Around two-thirds of your assets under management are passively invested. Do you see passive funds gaining market share compared to active funds—and why?
At BlackRock, we don’t speak of passive [investments], we speak of ETFs [exchange-traded funds] and index investments. When we look back 40 years ago, the first index fund was created; 30 years ago, the first ETF was created. And institutional investors were among the first to adopt those. But then the industry really, really gained speed over the last decade or two. When I look at ETFs, we were at the volume of below 2 trillion 10 years ago, and at the end of last year we were at 10 trillion. When you ask me why, I would say there are three reasons. First, ETFs are an easy way to invest; it’s an easy way to gain broad or specific market exposure. It’s a low-cost way to gain that exposure. And it’s a way to actually create resilient and robust portfolios across asset classes, because today you find ETF and index investments across asset classes: equites, bonds, real estate, commodities, etc. And perhaps as a last reason, this is where we see a lot of institutional investors come in—they use ETFs to also manage risk in portfolios, to gain exposure quickly but to also hedge portfolio risk.
BackRock offers a wide range of ESG related funds. But we’ve seen a backlash recently because of greenwashing. What’s your take on these reactions?
I think greenwashing is a very important topic and very much on the minds of the asset and wealth management industry, because it really boils down to trust in the financial industry, trust in a wealth manager, trust in asset managers, and hence it has the utmost importance. We at BlackRock—and here I am sure I speak for other players in the industry as well—we welcome any regulatory initiative to fight greenwashing. So most recently also the SFDR [sustainable finance disclosure regulation] that we’ve seen in Europe, which asks for transparency of investment funds that call themselves sustainable and expects the necessary transparency but also reporting for investors.
It was a tough year for sustainable funds because of underperformance of ESG funds compared with funds without any exclusion—so-called sin stocks. Can you talk about that?
It’s a very interesting and important question, and here probably it’s worthwhile to take a step back on BlackRock’s position related to ESG and climate risk. Two, three years ago, we came out with our investment belief that climate risks and sustainability risks are investment risks. And as a fiduciary manager of our clients’ assets, we try to manage climate risks and sustainability risks as well as we can. Now, over the past couple of years, we’ve seen sustainable assets actually outperform traditional assets, yet this year this was very difficult because of the surge in energy prices. So any portfolio that was underweight or excluded energy assets would take a hit on performance. We saw that. But for us this climate risk—and also the transition to a low carbon economy by 2050—is a long journey, and it’s not a straight and smooth journey. It will be a bumpy journey, and so what we see in the short-term with the energy crisis and the energy prices and the impact that has on portfolios, we see that as a short-term detraction of a long-term journey.
There’s also a lot of discussion around rating providers working with different qualitative and quantitative metrics and scores. What’s your take on that?
Here it is probably worthwhile to differentiate between ESG data that’s being reported by companies and what ratings agencies actually make of this data. So what we see in ESG data that’s being reported, we see a convergence of standards—something we welcome very much—so investors or ratings agencies actually now don’t have different ratings, but how they interpret it can differ very much, and that’s a good thing as well. It is very similar to, say, an investment bank rating a stock as a buy versus another bank, which might rate it as a hold.
You’ve mentioned you welcome regulators to step in. Switzerland recently issued the voluntary Swiss Climate Scores to have a common standard for climate transparency. Now one of the indicators is the stewardship of asset managers. There they look at questions like how do asset managers utilize their power in their engagement with companies or if they have goals to reduce emissions in the portfolio. What’s the global policy at BlackRock?
I think that is a very important question for an asset manager like BlackRock with two-thirds of our assets being index assets and for these we cannot actually divest of certain companies. So for our engagement related to climate risk, we look at the universe of approximately a thousand companies, which cumulatively account for approximately 90 percent of carbon emissions across our client portfolios. And with those we hold a very close dialogue about what their climate risks are. We ask for transparency but also what the company does and what the company management has in mind to actually mitigate those risks and lower those risks, and what their climate strategies are. So here we are very closely engaging with companies. Perhaps worth mentioning is also the impact of a company on natural capital, so on biodiversity and here we try to seek transparency as much as we can, although that’s really the next frontier. It’s very hard to gather that data, but it’s definitely something we focus on as well.
Let’s talk about Switzerland. BlackRock is an American company founded 34 years ago and has been operating in Switzerland for over 25 years with offices in Zurich and Geneva. How does Switzerland differ from other major financial centers?
Switzerland has been rated as one of the best business locations for years, and I would say due to a number of factors: education, we have great academic institutions; the political stability, which is very important; and favorable labor markets, also very important. I would say the financial sector, of course, plays an important part in being recognized as one of the most innovative business centers in the world. And perhaps lastly, it’s a great place to live, with an excellent work-life balance for many people. So yes, I think that makes Switzerland a fantastic place to do business.x
From your perspective, what needs to be done in the near future so that Switzerland remains the biggest offshore financial center?
I think here sustainability is key again. So I think on the one hand that we ensure that we have very reliable standards also for investment products created and distributed in Switzerland. And here the Swiss Asset Management Association is coming forward with a self-regulation approach, which we support very much. So I think that’s good. And then secondly, I think it is important that different stakeholders actually come together. And here I speak of the financial industry but also the real economy, politicians, the government, and of course representatives of academia—that they come together and work on a narrative for a sustainable Switzerland.