The headline in the Financial Times actually read ‘BlackRock, Vanguard, Axa raise coal holdings despite climate fears’.
The article was based on a report from InfluenceMap analysing who owns the world’s fossil fuels. The headline caused a ruckus among climate change campaigners and ESG types generally.
What, the same BlackRock that wants companies to make a positive contribution to society? But the only one of these three actually to buy coal was Axa. One of the first to question the FT’s interpretation, and the consequent cries of horror, was Yale and Brown Universities lecturer Cary Krosinsky, formerly of Trucost. “It’s not helpful for people to draw the conclusion that BlackRock is buying coal,” he said, “because they are mostly just invested in the same indexes as before but valuations have changed.”
So what does the report actually say?
“What Norges Bank is doing is an example of the ultimate outcome for indexing.”
First it analysed the 10 largest asset owners which have sold all direct holdings of thermal coal producers in the last two years, which includes the wealth funds of Kuwait and Qatar, IBM’s pension fund and the Ontario Teachers’ Pension Plan. “None of these 10 asset owners appear to have any publicly disclosed policy on thermal coal holdings,” said the report. BlackRock was the biggest fossil fuel owner and the fund with the most coal intensive portfolio, because it is the biggest owner. At the other end of the scale, German fund manager Allianz, which introduced a thermal coal divestment policy just before the Paris Agreement in 2015, has the lowest coal intensity in its portfolio.
In a puzzling finding, State Street has two funds that it markets as fossil free that are actually 100 times as thermal coal intense as State Street’s regular ETF. “The two funds,” says the report, “(SPDR MSCI EAFE Fossil Fuel Reserves Free ETF and SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF) worth a combined $100m actually contain significant fossil fuel reserves through holdings of companies including Wesfarmers, RWE and Vale.”This suggests that MSCI needs to look at the indices it claims are fossil free on which the State Street funds are based. Only French fund firm Axa, which also has a policy on thermal coal, more than doubled its thermal coal holdings because its majority-owned subsidiary AllianceBernstein acquired stakes in Peabody and Arch during the two-year time period in the study.
But, as Krosinsky guessed, BlackRock and Vanguard’s ‘increases’ in coal holdings occurred because Peabody Energy and Arch Coal were re-listed following emergence from bankruptcy and thus all sorts of indices, from the Russell 3000 onwards, increased their coal exposure.
I asked Krosinsky how would you address the question of ‘it looks like you’re investing in coal just because you’re investing in an index that has coal in it?’
“It depends what your definition of passive is,” he replied. “You can apply minimum standards to an index, on any subject, and then you’re combining the sort of practice that Norges Bank puts in place. This involves engaging with companies over time, and gives issues of focus a period of time to be resolved, and if not resolved then companies get sold. That is still passive. There are a lot of processes like this, and I think bringing those into index fund management would be very positive, and that’s something that will probably happen within the next six to 12 months.” In other words, it would be perfectly possible for funds like Vanguard and BlackRock to have index-linked funds that excluded coal but were still ‘passively’ managed.
Are we expanding the definition of what it is to be a passive investor, I asked? “No,” he replied. “What does it mean to be a passive investor? Every index is constructed with a methodology, and constructing that in itself is a decision. It’s just not true to say that passive means you aren’t doing anything. Passive always requires proper construction of an index, rebalancing and deciding what processes you should put in place to construct your index.
“What Norges Bank is doing is an example of the ultimate outcome for indexing. There are distinctions between active and passive investing, but I think many of the distinctions are incorrect. Some of the simplistic definitions don’t work and they are going to work less well going forward. Even BlackRock thinks so.