This month, BlackRock was in the news for launching Europe’s first government bond climate ETF.
The asset manager launched a sovereign bond exchange traded fund (ETF) that weights companies on their level of risk from climate change. Government debt from Germany, Spain, the Netherlands, Belgium and Ireland will be underweighted in the new ETF because of their higher greenhouse gas emissions or greater exposure to climate change risks.
In an interaction with Financial Times, BlackRock said that 78% of global fossil fuel reserves were owned by governments rather than private-sector companies. To date, investors have considered climate risk from an equity or corporate debt perspective, despite the average allocation to government bonds in client portfolios being around 17%.
The trend to launch climate change ETFs has picked pace after the European Union unveiled two climate benchmarks that comply with the Paris Agreement.
Mirae Asset Global Investment launched the Global X China Clean Energy ETF. BMO Asset Management introduced a slew of ESG-focused ETFs. Other asset managers such as Lyxor, Amundi, Deka, Franklin Templeton and Vanguard also launched ETFs focused on climate change.
BlackRock’s CEO Larry Fink spoke to Haywood Kelly, Morningstar’s head of global research on ETFs. Below are excerpts from that conversation.
- The hurdle for launching a new ETF strategy.
We do not create an ETF that we don’t think is going to perform. Many players create products that we don’t believe are going to have the liquidity that will stand the test of time and volatility. There have been stresses in ETF products over time.
Our intention is never to create a gimmicky product. Our intention is to create products that serve the needs of clients. Our aim is to stay in front of a clients’ needs, the needs of the world. We have a large suite of ETF products on a global setting.
We create products that meet the future needs of markets. It may not always work out and we are okay with that.
In the first six months of 2020, the inflows into BlackRock’s sustainable ETFs surpassed the entire amount garnered in all of 2019.
(During the second quarter results call in July 2020, Fink reiterated the company’s target of having 150 ESG ETF offerings in three years. BlackRock launched an ESG Money Market fund last year which gathered $13 billion.)
The biggest transformation of that is in fixed income. We believe that in the future, the fixed income market is going to be substantially more of an ETF market. Where actively investing your bond portfolio through ETFs will be a core foundation of how we invest in bonds.
(During the second quarter results call in July 2020, Gary Shedlin, chief financial officer, said that the firm’s belief in fixed income ETFs had been validated by their performance during the rise in volatility caused by the COVID-19 pandemic. “The pace of adoption in fixed income ETFs by asset managers, pension funds and insurance companies means the market has reached a turning point,” he said, adding that Blackrock had more than $634 billion in assets in fixed income ETFs compared to $514 billion a year ago, and $402 billion two years ago.)
- ETFs are not necessarily for passive investing.
Index and ETFs have democratized access for millions of people. This conversation about the dangers of a shift to passive investing is interesting but fundamentally wrong.
What we are witnessing in the past three years with respect to the growth of ETFs is not passive investing. It is a myth that everyone who is investing ETFs is a passive investor. They are not.
More and more active investors use ETFs for active management. They use ETFs to actively navigate their exposures to certain concentrations. They go in and out of active exposures through ETFs.
(Alex Bryan, director of passive strategies research at Morningstar, commented on this a few years ago in an interaction with CNBC, when he spoke about investors using ETFs to express active bets. Investors using ETFs to blend active-passive strategies and gain a controlled exposure to certain trends or sectors, will keep evolving.)