Game, Set and Match: BlackRock’s ESG Gambit and the End of Risk
LONDON, UNITED KINGDOM – Before 2020, the last time Wimbledon was cancelled had been due to the destruction of the tennis tournament’s famous center court during World War II. Nearly eighty years later, the grass court championship was again forced to suspend the competition as a result of the pandemic. This time, however, the All England Lawn Tennis Club (AELTC) – which owns and operates the grass court games – was covered by a $141 Million payout from an insurance policy it had taken out seventeen years earlier.
The curious inclusion of specific language addressing a pandemic or epidemic disease in the policy contract notwithstanding, these kinds of disaster insurance policies are nothing new. But, in the early 1990s, a significant wrinkle was added to the mix when losses incurred by the insurance industry after hurricane Andrew motived the sector to outsource the risk of these policies to capital markets through the creation of so-called Catastrophe Bonds or Cat bonds.
In essence, these new instruments allowed insurance companies to spread the risk among hundreds or thousands of outside investors by packaging these kinds of policies as derivatives and selling them on the open market. The financial innovation spurred the growth of the insurance-linked securities (ILS) industry, which comprises cat bonds and several other types of securitized debt instruments revolving around insurance “loss events“.
Previous Wimbledon champion Novak Djokovic would not get a chance to defend his crown or play for the $2.4 Million-dollar first-place purse in 2020, but AELTC would receive almost half of the $310 Million it had projected to make in ticket sales that year. Virtually all of the money paid out of the tournament’s policy will not come from the Insurance company, which charged about $2 Million a year for the contract, but from investors whose portfolios will now lose the principle they would have otherwise recuperated had the public health emergency stipulated in the policy not come to pass.
At the moment, the relatively tiny ILS industry stands at about $118 Billion worldwide, but significant events in the world of global finance this week augur a massive expansion in this sector as the two largest asset management companies on the planet, with a combined $16.1 Trillion under their control, signaled rapid movement in this direction and opened the door for a brave new world in which a pension fund meant to cover the retirement of workers in one country can be diverted to cover the losses of a company (perhaps a sports tournament) in another as a result of an unpredictable natural event.
By the Power of ESG
BlackRock and Vanguard sit atop the global asset management food chain and both are leading the way in the implementation of Environmental, Social and Governance (ESG) mandates across the private sector and ushering the so-called Fourth Sector – an emerging corporate paradigm, that amalgamates the non-profit sector, religion and private companies in a new black-box corporate structure, developed by Rockefeller Foundation’s B Lab and hinging on the UN’s Sustainable Development Goals (SDG).
On Wednesday, BlackRock formerly launched an ESG fund, with cat bonds as a “targeted asset“. Part of the BlackRock Capital Allocation Trust (BCAT), whose top investors include Alphabet, Microsoft and Amazon, the fund will focus on identifying “ESG-appropriate” securities and bonds that use proceeds in a “green manner”. By including cat bonds in the fund’s investment strategy, BlackRock sets the stage for such disaster finance vehicles to drive the burgeoning ESG market and opens the door for these high-risk instruments to become part of the portfolios, that more traditional investment fund managers put together for regular investors.
In addition, Fintech’s encroachment into the asset management game through direct indexing (DI) technologies is bringing “big-data analysis, quantitative algorithms and risk modeling” tools that are usually only available to high-net worth or institutional investors to the much larger intermediary market. BlackRock, J.P. Morgan and others have already made strides in these areas by acquiring DI development firms over the last few months, but perhaps no greater signal of the reality that this is not a mere trend was Vanguard’s acquisition of Oakland-based DI company Just Invest last month – the first acquisition for the legendary company in 46 years.
Nice Work if You Can Get It
The wealth-management behemoths concede that the move towards direct indexing tech is all about wielding ESG’s power to completely fashion corporate policies writ large and not about opening long-held investment secrets to the general investing public. While Vanguard may seem to have dragged its feet, the writing on the wall is clear and momentum is rapidly shifting towards the creation of the Fourth Sector as BlackRock, Vanguard and Fidelity Investments (collectively known as the Big Three) begin to use their considerable influence in the boardrooms of the world’s corporations to push through ESG-based reforms.
Controlling over $34 Trillion between them, the Big Three will have “a de-facto veto on all major corporate decisions by 2040” if nothing changes, according to John Rekenthaler from financial services firm, Morningstar, Inc. The indexing giants are availing themselves of ESG “filters” to pick and choose which companies are able to access investor funds and would become veritable “kingmakers”, not to mention the ability to steer the very markets their bottom line depends on.
“What’s happening now is that indexing consolidation is shifting some of that power from corporations to asset managers, and people are concerned”, says Joshua Levin of OpenInvest – the DI firm recently bought by J.P. Morgan. Predictably, Levin downplays the concerns by characterizing the problems as “a temporary way point”. Nevertheless, the amount of power acquired by firms like BlackRock and Vanguard in the aftermath of the 2008 controlled demolition of the traditional banking model is unlikely to be relinquished any time soon, despite Rekenthaler’s optimism that technologies like OpenInvest will soon “allow motivated Gen-Z-ers and Millennials to [engage in individual proxy voting] via their Vanguard account or Robinhood app”.
Those days may yet come. But, certainly not until the likes of BlackRock, Vanguard and their insurance industry partners have set the rules of the game and their profit margins are protected against any contingency, whether these come in the form of a momentary glitch in the software that causes a stock’s value to plummet or a securitized natural disaster that was called in by God. The point is to win at all costs and capitalize on life’s unpredictability without assuming any risk.
