Long the No. 2 index mutual-fund and ETF manager behind Vanguard Group, BlackRock BLK 0.69% has gained ground thanks to its deep ties with institutional investors and a push to include its sustainable funds in model portfolios used by advisers with individuals as clients.
The blitz of new funds from BlackRock, led by iShares product chief Carolyn Weinberg, has helped quintuple assets in BlackRock’s sustainable mutual funds and ETFs to $58.8 billion in June, from $10.3 billion at the end of 2019, according to Morningstar.
ETFs in general are currently pulling in more assets than traditional mutual funds, and BlackRock and its iShares funds has become “the pace setter” among funds attracting new assets to sustainable investing, says Rumi Mahmood, an ESG fund analyst at MSCI Inc. Many of BlackRock’s funds using environmental, social and governance criteria use indexes built by MSCI.
Todd Rosenbluth, head of ETF and mutual-fund research at CFRA, calls it “an impressive cash haul” for BlackRock. He says BlackRock has turbocharged its new ESG funds’ growth by putting them into its model portfolios used by investment advisers, sometimes as core funds for the clients.
In such models, BlackRock assembles groups of ESG-focused ETFs that cover the typical asset categories used by advisers. One model portfolio with 10 ESG-focused funds, for example, includes: four U.S. stock funds with large-, mid- and small-cap stocks; three non-U.S. stock funds; and three bond funds with different maturities. Taken as a group, the 10 ESG funds aim for a combined 60% stocks and 40% bonds.
A burst in 2020
While assets under management in ESG funds remain just 1.1% of overall U.S. mutual fund and ETF assets, assets in ESG funds last year grew 72% and accounted for one-quarter of all fund inflows, according to Morningstar data. Morningstar analyst Alyssa Stankiewicz attributes the recent success of ESG funds in part to their being underweight in energy stocks, a sector that has underperformed the broader market since the pandemic began, and to investors being increasingly concerned about “climate change and social diversity.”
BlackRock designs many of its ESG index funds as replacements for certain broad-market index funds. They exclude some controversial stock categories and then over- or underweight the rest based on their ESG ratings. Its most popular ESG index funds aim to give annual returns within 0.5 percentage point of their benchmark indexes.
The company’s largest ESG fund, the $22.2 billion ESG Aware MSCI USA ETF (ESGU), differs in its holdings’ values from its underlying MSCI USA Index by about 20%, due partly to the absence of five limited categories—civilian firearms, controversial weapons, oil sands, thermal coal and tobacco. ESGU only owned 351 out of 627 stocks in the MSCI USA index as of June 30, but nine of its top 10 holdings were also in the MSCI USA top 10. Stocks in both top 10s included Microsoft Corp. , Amazon.com Inc. , Alphabet Inc., Nvidia Corp. and JPMorgan Chase & Co.
ESGU also includes Amazon and Facebook Inc. , companies considered controversial by some ESG investors because of labor and data-privacy issues, as well as all top six U.S. oil companies.
Looking under the hood, the variations in many of the holdings of the BlackRock ESG fund and the underlying MSCI USA index wind up being relatively small. Highly rated Microsoft, ESG-rated AAA by MSCI, had a 5.16% weighting in ESGU versus 4.98% in the MSCI USA index. Mid-rated Apple (BBB), the largest holding in both, had a slightly lower 5.82% weighting in ESGU than its weight of 5.89% in the underlying index. Low-rated Facebook (B) was 2.02% of the ESG fund versus 2.14% in MSCI USA.
Ms. Weinberg of iShares says some of the BlackRock ESG funds aim to “tilt” specific stock weightings, overweighting those with positive ESG ratings and underweighting those with “less sustainable business practices.”
By comparison, the largest Vanguard ESG index fund, Vanguard FTSE Social Index Fund (VFTAX), screens stocks more aggressively, excluding all companies tied to oil, coal or gas reserves, production, refining or transmission. It also excludes stocks tied to adult entertainment, liquor, tobacco, and a wider array of weapons including nuclear and military. It includes none of the top six U.S. oil companies held by the big BlackRock fund.
The BlackRock index approach has drawn criticism from some ESG advocates.
“Simple exposure to companies with better ESG ratings is fine but I would argue is insufficient,” says Joe Keefe, president of Pax World Funds. ESG investors should be looking for something more, he says: “Companies that are developing the solutions in such areas as climate change and diversity and inclusion.”
Several ESG fund managers offer more-focused approaches.
Invesco Ltd. , which ranks sixth in ESG funds with $12.1 billion invested, has funds that address water scarcity and purity, solar energy and green buildings. Its solar fund, Invesco Solar ETF (TAN), tripled in price last year. Pax World Funds, which ranks No. 7 in assets, has funds for women’s leadership and the environment. Dimensional Fund Advisors, No. 8, focuses on reducing exposure to greenhouse gas emissions and fossil fuel reserves. And No. 9 Eventide takes a Christian faith-driven approach to invest in companies “creating value for society,” with an emphasis on biotech and tech.
The largest ESG fund, actively managed Parnassus Core Equity (PRBLX) mutual fund, with $31 billion in assets as of Aug. 31, has only 40 stocks. The fund offers what Parnassus Investments CEO Ben Allen calls “an authentic ESG approach.” In addition to excluding certain types of companies, it looks at fundamentals like valuation, competitive advantages, relevant and quality products and ethical practices. It shuns Amazon and Facebook, due to labor and data-privacy issues, and all fossil-fuel stocks. One of its largest holdings is Danaher Corp., because its medical testing tools play a role in drug development.
Ms. Weinberg responds to critics of the BlackRock ESG fund’s approach by challenging the more aggressive approach being taken by some, that companies need “to be super-green and can’t have any harmful connotation. That’s a very large leap for many people. Our dream was to democratize sustainable and take clients on a journey from traditional strategies to those incorporating ESG in various ways.”
In the past 18 months, BlackRock has nearly tripled its count of ESG funds to 46 from 16, with some big launches. One, the BlackRock U.S. Carbon Transition Readiness ETF (LCTU) which invests in companies well-prepared to benefit from the transition to a low-carbon economy, started in April with $1.2 billion from eight institutions led by the California State Teachers Retirement System. Some of its new funds screen more aggressively, like Vanguard’s, or focus on narrower themes like low carbon. In a line of iShares ESG funds launched last year, known as ESG Advanced, each fund excludes companies in 14 categories.
BlackRock is aggressively promoting its ESG products to wealth advisers. “Advisers are taking a second look at sustainable investing,” a BlackRock webpage says, adding that “clients are asking for it.” And it warns: “Introduce it to your clients before somebody else does.”
Its major index competitor, meanwhile, Vanguard, has left its lineup of five sustainable index funds and ETFs little changed in the same period, adding an ESG bond ETF last September. Still, its ESG assets have doubled since 2019, ranking No. 4. Its largest ESG fund launched in 2003, a decade before BlackRock’s in 2016.
Parnassus ranks No. 2 in ESG funds with $43 billion. Eaton Vance is No. 3 with $33.5 billion, based on its 2016 acquisition of Calvert Investments. The Eaton Vance lineup of ESG funds also could be helped by that firm’s acquisition last year by brokerage giant Morgan Stanley.
One big name in mutual funds, Fidelity Investments, remains a distant No. 24 with $2.6 billion in ESG funds. But in the past 18 months, Fidelity, too, has cranked up its number of ESG funds to 12 from five, introducing five in June alone. Pam Holding, co-head of Fidelity’s equity division and asset management lead on sustainable investing, says the firm aims to build a suite of actively managed ESG funds that can “outperform an index product over the long term.”