.

> I could keep being cynical about this all day.

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.

Ta 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.

I feel like you were looking for the north American slang word "jive"

TIL 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-wor...

I 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.

I'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.

Create it synthetically by shorting the things in which you do not want to invest.

Wouldn't the loan fees on the shorts disrupt that plan though?

If 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.

> In the common case you get paid to short as it’s a rebate on potential interest for the principal.

What does this mean?

You're borrowing money for their shares; you can earn interest on that.

If you don't mind explaining, how does this work in practice?

You give back shares on a later date. But sell the borrowed shares for money now.

If you don't know it, don't try it. You are playing with money, you don't have.

Thanks for clarifying, I know what shorting is but have never done it in an account where it made sense to do what the parent was suggesting.

You’re already accepting a lower return by excluding these equities from your portfolio, just accept a slightly lower, lower one.

Excluding certain securities doesn’t lower your expected return, it just raises the volatility very slightly because you are less diversified.

This presumes a difference of opinion in what blackrock thinks the security is going to do vs the investor. If blackrock thought it could get a better rate of return without a particular security, then there's no moral justification needed for dumping it.

That’s a lot of work and not equivalent

ESGV excludes more than you want but does exclude fossil fuels:

https://investor.vanguard.com/etf/profile/overview/ESGV

Unfortunately [in my opinion] it excludes nuclear power too

Unless you're Gates or the like with deep pockets, you shouldn't be near nuclear power as an investor unless public policy shifts to properly reward nuclear for its low carbon generating profile. This is why nuclear has closed up in states unwilling to subsidize it; it's not cost competitive with combined cycle natural gas, wind, or solar.

You could buy individual symbols (on top of an ESG ETF/fund vehicle) to get exposure to nuclear if you absolutely had your heart set on it. I would not recommend doing so.

There's not many nuke stocks anyway. Can easily back-fill the few that are public to diversify into that.

> I'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.

Show me one large company that doesn't do environmental damage?

I was about to say show me even a person or household that doesn’t do environmental damage.

This would be a cogent argument if there weren't degrees of damage.

IShares CRBN does something similar, I think.

> 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.

While 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.

I 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

If 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.

The 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).

Yep, heard this with Philip Morris and Mickey-D's as well when there were moralistic lawsuits and shorts against them: a couple of great trades.

Thank you for your service.

Maybe at some point y'awl will realize how nitrogen fixing works in current year (aka "Haber-Bosch process"), and where food comes from. Also good luck convincing the developing world to forgo a hydrocarbon economy.

How 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.

"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.

Only 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.

Surely China will pony-up for more coal?

Why would China care where their power comes from ? If renewables are cheaper, then they’ll use them. That’s it.

Quite 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?

China 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.

China absolutely cares about the environmental cost. Perhaps more so than the USA in the current political climate...

He's saying they'll have to pay more when they issue bonds, leaving less to pay as dividend.

Yep. There's a good Cliff Asness post on this: https://www.aqr.com/Insights/Perspectives/Virtue-is-its-Own-.... Increasing expected return for sin stocks is exactly what you want if you're serious about ESG investing.

This is a nuance barried in my comment, but if you buy an asset today and the cost of capital increases for that asset, that means the price went down all things equal and you lost money

> 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.

Or 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.

This 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).

Except 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.

If that were so obviously the case it would tank without any intervention or 'class action'.

Well if you take a look at coal performance in the US, that's pretty much what is happening.

What if you take a look at coal performance in China, Asia and Africa?

I 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.

The reason is unrelated to any views individuals at the firm may have on the profitability of coal. They will not be marked on performance, that is the whole point of passive indexing. You _are_ the benchmark, no judgement required.

It's not only passive funds. From the article: "The announcement by BlackRock, the world’s largest fund manager, that it will dump more than half a billion dollars in thermal coal shares from all of its actively managed portfolios".

I was responding based on the Matt Levine quotes (GPs) rather than the article. But accede entirely

This. Suppose the goal is to buy and hold some index for your pension in 30 years time. It's hard for to imagine that fossil fuels are going to grow faster than the other index components. So I'd rather cut them out.

But this wouldn't really be a return-maximizing strategy, would it? I wouldn't expect to hold the same stocks for the entire 30 years, rather I would be constantly looking for medium-term gains and then trying to lock them in once I think they've peaked. I.e., maybe I think fossil fuels are going to continue growing for at least a 5-year time frame, and then maybe around them, I would re-evaluate whether that's still true. In other words, the return-maximizing strategy would seem to be to treat them like any other investment.

There's truth to what you're saying; assuming one knows where relative medium term peaks and troughs are in multiple asset classes. That's a whale of an assumption. As is the assumption that fossil fuels are going to be higher growth rate over the medium term. Your strategy also requires attention and likely incurs more transaction costs if executing it yourself.

I thought I would do a ballpark check. Random first index of oil & gas I found was FTSE 350 Oil & Gas. Start 2010 value: ~7914. Start 2020: ~8253. Return: 1.043. General FTSE350 at the start of 2010: 2718. Start 2020: 4311. Return: 1.59. So we'd have done better buying a fossil fuel divested index 10 years ago. I see no reason to think this trend will reverse.

The fundamentals to me are that fossil fuels are likely only see more regulation, divestment and less importance to new technologies. While the upside wildcards in energy are most likely not in fossil fuels.

It's a tragedy of the commons, one cannot expect it to be solved by decisions of individuals.

I think demand for fossil fuel free holdings is more of a risk reduction strategy greenwashed as something more.

It 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).

I 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'...

>People doing the right thing for the wrong reasons is just fine.

It's not laudable though.

I'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.

Potentially 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.

The 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?

There 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

> 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?

Thanks for your brilliant commentary here.

Couldn’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?

"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.

Your post quotes the cynical piece of Levine’s editorial (literally his next three words are “but let’s not”, referring to “being cynical all day”), but it’s worth reading in full for the more nuanced perspective. I found the last two paragraphs surprisingly enlightening:

> The right model of BlackRock is probably that it is mostly an aggregator of preferences, but it is also, at the margin, a shaper of preferences. It passively reflects what investors want generally, but it has some ability to push those investors to want different things. There are other things that BlackRock does—it votes the shares of stock that it owns on behalf of investors, it meets with managers to talk about their sustainability plans, it writes strongly worded letters to CEOs—but I suspect that they’re mostly less important than the basic core function of taking $7 trillion from investors, channeling it where the investors want it to go, and slowly and subtly diverting those channels so that the money moves more in the direction that BlackRock wants it to go.

> This is an unavoidably uncomfortable role. If you want BlackRock to do more on climate change, you will be annoyed that it mostly offers broad passive products that buy all the stocks, including the ones you don’t like. If you want BlackRock to do less on climate change, you will be annoyed that it is pushing its clients into sustainability-focused funds rather than neutrally giving them all the stocks, including the ones BlackRock doesn’t like. Mostly it is an uncomfortably powerful role: BlackRock really is a general aggregator of preferences, so it speaks with the authority of its $7 trillion and its universal ownership, which means that its ability to shape those preferences matters.

No, these are two very different cases. The earlier one was about corporate social responsiblity, the new one is about investment profitability.

And if you are wondering if the BlackRock head is right, do a google search on "fossil fuels stranded assets"

>Larry Fink sent a strongly worded letter about how companies needed to make society better

On the topic of executives needing to improve society, Fink here was important in the creation of the MBS market.

There’s nothing inherently wrong with mortgage-backed securities (they exist today!). In fact, there’s a lot right with them - they allow specialization by firms within the mortgage process and participation by investors with various risk profiles. It’s applying the Unix mindset of specialized composable functions to mortgages.

The 2008 crisis happened because MBSs became a bubble - investors stopped performing diligence (and risk models were crappy), so securitizers started packaging up crap, underwriting standards dropped, etc.

If you're familiar with the market and the dogma at the time, the idea was that securitization used mathematical techniques to actually reduce risk, and these were being sold as such. What's wrong was after this bubble popped, the taxpayer was on the hook for the socialized bailout, while the temporary profits were privatized. As such, while people like Fink may not have seen this through from start to finish, their ignorance or unwillingness to blow the whistle on something as destructive as this calls into question--in my opinion--their competence or earnestness in indicting others to effectively do what he should have done.

While there were definitely a bunch of shady things going on (e.g. Paulson helping Goldman negotiate a 100% payout of AIGs CDS obligations) during the crisis, the treasury actually made a profit of $15.3bn on TARP.

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