NGO Study IDs Vanguard, BlackRock as Big Climate-Change Villains

Guess who the largest investors in climate-harming energy companies are? That would be major asset managers, with BlackRock and Vanguard Group the biggest offenders. So says an environmentalists’ report, “Investing in Climate Chaos.”

The report, spearheaded by Urgewald, a German environmental group, and conducted “in partnership” with more than 20 other nongovernmental organizations, comes down hard on two financial service stalwarts in particular: Vanguard, the mutual fund powerhouse, and BlackRock, the world’s largest asset manager.

Beyond those two, half of the stakes in fossil fuel companies identified in the report are held by just 23 investors. What’s more,18 of them are U.S.-based, the advocacy group stated, basing the report on data collected in January.

Most of the other managers and companies listed have relatively small positions in fossil fuel firms. Smaller players that the NGO named include State Street and Berkshire Hathaway, as well as fossil fuel companies themselves, such as Exxon Mobil; public utilities on the order of Duke Energy; and a few pension programs, notably Japan’s Government Pension Investment Fund.

By the report’s reckoning, Vanguard, managing $269 billion in fossil fuel investments, and BlackRock, at $263 billion, account for 17% of all investments in fossil fuel that Urgewald counts.

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“If it is bad for the environment, it is bad for retirement,” the report quoted Doug Norlen, from Friends of the Earth U.S., commenting. “Vanguard’s retirement schemes are built on investments that jeopardize our future.”

Vanguard’s largest fossil fuel holding is $4 0billion in Exxon, its disclosures show. The report blasted the oil giant as having “done more than any other to obstruct the adoption of effective climate policies.”

BlackRock has positions in oil and gas companies that account for two-thirds of the world’s yearly hydrocarbon production, per Urgewald. Its single largest energy holding is also Exxon, which is the firm’s ninth biggest equity position overall. . Although the asset manager has a policy against investing in any business that gets at least one-quarter of its revenue from coal, the report charged that BlackRock exempts power companies that use coal. “As a result, BlackRock remains the world’s largest investor in coal developers,” it said.

This green-minded broadside illustrates a dilemma for these asset managers, many of which have taken supportive stances to combat climate change. BlackRock, in particular, is under fire from numerous Republican state officials that condemn its backing of environmental, social and governance precepts. Some GOP pols accuse the firm of “boycotting” fossil fuel producers. Neither Vanguard nor BlackRock could be reached for comment.

In the past, BlackRock has responded to critics on the right and the left by saying that, while it supports ESG, is not about to “dictate how clients should invest.” In a statement, it declared that “transition to a low carbon is in the interest of realizing the best long-term financial results for our clients.”

Vanguard, also under GOP attack, has made much the same argument. It did raise environmentalists’ ire last year when it quit the investment-industry initiative on combating climate change, saying it wanted to “speak independently on matters of importance to our investors.” Some contended that Vanguard was just knuckling under to politicians’ pressure.

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Tags: BlackRock, Climate Change, coal, ESG, ExxonMobil, Fossil Fuels, NGO, Republican, Urgewald, Vanguard Group

Direct indexing, which has found favor with institutions and financial advisers that seek to tailor traditional indexes to beneficiaries’ preferences, is expanding rapidly. But a Morningstar study found that the different offerings from Wall Street firms are pretty much the same.

To meet investors’ requirements, these providers customize bespoke indexes that do such things as omit tobacco stocks or include those with high environmental, social and governance scores.

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Of the $260 billion invested in direct indexing strategies at year-end 2022 (other estimates are higher), “providers have similar offerings,” the research group found in its survey of Wall Street firms and others. Family offices have used these strategies and some employers are said to be eyeing them for defined contribution portfolios.

Direct indexing has been around for years, but current-day computing power has accelerated its use, according to the report by Jason Kephart, Morningstar’s director of multi-asset ratings, and his team. Also, a batch of large asset managers—such as BlackRock, Morgan Stanley and Franklin Templeton—have recently acquired smaller competitors, broadening their range.

The category is poised for growth. Cerulli Associates projects that direct investing will expand at a 12.3% annual rate through 2026, outpacing exchange-traded funds (9.5%) and mutual funds (minus 2%). The latter two categories are, and will continue to be, many times larger than direct indexing, the consultancy estimates: $7.1 trillion and $20.8 trillion, respectively. Cerulli puts direct investing’s current asset size, at $462 billion, higher than does Morningstar, which employs a different gauge.

For Morningstar, examining the beefed-up competitors in the direct indexing field resembles “comparing different chain restaurant menus.” The study said, “Sure, there are small differences, but the core offerings look alike.”

Starting fees range from 0.23% to 0.40%; they usually fall as account sizes increase. Accounts of around $5,000 usually have just three indexes they can choose to customize, mainly the S&P 500, MSCI All-Country World and MSCI Europe, Australasia and Far East indexes. Larger accounts get to add more, such as the Russell 2000 and MSCI Emerging Markets.

From there, Morningstar added, investors can “choose their own adventure,” although it will come from a standard palette.

The one area that is tough to parse among the direct index providers is how these firms go about their “tax harvesting,” in which they offset gains with losses, . Extending the fast-food metaphor, Morningstar referred to these methods to a “secret sauce.”

At the same time, other large players who have belatedly entered the scene are struggling to catch up and boost their offerings, Morningstar found. For example, JPMorgan offers just a U.S. large-cap direct indexing option, and Charles Schwab has four indexes covering U.S. large caps, international large caps, ESG and small caps. Both only started in direct indexing last year.