If there’s one thing the world’s biggest money manager knows, it’s how to make an impact. BlackRock did just that in February with the announcement that Deborah Winshel, former president of New York–based, hedge-fund-backed charity the Robin Hood Foundation, would be joining the firm to help lead its new impact investing practice.
The Rockefeller Foundation coined the term “impact” in 2007; it refers to a type of investing gaining popularity at the time, particularly among foundations and high-net-worth individuals, that looks to align financial rewards with an economic and social mission. For $4 trillion BlackRock, impact can mean anything from equity allocations that screen out securities such as tobacco stocks to green-infrastructure investments or those with a desired social outcome.
Historically, the type and number of investors who considered so-called nonfinancial factors — environmental, social and corporate governance, or ESG — were limited. They were typically individuals, religious institutions and some foundations, often using program-related, or grant, funds.
Over the past decade more investors, including large pension plans and sovereign wealth funds, have started to express concern about externalities such as climate risk. Some, particularly in the foundation and ultrahigh-net-worth space, have also become interested in carving out opportunities that let them pursue a social or environmental agenda and make money. At the same time, a growing body of evidence shows that consideration of ESG factors by active asset managers can enhance returns.
Activists have mounted successful campaigns to encourage institutions to address climate change and tackle the level of carbon assets in their portfolios. Better use of data and more accountability of outcomes in the nonprofit sector, pioneered by such groups as Robin Hood, have made it easier to quantify the impact of philanthropic endeavors. This has made it possible to create investment strategies out of certain philanthropic activities, especially in cases where the benefits will result in lower costs to the community. There have also been innovations in the capital markets, including the emergence of social finance bonds and the growth of the green-bond market.
All of these changes have made the sustainable-investing space much more attractive to asset managers and clients. The tenth Report on U.S. Sustainable, Responsible and Impact Investing Trends, published by Washington-based US SIF – The Forum for Sustainable and Responsible Investment, found that U.S.-based socially responsible assets under management almost doubled between 2012 and 2014, from $3.74 trillion to $6.57 trillion.
New York–based BlackRock already manages $214 billion in value-based investments, where assets are invested using various screens that exclude certain securities, like firearms, depending on the client’s values. But it has stayed in the background of the impact movement — until now. In a sign of how seriously the firm is taking the impact investing trend, Winshel reports directly to chairman and CEO Laurence Fink and chief product officer J. Richard Kushel.
In the past 12 months, BlackRock and its impact team have executed two landmark transactions. Last April the firm, British index provider FTSE and New York–based environmental action group the Natural Resources Defense Council launched the FTSE Developed ex Fossil Fuels Index Series, which excludes companies directly engaged in exploring for, owning or extracting fossil fuel reserves. Then in December the United Nations announced that its $53 billion Joint Staff Pension Fund had seeded two low-carbon exchange-traded funds, one of which is managed by BlackRock.
With the ETF and index products, BlackRock and its partners wanted to develop strategies that other clients could also invest in, Kushel says: “We are focusing our time on building things that are scalable.” Green bonds, infrastructure and renewable energy are other areas where BlackRock has established expertise. In a December report think tank the Croatan Institute and nonprofit Clean Energy Group identified the U.S. green-bond market as a key sector for “the growing group of foundations, endowments and other institutional investors that are grappling with fossil fuel divestment and seeking new investments in climate solutions.”
Joshua Humphreys, president of the Durham, North Carolina–based Croatan Institute, anticipates that green bonds will become a bigger part of climate-conscious investors’ portfolios. BlackRock runs a $1 billion green-bond portfolio for Switzerland-based Zurich Insurance Group; its renewable-power group, founded in 2011, has more than $1.5 billion worth of commitments and assets under management.
One new area that BlackRock is excited about is public equities. The firm has devoted considerable time and resources to developing a proprietary process for assessing and monitoring the impact — environmental, social and other — of publicly traded companies. Kushel explains that it retrieves data from several sources in addition to Securities and Exchange Commission filings, such as patent records. “We’ve found that we can improve the return profile of an equity portfolio by optimizing for social impact,” he says. Now BlackRock has the numbers to prove it. The firm plans to launch a fund based on this effort “in the very near future,” Kushel adds.
