- Millennials' grassroots movement leads to a new asset base
- BlackRock starts selling first impact-labeled fund in U.S.
It began as idle chatter between two employees in their 20s exploring the intersection of lucre and idealism. Both had read about the practice of investing in companies that seek to do good and still make a profit.
At the time, four years ago, so-called impact investing was still pretty new and the employees, Zaneta Koplewicz and Robert Morris, noted that their company, BlackRock Inc., the world’s largest money manager, had nothing like it. They also noted something else: people like them -- well-educated millennials -- were deeply attracted to it. If it was becoming more viable, there was a market niche to be filled.
So began a three-year, 28-person global campaign of dawn and weekend video conference calls across six offices, resulting in a 40-page report to the firm’s global executive committee that Chief Executive Officer Laurence D. Fink personally praised.
On Tuesday BlackRock is rolling out its first impact-labeled U.S. mutual fund. Its size will amount to a rounding error of the $4.7 trillion under BlackRock management. (A similar fund it started in Europe in August has attracted $200 million so far.) But in the nascent world of impact investing -- backing profitable companies trying to produce social and environmental good -- it is a milestone.
"When we see organizations like BlackRock, Bain Capital, Zurich and AXA and so on enter the impact investing market, it’s really being driven by what they’re seeing: an increase in demand from their clients, both institutional and individual," said Amit Bouri, co-founder and CEO of the Global Impact Investing Network.
BlackRock data crunchers have devised models to measure the potential financial return and societal effect of certain publicly traded companies. Ex-Google Inc., NASA and Netflix Inc. number mavens will scrape public data daily and create algorithms to identify investments and track outcomes. They are focused on companies that use environmentally sustainable technology, show a high level of employee satisfaction or carry out research on ending disease. Companies with ethical controversies or a litigious history will be avoided.
In some fashion, such investing is not new -- and has had limited success -- but it has evolved from shunning industries such as tobacco and gambling to encouraging positive outcomes.
The new approach stems from growing public disappointment in politics, said Brad M. Barber, a professor of finance at University of California Davis.
"People have increasing frustration with the inability of our political process to deal with so many of these issues like climate change, like income inequality," Barber said. "So one way in which you can feel like you’re at least trying to contribute to the discourse is by investing in a way that’s consistent with your personal beliefs."
Koplewicz’s grassroots group surveyed BlackRock’s biggest clients in 2012 as they gathered information for their proposal, and found that many of them -- family offices, foundations, endowments and pensions -- had already committed money to impact investments or were considering it.
"The light bulb went on," Koplewicz, 31, said. "Often philanthropy isn’t enough so you need to infuse almost a more market-based approach to affect outcomes that you want."
The number of new mutual funds that aim to align investments with values has soared to 18 so far this year from three in 2014, according to David Kathman, a senior analyst who covers equity funds at Morningstar Inc. Assets in these types of mutual funds have jumped to $134 billion as of September from $93 billion at the end of 2010, Morningstar’s data show.
Over the past 10 years, social impact funds have returned about 5 percent on average annually compared with 6.1 percent for large-cap funds, according to Morningstar.
From Morgan Stanley and Goldman Sachs Group Inc. to Bank of America Corp. and JPMorgan Chase & Co., other major Wall Street firms have also been developing impact investing opportunities for clients. BlackRock says how it uses proprietary data as the basis for measuring the new mutual funds’ social and financial outcomes sets it apart.
The BlackRock Impact U.S. Equity Fund will mostly invest in more than 400 companies that are within the Russell 3000 Index. It will shun tobacco, weapons and alcohol while seeking stocks that advance health, the environment and treatment of workers, according to a filing. Companies researching diseases will be measured by the number of lives affected by their work.
To increase the chance of financial success, not all the companies in the fund are do-gooders; some are neutral in their impact. And the fund, which aims to generate market-rate returns, continues to develop reporting mechanisms for investors that reflect the impact the fund is having on society compared with the broader Russell 3000 Index. BlackRock starts actively selling the fund on Oct. 13.
Analysts note that impact investing carries risks, especially because the definition varies.
"Do some research," said Kathman of Morningstar. "Don’t assume that just because a fund calls itself sustainable or socially responsible or impact that you know what that means -- because it varies sometimes dramatically from fund to fund."
BlackRock’s European impact mutual fund has underperformed its benchmark, declining 1.7 percent since its start through Oct. 12 compared with a 1.4 percent drop in the MSCI World Index, according to Bloomberg data. A version for Japanese investors also began in September, and more are on the way. Shares of BlackRock have declined 11.7 percent this year, compared with a 12.2 percent drop in the Standard & Poor’s index of asset managers and custody banks.
The company hired Deborah Winshel, the former president of The Robin Hood Foundation, in March to oversee the impact initiative.
Having planted the seeds and watched their tree grow, Morris and Koplewicz have moved on. Koplewicz now leads investor relations for event-driven hedge funds. Morris left the firm to pursue poetry.
Asked what had driven him, at age 24, to lead a small revolution inside such an established investment firm, Morris said it was partly the realization that he wasn’t alone.
"The desire to do something that feels connected to the world seems like a pretty common desire," he said. "What we found was it existed in almost everyone we reached out to in that early group. When you give someone an opportunity to work in a way that’s a little more conscious of the effects of things, people want to do that."