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BlackRock’s sustainability ‘report card’ one year from Fink’s annual letter



When BlackRock chief Larry Fink issued his annual corporate missive to chief executives last January, he promised a huge shake-up at the world’s largest asset manager.

With global warming driving a “fundamental reshaping of finance”, Mr Fink said it was time for BlackRock to put sustainability at the heart of how the $8.7tn fund house invests.

BlackRock would launch new products, consider environmental, social and governance issues in investment decisions, sell some coal holdings and overhaul how it deals with companies.

His pronouncement came after years of criticism that BlackRock had been too slow to act on ESG issues, particularly climate change.

The focus on sustainability was widely welcomed, but also met with scepticism. “It is important to acknowledge that BlackRock saying that climate change is a big investment risk is a positive sign,” says Diana Best of the BlackRock’s Big Problem campaign, a network of climate activist groups. “There were great parts of Larry’s letter, but we still had questions.”

With Mr Fink’s 2021 letter due this month, we look back at BlackRock’s progress so far.


What BlackRock said it would do: Review its voting policies, improve transparency around its stewardship activities, and start to vote against board directors if companies were not making sufficient progress on sustainability issues.

What it has done: There has been a big shake-up in BlackRock’s stewardship activities, which includes discussions with companies across the world and its voting at annual meetings. Sandy Boss was hired to lead the division last year.

The group has focused on increasing transparency around its voting and stewardship activities, including publishing more so-called voting bulletins on controversial votes. It also reviewed its stewardship policies and in December committed to backing more shareholder resolutions on climate change, after criticism in the past it had failed to support such proposals.

BlackRock has already started to vote against boards at annual meetings, punishing 62 directors last year due to climate-related issues. It has ramped up its engagement with 440 carbon-intensive companies.

Catherine Howarth, chief executive at ShareAction, a responsible investment charity, says the decision to vote against directors could have a big impact by forcing boards to more closely address investor concerns.

The stewardship improvements meant that BlackRock received a B grade for engagement, up from C+ a year ago, in an annual ranking of big asset managers from InfluenceMap, a London-based think-tank. But it still lags behind many of its European peers.

“Our view is they have gone from being quite a long way behind the curve to just behind the curve. They have a lot to do to catch up with . . . some of their European competitors,” says Dylan Tanner, executive director at InfluenceMap.

Putting ESG at the heart of the investment process

What BlackRock said it would do: Integrate ESG in investment portfolios, launch new exchange traded funds and other products focused on ESG, and publish the sustainability of each fund, including carbon footprint and controversial holdings.

What it has done: BlackRock says ESG has been integrated into all of its active and advisory strategies, covering about $2.7tn of its assets under management. It has doubled the number of ESG index offerings, as well as actively managed sustainable products.

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It is also now possible for investors to check how sustainable BlackRock’s retail funds are across various metrics, including carbon intensity, and to check for exposure to controversial holdings, such as companies behind civilian firearms.

Ms Best, however, says that even with these actions, BlackRock has a “passive problem” — with billions of dollars of assets not subject to the same sustainability requirements as their active strategies.

“Without tackling the passive problem, BlackRock will remain heavily exposed and the largest investor in coal, oil and gas,” she says.

“They are an absolute behemoth of a company,” says Ms Best. “They absolutely need to get this right because they are a make or break for our climate.”

Coal restrictions

What BlackRock said it would do: Divest from fossil fuel companies that generate more than 25 per cent of their revenues from thermal coal by the middle of 2020 in its discretionary active investment portfolios.

What it has done: BlackRock says it has ditched coal as pledged. But campaigners say the asset manager has not gone far enough, arguing its exclusion policy applies to only a small section of the coal industry and its assets under management.

“In order to effectively exclude the coal industry, BlackRock should drop all companies that are planning to expand existing or build new coal infrastructure,” says Katrin Ganswindt, finance campaigner at Urgewald, a non-profit. “At the very least, companies with a coal share of revenue of 20 per cent and a coal share of power production of 20 per cent should be excluded from BlackRock’s portfolios.”

A report this month by Reclaim Finance, a non-profit, and Urgewald said BlackRock remained highly exposed to the coal sector, with holdings totalling $85bn.

BlackRock, however, has used its vote at annual meetings to punish companies over coal, voting against directors at groups such as Fortum, and supporting a shareholder proposal at AGL Energy.

Still, many of their most vocal critics have been positive about BlackRock’s progress over the year, even if they believe there is still work to be done. As Ms Howarth says: “BlackRock is capable of so much influence and impact. It is our job to keep challenging and keep the heat on them.”

What BlackRock pledged in 2020

  • Integrate environmental, social and governance considerations into all active management decisions in 2020

  • Divest from fossil fuel companies that generate more than 25 per cent of their revenues from thermal coal in its discretionary active investment portfolios

  • Alternatives business will abandon any new direct investment in companies that generate more than 25 per cent of revenues from thermal coal

  • Publish details on the sustainability profile of every mutual fund, covering areas such as their carbon footprint or data on controversial holdings

  • Begin offering sustainable versions of its model portfolios

  • Double its number of ESG exchange traded funds to 150 by end of 2021

  • Expand the number of low-carbon strategies — no timeframe

  • Disclose voting records quarterly rather than annually

  • Disclose what topics it discusses with companies during meetings

  • Require companies to disclose in line with the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board

  • Set a goal of increasing sustainable assets under management by more than tenfold this decade — from $90bn in January 2020 to more than $1tn

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Saudis agree oil deal with Pakistan to counter Iran influence




Saudi Arabia has agreed to restart oil aid to Pakistan worth at least $1.5bn annually in July, according to officials in Islamabad, as Riyadh works to counter Iran’s influence in the region.

Riyadh demanded that Pakistan repay a $3bn loan last year after Islamabad pressured Saudi Arabia to criticise India’s nullification of Kashmir’s special status.

But the acrimony between the two longtime allies has eased after Imran Khan, the prime minister, met Saudi Crown Prince Mohammed bin Salman in May.

News of the oil deal with Pakistan comes as Saudi Arabia embarks on a diplomatic push with the US and Qatar to build a front against Iran, said analysts. Riyadh lifted a three-year blockade of Qatar in January in what experts said was an attempt to curry favour with the newly elected Joe Biden.

Pakistan had shifted closer to Saudi Arabia’s regional rivals Iran and Turkey, which, along with Malaysia, have sought to establish a Muslim bloc to rival the Saudi-led Organisation of Islamic Cooperation.

Khan has developed a strong rapport with President Recep Tayyip Erdogan, encouraging Pakistanis to watch the Turkish historical television series Dirilis Ertugrul (Ertugrul’s Resurrection) for its depiction of Islamic values.

Ali Shihabi, a Saudi commentator familiar with the leadership’s thinking, said that “bad blood” had accumulated between Riyadh and Islamabad, but recent bilateral meetings had “cleared the air” and reset relations to the extent that oil credit payments would restart soon.

A senior Pakistan government official said: “Our relations with Saudi Arabia have recovered from [a downturn] earlier. Saudi Arabia’s support will come through deferred payments [on oil] and the Saudis are looking to resume their investment plans in Pakistan.”

The Saudi offer is less than half of the previous oil facility of $3.4bn, which was put on hold when ties frayed.

But Fahad Rauf, head of equity research at Ismail Iqbal Securities in Karachi, said: “Any amount of dollars helps because time and again we face a current account crisis. And with these prices north of $70 a barrel anything helps.”

Pakistan’s foreign reserves were more than $16bn in June compared with about $7bn in 2019 before it entered its $6bn IMF programme.

Robin Mills at consultancy Qamar Energy said: “Saudi Arabia and Pakistan are allies, but their relationship has always been rocky. And the Pakistan-Iran relationship is better than you might think.”

Mills said that the timing of the Saudi gesture was “interesting” given that Iran was preparing to step up oil exports with the US considering easing sanctions.

“The Saudis are on a bridge-building mission more generally. They have sought to mend fences with the US and there is also the resumption of relations with Qatar,” he said.

Ahmed Rashid, an author of books on Afghanistan, Pakistan and the Taliban, said that there were a variety of factors that might have spurred Riyadh to restart the oil facility.

It may be “partially linked to the American need for bases” to launch counter-terrorism attacks in Afghanistan from Pakistan, he said, but added that its priority was probably to prevent Islamabad from falling under Tehran’s influence.

Rashid pointed out that Pakistan was caught between China, which has invested billions of dollars in infrastructure projects, and the US.

“Pakistan has to play it carefully, it is dependent on China for the Belt and Road, dependent on the west for loans,” said Rashi. “This is a very complex game.”

Anjli Raval in London and Simeon Kerr in Dubai

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Digital euro will protect consumer privacy, ECB executive pledges




The introduction of a digital euro would boost consumers’ privacy and protect the eurozone from the “threat” of competing cryptocurrencies that could undermine the bloc’s monetary sovereignty, according to the central banker overseeing its development.

Fabio Panetta, an executive board member at the European Central Bank, told the Financial Times that one of the project’s key aims was to combat the spread of digital coins created by other nations and companies.

“If the central bank gets involved in digital payments, privacy is going to be better protected . . . because we are not like private companies,” he said. “We have no commercial interest in storing, managing, let alone abusing, data of users.”

“Of course there is the potential threat that could come from others issuing a digital means of payment . . . If people do want to pay digitally and we do not offer them a digital means of payment, somebody [else] would do that.”

He contrasted the digital euro — an electronic version of cash issued by the central bank — with “unstable coins” such as Diem, Facebook’s planned digital currency which would let users send money as easily as text messages.

The ECB’s recent consultation on a digital euro found that people’s greatest concern was that it would erode their privacy. But Panetta said the central bank had tested ways to separate people’s identities from their payment details. “The payment will go through, but nobody in the payment chain would have access to all the information,” he said. 

The central bank has also tested “offline payments for small amounts, in which no data is recorded outside the wallets of payer and payee”, he said; transfers of up to €70 or €100 could be done using a Bluetooth link between devices. 

Chart showing expected post-pandemic payment behaviour in the eurozone

“For very small amounts, we could permit really anonymous payments, but in general, confidentiality and privacy are different from anonymity,” Panetta said, adding that some checks would be needed on most transactions to avoid money laundering, terrorism finance or tax evasion.

“A payment can be reconstructed [after the event] if the police want to assess whether there’s been any illicit activity,” he said.

Nearly two-thirds of the world’s central banks are running practical experiments on whether to launch digital currencies, according to the Bank for International Settlements.

But commercial banks worry that central bank digital currencies could erode their deposits, especially in a crisis. Morgan Stanley estimated as much as €837bn, or 8 per cent of eurozone bank deposits, could switch to digital euros.

It could also crowd out cash, some critics have argued; more than half of German households surveyed recently by the Bundesbank expressed scepticism about a digital euro and frequent cash users were the most dubious.

Panetta said a digital euro would lead to “a fundamental change in the way in which payments, the financial system and society at large will function”, for example by being “programmable” to allow automated payments, such as road tolls or in a cinema.

But he said the ECB was determined to make sure the digital euro did not undermine the commercial banking system, replace cash, crowd out innovation or become a shadow currency in smaller countries.

To achieve this, it is planning to either cap the amount anyone can hold at €3,000 each or impose “disincentivising remuneration” above that threshold, Panetta said.

The ECB’s governing council will meet next month to decide whether to push ahead with the preparations and Panetta said it could be ready for use in about five years’ time. 

The central bank will also complete its new oversight framework for private digital currencies and crypto asset providers by the end of this year, he said.

Chart showing average amount of cash in the wallet at the beginning of the day, by country

Crypto assets such as bitcoin are “very dangerous animals” that are “largely used for criminal activities” and consume “a huge amount of energy”, Panetta warned. 

So-called stablecoins such as Diem are meant to be safer as they are backed by fiat currency reserves, but Panetta said the potential volatility of those reserves created “an inherent instability in the function of these coins — and for this reason they are still unstable coins”.

Regulating and supervising crypto assets is hard “because there is no responsible legal entity,” he said. “It is decentralised. They could be in China. They could be in Switzerland or in South America . . . But to the extent that intermediaries are involved in the supply of those crypto assets, then we would have regulation and oversight in place.”

The digital euro should be made available in limited amounts for tourists visiting Europe, Panetta said, but the ECB would “have to reflect very carefully on access, and up to which limit, for foreign users”. 

Major central banks are in talks to ensure their digital currencies are kept “interoperable”, Panetta said, as this would help to “make cross-border payments more efficient and much cheaper”.

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SEC aims to stop insiders dumping stock before the bad news hits




It seems the great trading edge enjoyed by corporate insiders is knowing when to sell. That makes sense. There are many brokers and business-TV guests with stock buying tips, but few who will urge you to sell now, before the bad news comes out.

But we are probably coming to the end of a great couple of decades for legalised insider trading in America. This boom really started with a 2002 “reform”, the Securities and Exchange Commission’s adoption of Rule 10b5-1. This provided a means for senior executives or board members to sell their shares without making themselves vulnerable to charges of acting on “material non public information”.

New SEC chief Gary Gensler has called for reform of the rule, telling a Wall Street Journal conference that it led to “real cracks in our insider-trading regime”.

The rule was issued, as is customary with major reforms, in the wake of a series of giant corporate scandals — in this case those that came to light after the dotcom crash of 2000-2001. You know, pump earnings, goose the stock, dump your shares. Never again.

To qualify for protection under 10b5-1, covered insiders could no longer sell their companies’ shares at will. They have to enter into a (non-binding) contract, or plan, that instructs a third party to execute trades on their behalf according to a written plan, based on value, timing, number of shares, and so on. The stock sales under these plans would then be disclosed to the SEC and then the general public.

At the time, this seemed like a reasonable way to ensure market transparency while allowing insiders to sell shares to make tax payments, buy houses, or cover school tuition. Plans + disclosure + aligned interests = good.

In practice, Rule 10b5-1 has turned out to be a “get out of jail free” card for opportunistic timing of stock sales using insider information. It is also probably a good object lesson for why $4,000/hour lawyers are a better value than $400/hour lawyers.

To begin with, you, the insider, must follow a plan, detailed in a SEC Form 144, which you adopt at a time when you are not in possession of material non-public information. That would include, for example, certain knowledge that the next earnings announcement will be disappointing for the public shareholders.

Ah, but while you have to establish the plan with, say, your broker or family lawyer, you can modify or cancel the plan at will, in private. And you are not required to inform the SEC or the public that the plan is in place. Even better, there is no minimum number of transactions, so you can use it to make one big sale.

And you can file your plan (when you are ready) on a paper form, rather than in an easily accessed online filing. Until the pandemic, the 10b5-1s were only available for a limited time in the SEC’s Reading Room. It is possible, even likely, that an insider’s pre-filed plan might become general knowledge only after their stock sale has already been executed by his broker.

Mostly the insiders appear to be getting out before bad news is disclosed.

Daniel Taylor, a Wharton School associate professor and director of the Wharton Forensic Analytics Lab, has co-authored a series of studies on data combed from the 10b5-1 filings. He says “the sellers’ outperformance (in timing trades) comes from avoidance of risk”.

According to one of his studies, sales executed in the first 30 days of plan adoption are associated with the stocks underperforming others in their industry by 2.5 percentage points over the following six months.

Sales made 30 to 60 days after a plan adoption foreshadow 1.5 points of underperformance by the insiders’ companies. The sell-off effect was consistent over the 2016-2020 period covered by the study. The insider advantage disappears if sales are made under plans that are at least 60 days old.

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As Taylor (and others) see it, the policy lesson is clear: insiders should be required to wait for at least two months after filing their plans publicly before their stock sales can be executed. Oh, and those plans should be filed in easily accessible electronic form, so insiders’ lessened commitment to their companies becomes obvious before the bad news.

The odds favour the SEC’s adoption of such changes.

The next frontier, Taylor says, is to limit insiders’ use of privileged information about competitors, suppliers, customers and the like. That “shadow trading” is probably a bigger rip-off than insider selling.


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