Zoom room one

  • Professor Stephen Kotkin, Professor in History and International Affairs, Princeton University (United States)
  • Karen Karniol-Tambour, head of investment research, Bridgewater Associates (United States)

Current number of participants:

1

Zoom room two

  • Kate Barker, chair, BCSSS (United Kingdom)
  • Michael Hewett, managing director, investor relations, SVP Global (United Kingdom)

Current number of participants:

1

Zoom room three

  • Sharan Burrow, general secretary, ITUC (Belgium)
  • Jon Cheigh, chief investment officer, Cohen & Steers (United States)

Current number of participants:

1

Zoom room four

  • Geoffrey Ling, MD, founding director of the Biological Technologies Office of DARPA; Professor of Neurology and Neuro Critical Care, John Hopkins Medical Center (United States)
  • Niall Quinn, global head of institutional business, Pictet Asset Management (United Kingdom)

Current number of participants:

1

Zoom room five

  • Arjen Pasma, chief risk officer, Investments, PGGM (The Netherlands)
  • Geoff Hodge, Executive Chairman, Milestone Group (Australia)

Current number of participants:

1

Zoom room six

  • Fiona Reynolds, chief executive, PRI (United Kingdom)
  • Masja Zandbergen, head of sustainability integration, Robeco (The Netherlands)

Current number of participants:

1

Zoom room seven

  • Angela Rodell, chief executive, Alaska Permanent Fund (United States)
  • Jenny Johnson, president and chief executive, Franklin Templeton Investments (United States)

Current number of participants:

1

When the CEO of the world’s largest asset manager speaks, the world tends to listen. So it was last week when BlackRock’s Larry Fink announced the company would put climate change centre-stage across its $7 trillion portfolio after what critics have called years of prevarication.

The news came via two letters to fellow CEOs and clients, the latter detailing wide-ranging plans in response to the climate crisis including removing some coal companies from its active funds, boosting transparency in its voting and engagement with investee companies, and increasing the number of sustainable funds the firm offers.

BlackRock has traded on climate-conscious statements before like a paper in 2016 where it warned that investors could no longer ignore climate change.

But Fink’s annual missive follows a year of mounting criticism of the company’s climate record that saw Japan’s ¥150.7 trillion ($1.35 trillion) Government Pension Investment Fund withdraw millions from a BlackRock-run passive mandate on stewardship concerns and eco-warriors step up their pressure on the asset management industry’s biggest fish.

It also comes against the backdrop of nagging awareness that the manager, headquartered in the US where ESG integration lags European rivals, could be missing out. With responses from the ESG and asset owner community to Fink’s promises ranging from “significant” to “a game-changer” – and expectations that more US asset managers will follow suit – it feels like this time something is different.

Loose wording aside, it is Fink’s pledge to be “increasingly disposed” to use BlackRock’s voting rights to influence sustainability in the thousands of listed companies in which it invests that has prompted most enthusiasm.

It marks an overhaul of the firm’s engagement and stewardship policies on which ESG integration in its vast passive allocations depends.

“The promise included in Larry Fink’s letter to vote against management at companies that do not make sufficient progress to account for climate risks is hugely welcome and a step change for the entire investment industry,” says Edward Mason, head of responsible investment at £8 billion ($11 billion) Church Commissioners for England which has “some” active mandates with the firm – Fink has promised to integrate ESG into all active management decisions in 2020.

In another step change, BlackRock will reveal its voting records quarterly rather than annually and disclose what topics it discusses with companies during meetings.

“On key high-profile votes, we will disclose our vote promptly, along with an explanation of our decision,” writes Fink.

Up until now the manager has tended to work directly with investee companies through its own internal stewardship teams rather than wield its voting power to effect change.

A strategy that kept “everyone in the dark” about the companies it meets, the topics discussed, and most importantly the outcome of those engagements, says Jeanne Martin, campaign manager at ShareAction, a pressure group which found BlackRock supported less than 10 per cent of climate-related shareholder resolutions last year.

“The substantial shift and commitment to improved transparency will enable us, and clients, to hold them to account and deliver on these most welcome commitments,” says Mark Mansley, CIO at the UK’s £30 billion Brunel Pension Partnership.

Devil in the detail

The next question is whether the firm limits its voting influence to support resolutions for yet more data and disclosure from investee companies or takes a bolder approach – like voting to force listed companies to actually deal with climate change by embarking on Paris-aligned, transition planning.

The AGM season (it begins in the spring) and disclosure of BlackRock’s own voting records at the end of August, will offer the first glimpse into the extent to which Fink is as good as his word.

“BlackRock can really make a difference around active ownership and voting on climate resolutions. The commitments seem serious, but of course the proof will be in the pudding,” says Johan Floren, head of corporate governance at Sweden’s SEK490 billion ($53.8 billion) AP7 which has a global equity beta mandate with BlackRock.

Passive

Integrating climate change into passive strategies doesn’t just come via stewardship. Fink said the firm will double the number of ESG ETFs to 150 over the next few years, including sustainable versions of some of the firm’s flagship index funds.

Along with more choice, he also promises to offer “simpler” ways to integrate ESG in passive investment. This should help build credibility in products like ETFs and open-ended funds, ensuring they have the sustainability criteria investors think they are buying. It’s a big task. Witness, for example, how holdings in ‘BlackRock iShares JPMorgan ESG $ EM Bond UCITS ETF’ include Saudi Aramco and bonds issued by Saudi Arabia – questionable assets for many climate-conscious investors.

Elsewhere, Fink has promised to assess ESG “with the same rigour that it analyses traditional measures such as credit and liquidity risk.”

The firm will now pressure public companies to disclose in line with standards set by the Sustainability Accounting Standards Board (SASB) which sets voluntary financial reporting standards, and the Task Force on Climate-Related Financial Disclosure (TCFD).

In a reflection of BlackRock’s influence, the impact of its public endorsement of SASB standards immediately spiked enquiries from the corporate community on what one of their largest shareholders would require, says Janine Guillot, CEO of SASB.

“We are feeling the impact already with new enquiries from companies interested in getting more information. We are gearing up our guidance for these businesses as they move through their journey.”

But she also flags that BlackRock’s endorsement hasn’t come out of the blue. The firm has supported SASB since 2016 as part of its Investor Advisory Group, and SASB guidelines are already widely used by investors.

Perhaps, she says, the real sign of change comes from BlackRock issuing its own SASB report published on its website in early January, and the “strong message” that it is not asking its portfolio companies to do something it is not prepared to do itself.

Other promises have garnered fewer headlines. BlackRock’s pledge to divest from fossil fuel companies that generate more than 25 per cent of their revenues from thermal coal by the middle of the year only applies to its active investment portfolios. Yet it’s still significant, says Mindy Lubber, Ceres chief executive and president.

“BlackRock’s sheer size and influence will stimulate a hard look at these companies by other asset managers and global owners. Now campaigners like ShareAction’s Martin want to see BlackRock using its voting power to influence banks’ financing coal.

For others, the firm announcing it has signed up to the Climate Action 100+ initiative, the group of 370 fund managers and asset owners that is putting pressure on some of the heaviest polluters to reduce their environmental impact, is particularly noteworthy.

“BlackRock joining Climate Action 100+ brings more of the financial choir to sing from the same hymnal. That’s important for companies, policy makers and civil society to hear!,” says Anne Simpson, investment director at CalPERS, which has no mandates with BlackRock.

The ESG world is often accused of living in an echo chamber where everybody thinks and says the same. Maybe the real significance of Fink’s letters comes from the fact that BlackRock’s size means they have landed on the doorstep of a complex and diverse group of global asset owners and managers that reflect widely different views.

Reactions will likely span applause, scepticism to outright opposition, yet Fink believes it’s time to change his message to them all.

“It appears that BlackRock has decided that the financial risks of climate change are so significant and real they can make a case to their entire client base that climate risk should be a consideration in investment strategy,” concludes Guillot.

Blackrock’s key pledges:

Aim to increase sustainable assets under management from $90 billion today to more than $1 trillion.

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. Its alternatives allocations will no longer make any new direct investment in companies that generate more than 25 per cent of revenues from thermal coal.

To integrate ESG considerations into all active management decisions in 2020.

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

Begin to offer sustainable versions of its model portfolios and double its number of ESG exchange traded funds to 150 by the end of 2021. These models will put ESG-optimized index exposures in place of traditional market cap-weighted index exposures. Over time, BlackRock expects these sustainability-focused models to become the flagships themselves.

It will expand the number of low-carbon strategies.

Disclose voting records quarterly rather than annually and reveal what topics it discusses with companies during meetings.

It will require companies to disclose in line with the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board

Two major forces continue to drive China’s healthcare environment for the foreseeable future. It is common knowledge that the aging population (over 60) is expected to peak from the current 17.5 per cent to 35 per cent by 2050 – a number larger than the entire US population today.

What is interesting however, is that despite the shift to a two-child policy, the fertility rate will continue to stay low due to the rising cost of living. According to data from Xinhua University, families having two children peaked in 2017 since the 2014 change, but has been on a downward trend since.

The other key factor is the dramatic shift in the type of health conditions that are becoming prevalent. China reached a tipping point this year as chronic conditions have overtaken infectious diseases as the leading cause of death. The shift to chronic conditions is substantial and shows no signs of slowing down. Examples include pancreatic cancer which has jumped from 57th spot in 1990 to number 24 in just 27 years. Alzheimer’s jumped from number 28 to the 8th spot for the same period, according to the Chinese Centre for Disease Control.

Chronic conditions are by far the number one driving factor of healthcare costs. In a population consisting of a typical distribution of ages and degree of health, 1 per cent of the most chronically ill can drive as much as 50 per cent of the total health expenditures for that population. According to an analysis done by Dr. Ezekiel Emanuel at the University of Pennsylvania, there is a very strong correlation (more than 90 per cent) between a country’s GDP per capita and its health spending. So, with China predicted to be the largest world economy in 2050 with roughly $48 trillion in GDP, its healthcare spending alone can exceed the entire current GDP of a country like Germany.

Despite these record-setting market opportunities, investors familiar with the Chinese market understand that tapping into that market is easier said than done. Several challenges present themselves for a foreign investor, the most important of which is the role of the government. Another important and often overlooked factor is the unique features of how the average Chinese person approaches spending on their healthcare needs.

The government has been able to provide coverage to almost every citizen through its social insurance program. The challenge is the amount of coverage for an average citizen is roughly half his/her total health expenditure, compared to developed economies where the out-of pocket is around 20 per cent. This financial burden is an obstacle in the government’s effort to shift the economy to a consumer-driven model.

Another growing financial burden on the average citizen relates to long-term care. With the Chinese tradition of the offspring taking responsibility for the care of their elderly parents, the legacy of the one-child policy means that the average couple can be responsible for up to four elderly parents. In terms of receiving care, China is probably the only country encountered, where the average person trusts the government-run hospitals more than private entities – a clear legacy built overtime since the establishment of the PRC.

The net result is tier one public hospitals (usually in Beijing) are overwhelmed with patients from across the entire country, while tier two and private hospitals struggle to fully utilise their capacity. The government has attempted to encourage the domestic private sector to fill in the gap for both insurance and care delivery. So far, the efforts have not yielded much change. A study done by NanKai University has shown that the private insurance sector only contributes 3 per cent or so of the average health expenses.

Furthermore, most private hospitals struggle to make a profit even those who have been established for over 20 years. Such heavy reliance on the government means that innovation and adoption of new technology will be a slower than needed process. This is evident in how the care delivery model is very hospital centric in China, much more than any other developed country.

Care delivery through a hospital has proven to be a very costly method especially when dealing with chronic illnesses. New innovation is focused on moving care out of the hospital, leveraging new technologies. So, as the number of hospital bed days in most developed systems continue to be driven down, China has one of the highest average bed days and the number continues to rise. Finally, bringing preventive care to the day-to-day lives of the average person is virtually impossible with overworked, understaffed tier one public hospitals.

Foreign investment needs to be very focused on those pockets where they can have a level playing field. Understanding the government’s objectives and upcoming reform is key, establishing a relationship and being able to demonstrate direct benefit that works towards solving their healthcare burden, is even more important. Investing in care that provides a foreign institution direct access to Chinese patient data is probably too sensitive for the Chinese authority to allow free reigns.

Furthermore, return on investment in hospitals and long-term care facilities may be a long way away, especially when dealing with local competition that are willing to set profitability aside and invest for the very long term. For example, Taikang, a holding company whose main subsidiary is a life and health insurance business, is also investing in building care delivery facilities for the past decade, and is willing to put profitability on the back burner, at least for a while.

One area that foreign capital and know how has the edge over domestic competition lies in how the middle class is evolving much faster than the primarily publicly run health system. Very soon they are going to lose patience with the rate of modernisation of care delivery and may continue to look to overseas services. This has been seen with the popularity of medical tourism, the question is how will that evolve. Recent investment in remote/telemedicine has been very promising, showing how the average Chinese is comfortable using technology to receive part of their care.

Foreign entities capable of filling this need to a technology savvy Chinese, across the entire ecosystem from insurance coverage, most advanced prescription drugs, might be where they have an edge.

Sam Radwan co-founded Enhance International LLC in 2009, a consultancy, that advises Chinese insurers, headquartered in Chicago with offices in Beijing, Shanghai and Taipei. He has advised the director of health reform at China’s National Health and Family Planning Commission as well as the private health insurers including China Life and Taikang. He’s currently conducting a joint research exchange with the China Academy of Social Sciences.

I chat with Campbell, Professor of Finance at Duke University, on the future of quantitative finance, academic journals, model fitting and the intellectual fallacies within inference.

Nothing on this podcast is to be considered investment advice or a recommendation. No investment decision or activity should be undertaken without first seeking qualified and professional advice.

The latest trustees report from the £26.8 billion Wellcome Trust, the charity that funds scientific and healthcare innovation like 2019 Nobel Prize winner Peter Ratcliffe’s pioneering work on cells, sounds another alarm bell for the fund’s external equity managers.

Wellcome, which aims to spend on average around £1 billion a year on its charitable commitments and returned 6.9 per cent last year compared with 13.4 per cent the year before, runs a £15.1 billion public equity portfolio. At its core lies a £7.5 billion, internally managed, mega cap allocation to global names in a basket prized for its liquidity. The portfolio also includes a high performing internally run £1.8 billion emerging market allocation. However, the weak link remains an externally managed allocation to strategies that include smaller, higher-beta companies, where a wide range of outcomes saw five of the eight managers underperform their relevant indices in 2019.

“We continue to weigh up the merits of internal and external management and to use passive vehicles where appropriate,” say the trustees. That weighing up could mark a continuation of a trend that has seen the fund reduce its external active management mandates in global and developed equity markets from 85 per cent to about 20 per cent of total public market exposure over the last decade.

The tougher climate for external equity was also reflected in Wellcome’s £2.9 billion hedge fund portfolio, springing back into life to outperform global equities after several years in the doldrums. That despite enduring low interest rates and QE which has led to high levels of correlation and dampened volatility. Indeed, the trustees’ suggest they would allocate more to hedge funds if it was easier.

“We are very comfortable with our current stable of managers, but consistently good ones are very difficult to find which makes it hard to scale this part of the portfolio.”

Moreover, the best hedge fund managers are unwilling to take on more capital, they say.

“It has also proved difficult to increase this part of the portfolio to a more meaningful size because the best managers tend to be unwilling to accept new investment.”

Star performers in the portfolio (which returned 9.2 per cent in 2019) were found in the £1.7 billion equity/long short portfolio and a £1.2 billion absolute return directional and non-directional allocation.

Elsewhere, commitments in Wellcome’s £8.3 billion private equity portfolio which comprises buyout funds, venture capital, multi-asset partnerships and co- and direct investments, are set to slow.

“The fundraising timetable of our key partners largely dictates the pace. From what we can currently see, this suggests that we are likely to make fewer new commitments over the coming year,” say the trustees, noting that private equity is an increasingly crowded market.

“New money has continued to pour into the asset class, which has pushed up valuations of private companies, exacerbated by the willingness of lenders to provide debt on very attractive terms to borrowers. Our strategy has been to concentrate on the very best partners, which we believe should continue to be able to navigate a more difficult environment. We do not foresee future returns being as strong as the last decade, but we do continue to expect a premium to public market returns.”

Wellcome’s private equity portfolio has grown to account for nearly 28 per cent of total assets (compared to 11.5 per cent in 2005) of which VC is an increasingly important return seam. It delivered the fund’s biggest gains of 2019 at 27 per cent, something the trustees linked to “the continued skill of our managers in identifying disruptive technological innovation.” Although technological innovation will remain a key investment area for the portfolio, the challenge is balancing that with the illiquidity of many tech-related assets.

“We need to balance the focus on high potential returns carefully against the need to maintain sufficient liquidity to fund our mission today,” says the report.

Indeed, liquidity and public market exposure remain key priorities given the portfolio doesn’t benefit from donations or other outside sources, the trustees said. “With the economic cycle now very mature, we are actively planning for a lower return environment and focusing on ensuring that Wellcome has adequate liquidity for the foreseeable future.”

Slowing economy

The report flags risk from the slowing world economy linked particularly to global trade tensions and less consumer demand.

“Any deal on US-China trade issues is likely to be a temporary truce in what is shaping up to be a protracted economic struggle between the world’s two major economies.”

Moreover “political logjam in the Eurozone” stands in the way of growth-oriented policies, it says.

“After a long period when owners of capital, like Wellcome, have been the beneficiaries of globalisation, of technological disruption and of ultra-accommodative monetary policy, societal attitudes are shifting. Political populism is at least partly a reaction to stagnant real wages in the West.”

As for Brexit, it hit Wellcome’s UK property returns particularly, although a bright spot in that portfolio came from a strong performance from asset backed operating businesses like student accommodation and budget hotels. The fund has no plans to reduce its allocation to UK property.

“Our experience over the long-term has been that keeping a significant proportion in property delivers good returns and positive cash flow generation. The assets are mostly unlevered, which means that there is a low probability of permanent loss of capital”

Sterling exposure is close to Wellcome’s minimum limit of 15 per cent. Elsewhere the fund is “paying close attention” to the potential for US dollar weakness given that over half its portfolio is dollar denominated. Overall exposure to Asian currencies continued to grow, but the mix has changed.

“We added to Chinese equities in the market weakness in Q4 2018, which was partially offset by sales of assets in Japan.”

The investment committee’ priorities through the course of the year included currency exposures within the portfolio, notably Sterling in the context of Brexit; the investment executive’s approach to ESG; hedge funds and the impact of low interest rates and the position of the credit cycle.

On Christmas Day, Tourism Australia released a $15 million tax payer funded advertising campaign aimed at luring the British to have more holidays down under. Sitting in Melbourne with friends and family enjoying a Christmas lunch shrouded by smoke haze and about to head to the New South Wales South Coast, it seemed like one of the most ill-timed tourist promotions in history.

Far from the beautiful animals, beaches and bush depicted in the star-studded campaign, what most people across the world were beginning to see was increasingly apocalyptic images of a country being ravaged by the most severe bush fire season in the country’s history.

The advertising campaign reflected the relaxed image of Australia at play. So relaxed that the Prime Minister headed off on holiday to Hawaii just as temperatures soared and a new round of conflagration broke out in south east Australia – on top of the many fires still burning since September.

The holiday trip for the PM was typical of a tone-deaf government which, upon gaining power in 2013 prioritised repeal of Australia’s nascent carbon pricing scheme and wasted the intervening years to 2020 failing to heed the domestic and international science-based assessments of coming climate impacts on a fire-prone nation. I have been an extremely vocal critic of Australia’s stance on climate change and share the concerns of many Australians working internationally on climate and sustainability issues about the future of our home country – and not it seems without some justification.

As it stands today, at least 28 people are dead, close to 2,000 homes destroyed, a billion animals have been killed, nearly 15 million acres of land have been burnt, an area larger than the size of many small European nations. There is also huge ecological impact and economic costs will run into the billions – not to mention the psychological costs. All this, and the “normal” fire season runs into March, so the danger is far from over.
To date more than one third of Australians are impacted by the fires. The never-ending smoke is so bad it has reached New Zealand and now South America. The long-term health consequences are yet unknown. Never in my lifetime did I think I would see kids playing on the beach in smoke masks.

The destruction in Australia should shock us all. Its emblematic of the so-called “natural disasters” being felt with increasing severity across the globe, the climate impacts already baked into our global weather patterns which we all have been repeatedly warned and warned about, but somehow continue to ignore.

Perhaps most shocking though is that despite the loss of lives and habitat, the government has said in a roundabout and meagre fashion that while it ‘acknowledges’ the link to climate change Australia will not be making any changes to its manifestly inadequate climate and energy policies. This from a country that ranks 56th out of 61 countries in the 2020 Climate Change Performance Index, which looks across the categories of emissions, renewable energy, energy use and policy. When it comes to climate policy, Australia ranked last even behind the United States which has announced its intention to withdraw from the Paris Agreement.

One of my strongest criticisms has been of the climate deniers and fossil fuel industry, and behind them the powerful domestic lobby groups like the Minerals Council, the Business Council and others. Already named among the worst in the world for negative climate lobbying which have been a long-term drag on climate action, often mouthing concern in public but behind the scenes stamping hard on the brakes to prevent progress on national policy.

The lobbyists are certainty alive and well in this country, with a government happy to dance along. At the recent Madrid COP, Australia was front and centre as one of the countries along with United States, Saudi Arabia, and Brazil holding back progress on climate action.

Tackling negative corporate climate lobby groups is an issue that needs to rise in importance on the investment community’s agenda. In both Australia and the US, the anti-climate business lobby groups are winning the day. 2020 needs to see the tables turned, and corporate members either resign from these groups, as Australia’s telecommunication giant Telstra is contemplating, or forcing some drastic and sustained reforms.

We all know that we face a climate emergency and some very stark evidence of the emergency is being played out over this Australian summer. With COP26 being held in the UK this year, and countries due to commit new and more ambitious nationally determined contributions (NDCs), the investment community must play a larger role in combating climate change.

The investor agenda must play a leading role in encouraging governments to be ambitious and support them in more ambitious policy. We need to demand that governments listen to the experts from all walks of life and act accordingly when producing their NDCs.

In Australia we are fortunate to have the oldest indigenous culture in the world, and we all could learn something from them, particularly when it comes to respect for the land. Land is of great significance to Aboriginal and Torres Strait Islander people. The “country”, or the land, is known as the mother and it encompasses an interdependent relationship between an individual and their ancestral lands and seas. They believe that we must look after the land, the mother, if we want the land to look after us – which of course makes perfect sense.

Perhaps it’s best summed up by this quote from Dennis Foley, a Gai-mariagal and Wiradjuri man, and Fulbright scholar.

“The land is the mother and we are of the land; we do not own the land rather the land owns us. The land is our food, our culture, our spirit and our identity.”

Australia in January 2020 has become the newest example of a climate-impacted land. Others will take their turn. The planet is mother to us all. In this decade we must redouble our efforts to protect her.

Fiona Reynolds is chief executive of PRI. She is an Australian living and working in London.