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What are Publicly Listed Asset Managers Saying about Sustainable Investing During 2020 Earnings Calls?

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The Bottom Line:  “ESG is just an absolute necessity for any investment organization to be deeply engaged in,” according to Marty Flanagan, CEO, Invesco Ltd.

What asset management companies are saying about sustainable (and ESG) investing? 
Based on publicly listed asset management company 1Q/2Q 2020 earnings calls/earnings announcement comments and Q&As.  Coverage across large-to-small cap publicly listed asset management firms focused on remarks made during the latest earnings conference calls/earnings announcements specifically regarding the topic of sustainable investing.  Comments, to the extent there are any, are extracted from full earnings call transcripts as well as earnings announcements and have not otherwise been edited or modified in any way.

Q1/Q2 earnings call/earnings releases references to sustainable and ESG investing in late April early May 2020, include:  BlackRock, Inc., Invesco Ltd, T. Rowe Price Group, Franklin Resources, Inc. and Federated Hermes, Inc.

BlackRock, Inc. (BLK) Q1 2020 Earnings Call for the period ending March 31-April 16, 2020
Prepared Remarks (Larry Fink, Chairman and Chief Executive Officer): …Throughout the recent market volatility, one enduring trend has been the move to sustainable investing. In addition to the $10 billion of sustainable ETF inflows I’ve already mentioned, we continue to see broad and strong interest in active sustainable strategies even as equities sold off more broadly.

In January, BlackRock committed to be placing sustainability at the core of our approach as an investment manager in how we manage risk, how we construct portfolios, design products and engage with companies and to be making sustainable investing accessible to more people.

These commitments remain a priority and we continue to make progress in executing on them. The pandemic we’re experiencing now is further highlighting the value of sustainable portfolios. We’ve seen sustainable portfolios deliver stronger performance than traditional portfolios during this period. And we expect clients rebalancing in the current environment will include a substitution of some traditional assets, the sustainable ones as they see the potential for the long-term benefits.

BlackRock’s goal to be — is to be a leader in — global leader in sustainable investing. And we believe the assets we manage for clients in this category will reach over $1 trillion by the end of the decade. We also saw it’s [Phonetic] strong quarter for our multi-asset platform, which also generated $4 billion of net inflows. Our global allocation franchise, a long-term flagship product, now under Rick Rieder’s leadership significantly outperformed peers and stayed true to its three decade promise of providing upside return with limited downside capture.

Just as we are focused on strong corporate governance and communication across BlackRock, our investment stewardship team continues to engage and communicate with companies through this time on behalf of our clients. In addition to proxy season fast approaching, the team is actively engaging with companies on topics like operational resiliency and how companies are taking the care of their employees, contributing to their community and living their purpose. These issues are more important than ever before.

BlackRock is helping our communities during this time of great need. Early in the first quarter, before the full impact of the pandemic appending global markets, we contributed our remaining 20% stake in PennyMac to our existing [Indecipherable] advisory funds and we created a newly established BlackRock Foundation with the goal of supporting a more inclusive and sustainable economy.

Since then, through these charitable funds, we committed $50 million to immediate COVID-19 relief efforts. Our focus has been two-folds. Supporting front-line medical workers, who are the true heroes in the crisis, and supporting food banks, which are on the front line at helping address the financial hardship and social disallocation that the pandemic is pouring into so many.

Salim Ramji (Global Head of iShares and Index Investments):  Core equities delivered $11 billion with its growth largely coming from the growth of model portfolios and buy and hold segments globally. Our sustainable line raised $10 billion in the quarter, which puts us as the global market leader with 66% market share. Our factor ETFs raised nearly $2 billion, even as the industry saw outflows and factor strategies and our fixed income ETFs experienced high volatility during the — high volatility of flows during the quarter ending roughly flat in a fixed income market across active and index, which saw record outflows of $178 billion in the US alone.

And when that market is under stress, investors turn to iShares even more. Our conviction is even stronger today, that fixed income ETFs will be a $2 trillion market over the next four years with a significant growth opportunity for BlackRock. The second accelerant stems from the growth of model portfolios globally. In times of volatility, we see more investors, especially in wealth management move to discretionary model portfolios.

The reasons are straightforward, they’re simpler, cheaper, more diversified and tend to perform better over the medium term. iShares benefits in two ways, through the models that BlackRock manages and even more significantly through the models that third parties, often our clients manage themselves, where iShares plays a central role at the core and increasingly in factors and ESG.

Last year, growth in models accounted for about 30% of iShares flows in the United States, and we’re seeing that growth accelerate. Q1 was a record quarter for our managed models of iShares. Models are a critical area of growth and we think it should account for half of iShares’ growth over the medium term. The third and final accelerant is sustainable ETFs, which is we think is not only a major growth area, but one that is right for indexation.

Q1 was a record quarter for us and sustainable ETFs at $10 billion. We now manage $40 billion across ETFs and index mutual funds. But these are just early days. Client demand has surprised us to the upside. We are seeing iShares being bought as part of tax loss harvesting campaigns, as core parts of asset allocation and model portfolios and is tactical exposures by institutional investors.

Question (Craig Siegenthaler, Credit Suisse, Analyst):  Thanks, good morning. I wanted to come back to the Financial Markets Advisory business. Could you walk us through each of the government programs that you’ve already been assigned to? And then also how should we think about the potential AUM and fee opportunity for the firm?

Answer (Larry Fink):  Thanks, Craig. Let me answer the first part, and maybe I’ll ask Gary to finish up the question. As I mentioned in the call, we’ve built FMA from the very beginnings of the firm. Actually our first revenues when we started the firm was — we didn’t call it FMA, but it was an advisory assignment and then it really took hold as I think I said in in our call that, it’s been part of our platform truly since 1994. And over time, we’ve really successfully completed these crisis-oriented mandates we have been working and regulatory assignments for financial institutions. And now we’re actually working with a number of institutions on ESG, risk and risk analytics, and their strategy related to it.

So it has been truly a component of BlackRock that over the last few years we haven’t really discussed because it becomes much more notable during financial crisis like it did in 2008 to 2012. We don’t — we did not build this with the idea that we’re going to — we’re going to be needed during these crisis. We’ve built it to help our clients during normal times and resiliency, but I don’t think — during crisis, I don’t think there’s any firm in the world that is better prepared to be working on these truly critical assignments of designing programs or assisting our clients, whether it is assistance in terms of related to monetary policy, in terms of how it is effectuated the procedures and the policies and this is something I’m very proud of.

It has been already noted that we won a rather large assignment with the Federal Reserve Bank of New York, with the Bank of Canada and now, the European Commission on ESG, and we’re having dialogues across different governments right now. And so I do believe it’s going to continue to be opportunities for us. It will continue to give us strong differentiation and I’ve been, I’m very proud of how resilient this division is, but importantly how it is helping our clients by capturing all the information flow from BlackRock and helping design these effective programs with our clients and yet retaining the confidentiality of all the information, segregated, separated, differentiated. We are — this is a very strong component of our fiduciary culture.

Question (William Katz, Citi, Analyst):  Good morning, everyone. Thank you for the added comments and similarly hope everyone is safe and healthy through all this pandemic concerns. Larry, just sort of curious, you had mentioned you’ve been in contact — one of the themes on this call is you’ve been in sort of contact with a lot of your clients throughout the quarter, particularly toward the end of the quarter. A lot of moving parts, but I’m sort of wondering if you’re getting any sense of how allocation changes may shift here? Would that be on the institutional side or the retail side? And I was wondering if you could maybe answer the question through the prism of maybe asset allocation versus product allocation. Thank you.

Answer (Larry Fink): Yeah, let me start with that related to the derisking-risking. And I’m going to have Rob Kapito talk about this too, because he out on the front line with us. Obviously, we had vast derisking from February 21 to the end of the quarter. And much of it was done using indexed products to go in and out of marketplaces, but our conversations have been very broad in terms of what — how clients are going to start, inching back into the marketplace. So we had a recent call in the month of April with 750 institutional clients. And 75% of that group expressed plans to actively take on more risks and buy — start beginning to buy at dips. But only 5% expressed that they are taking risk off the table. And we’re seeing this across the board in our illiquid alternatives space. We are actually having deeper longer broader dialogs than ever before. Clients are looking to — continue to look for that.

As we showed sustainability issues, clients are just as interested today despite all the underpinnings of the global economies related to COVID-19. And so I would say clients have done broad derisking, they wanted to get their foundation and views. Several of them have already entered the markets. Some of them are going to be waiting because they expect another dip. And that really depends on the client’s position. We actually have some clients who are needed to sell because of the decline in energy prices. And there are all many reasons where you had not just derisking, but we have governments who need cash flow and need to spend on that. And so that’s also that has — in my mind, that drove as oil price were being driven down, it obviously created an environment where those countries that have been benefiting from rising energy prices, stable energy prices, they were investing dollars and now they’re — to support their economy, they’ve done other things in terms of using some of their vast savings to support their own economy.

We also expect to see clients continue to look at different equity strategies. In fact, whatever. One great client of BlackRocks heard from us about opportunities and they sold a large component of their US government bonds and bought a portfolio, a conservative portfolio of dividend stocks. So selling government bonds and going into a higher yielding asset class with upside potential in terms of beta. So they obviously went from one extreme government bonds to — not hyper growth equities, but equities in providing the foundation of higher income than what you could earn in bonds. So across the board. Let me have Rob continue to give you a little more texture and color.

Answer (Rob Kapito, President): Yeah. So we are in a unique position because of the diversity of the platform. So we get to look at clients’ preferences as they evolve. And what we did see was some outflows in active fixed income, but then where did people go? We saw $52 billion of inflows into cash. We saw $4 billion into active equity and $4 billion into multi-asset and $4 billion into liquid and illiquid alternatives. So a lot of clients looked at where levels were and interest rates, and look to actually rerisk. And it was broken down more by institutional and retail. Certainly a lot of institutions, some chose to derisk and that shows the build up in liquidity moving into cash. When others realized valuation opportunities and equities were at levels which they had wished, they were able to invest in among these declines. So they entered.

On the retail side, people were a bit concerned about credit and they were concerned about being in the right credits that represent companies that represent the new normal or that have better business models. But one thing in the asset allocation, which I didn’t expect and give Larry credit for calling this one, was in this reallocation people used this to go into ESG oriented products or to structure their portfolio in a more ESG oriented way, and we saw that in the flows and reflected in our ESG oriented products, which had extraordinary inflows. So that was one of the interesting aspects of this change in asset allocation.

IShares is leading the market in part because of product and education, but also commitment and an intention to focus on building out a global and diverse set of products that now numbers 100 across ETFs and index funds. We expect our sustainable ETFs are going to grow 4x or 5x, over the next three to four years. I hope you better understand forces that are driving our flows this quarter especially precision, market driven, segments and institutional clients in the diversity of the platform. That doesn’t make the next quarter and the one after that any easier to predict. Even with the upswing that we’ve seen in the past couple of weeks.

But what is both predictable and stronger as a result of Q1 are two things. The resiliency and performance of iShares in the face of the most extreme tests that we have faced in our history, and the growth opportunities that these tests and the accelerants are driving. As we look at that medium to long term, our confidence in iShares and our prospects for double-digit asset growth, strong revenue growth and market leadership remains strong.

Invesco Ltd (IVZ) Q1 2020 Earnings Call for the period ending March 31-April 24, 2020
Question (Stephanie Ma, Morgan Stanley, Analyst):Hi. This is actually Stephanie filling in for Mike. I wanted to get your updated views on ESG maybe. Do you think the environment today lends itself to increased demand for industry products further in the industry, broadly speaking? And then, maybe within Invesco, do you see an uptick in demand and any sort of opportunities you see from here on the ESG front? Thank you.

Answer (Martin Flanagan, President and Chief Executive Officer):Yeah. Why don’t I make a comment first and then Andrew can speak to it, and Colin and Greg are in the middle of it. They know what happens. So, I think there’s no question. And again, I think it depends on what — where you sit. ESG is just an absolute necessity for any investment organization to be deeply engaged in. Beyond what your opinion is, it’s absolute business necessity in Europe. If you are not very strong, you are incredibly disadvantaged. It is gaining legs here in the United States and also Asia. But what I will tell you, as an organization, we are deeply engaged in ensuring that we have ESG capabilities embedded to our investment capabilities and various offerings.

But, Andrew, do you want to start with some of the — maybe talk about the other [Technical Issues].

Answer (Andrew Schlossberg, Senior Managing Director and Head of Americas):Yeah. No, sure. I’ll make a couple comments and others may want to as well. I think this environment, and we’re positioned for it, is probably going to create more demand around ESG and just more momentum. I’d go beyond product — I know your question focused a bit on that. We certainly think there will be ESG-focused product and we’ve been building that or have built that and will continue to look at it.

I think the bigger area that we’re focused on, and Greg might want to comment on it, is how we’re embedding ESG into fundamental strategies as a factor of the way that we’re looking at active investments. And I think that’s a growing expectation of all of our investors –I’m sorry, our clients around the world. So, I think that’s an area of focus for us too.

And then, lastly, I think more and more, as people are putting together asset allocations in portfolios, at the retail level, it’s going to continue to be a factor that drives those aspects too. So that, I think, we’re seeing it on all fronts. Maybe while people are triaging in various environments right now, you may see a short slowdown, but in the medium or long run, I don’t see any of that abating.

Answer (Greg McGreevey, Senior Managing Director, Investments):The only thing I’d add to that is I think that the focus that we’re seeing this from a lot of different participants overall, and there’s just a tremendous focus that — while it emanated in Europe, I think that we’re seeing that in a lot of discussions that we’re having with clients in Asia and clients in North America overall. And so, that’s coming in the form of demand and we’ve got a number of products that have kind of hit that demand that stem from things that we’re doing in our alternative business to things that we’re doing in fixed income and other areas. And so, we have a wonderfully strong capability, we think, in ESG, and so we’re trying to match-up that capability to the point that Andrew made in embedding those into our investment teams and making sure that we’re kind of proactively — really not just touching the surface on ESG, but really embedding that in the things that we can do from an investment standpoint to make decisions that are going to support ESG mandates overall.

So, we’ve got a strong capability. We’ve got increased demand. We’ve got a lot of products that we’ve already put into the marketplace. And we think that, while it maybe is stalled for a couple of weeks in light of what’s going on in the environment, once we get through this, which we will, that demand, we think, will come back online and we’re well prepared to be able to handle that, we think.

Answer (Martin Flanagan): Colin, anything you want to add from an institutional point of view? No. I’d just reinforce the points that were made. It’s a core skill. And I think as Andrew mentioned, the ESG book is a product, but, equally importantly, and maybe more importantly, as a factor that can be applied across portfolios, is of critical importance. In fact, our ESG capabilities have been core to a number of our wins, particularly in the solutions space where that ability was critical from a client standpoint. And we feel quite good about our capabilities. So, that was the last question. And again, I appreciate everybody spending time with us and engaging and we’ll be chatting soon. Thank you.

Rowe Price Group (TROW) Q1 2020 Earnings Release for the period ending March 31-April 28, 2020
“The firm was in very strong financial shape as we entered 2020 with no debt and plenty of cash. This strength gives us the confidence to continue investing in our capabilities for the long term, despite volatile markets. And we continue to make progress against our strategic objectives. In Q1, we expanded our ESG efforts with the launch of a new sustainable range of SICAV funds, bringing socially responsible investing versions of several of our funds to European investors. In addition, as part of our ongoing focus on the global retirement market, we launched our new Multi-Asset Global Income SICAV. In Japan, we continued to see success with our Investment Trust (ITM) offering, which was expanded in Q1 with the launch of our US Large Cap Growth Equity ITM for institutional investors.

Franklin Resources, Inc. (BEN) Q1 2020 Earnings Call for the period ending March 31-May 1, 2020
Question (Michael J. Cyprys, Morgan Stanley, Analyst): Great. And just as a follow-up question. I was hoping you could talk a little bit about the high net worth buildout. Maybe just an update there. You’ve done some acquisitions. How is that progressing? And just maybe an update on the overall strategy and buildout would be helpful.

Answer (Jennifer M. Johnson, President and Chief Executive Officer):  Yes. So our high net worth business has been about $20 billion. And we think it’s a great business for a lot of reasons. One is it’s a great business in itself. It’s a very sticky business, but it needs more scale. Fiduciary Trust is older than Franklin Templeton. This is a business that really is one of those core, just premier high net worth. And so we wanted to get more scale. So we in that, when we acquired Athena and Penn Trust, it gave us two capabilities to add not just scale to the business, but specific capabilities. Athena is renowned in the U.S. for endowments and foundations for its ESG. And Penn Trust has specialty on in for people who have special needs children in managing those trusts for those. So not only do we get capability, but we’re adding scale of adding with that increased by 50%, the size of Fiduciary Trust’s assets under management.

In addition to that, as the world is moving to more fee based, advisors are getting pressured by clients to provide more of a wealth management. What was historically preserved to just really ultra-high net worth people are now being requested of financial advisors. So things like financial planning, tax efficiency, even estate planning. So having this resource within the firm allows us to be able to take some of that and be able to offer it to advisors. And just as an education, we have our one of our heads of trust council doing a webinar for financial advisors to just talk about educating them, so they can talk to their clients about estate planning. And so these types of capabilities, we think, will build greater loyalty and, with that advisor, that growing fee-based advisor network.

Federated Hermes, Inc. (FHI) Q1 2020 Earnings Call for the period ending March 31-May 1, 2020
Opening remarks (J. Christopher Donahue, CEO and President):  With our EOS* engagement business we represent over $1 trillion of actively managed assets for engagement purposes up from about $877 billion at the end of 2019. We continue to develop and expand this stewardship and engagement business in the U.S. We have hired several new U.S. based engagers and are working on adding more. At Federated Hermes we are delivering leading ESG data research and proprietary tools to over 90% of our investment teams making us a leader in ESG integration and active responsible investing. We believe that these investment research tools coupled with engagement insights and our leading position in active stewardship through EOS are a key differentiator among active managers seeking to deliver long-term sustainable outperformance and this places us among the largest active managers with integrated ESG capability.

Question (Patrick Davitt, Autonomous Research):  Hey good morning, how are you? So, it sounds like there was some good growth in the EOS assets in the quarter, could you kind of update us on how to think about the economics of that growth and you mentioned beefing up the U.S. sales force, could you give us some color around what the mix between U.S. and non-U.S. clients is?

Answer (J. Christopher Donahue):  Okay, I will talk a little bit about the concept and then Saker will fill in on that breakdown that you’re looking for. The EOS is basically our way of showing that engagement really works and yes, it’s great to be at a trillion and that growth is important. It is also important to note that we were able to review over 1000 companies on this engagement basis. This is in addition to what everybody does on the analyst side in terms of contacting companies. And the whole point of all of this is to come back to that point we made earlier namely that it’s our belief that sustainable investing is going to be the most helpful thing in terms of long-term growth. I’ll let Saker comment on the other aspects of EOS.

Answer (Saker Nusseibeh, Chief Executive Officer):  Thank you very much. So EOS just to EOS to recap we do two functions. One is we represent clients who’ve got investments in industries. As long as they have investments in industries and they want to engage actively on the assets to ensure that we look after them and they create sustainable wealth over the long term, they will have a need for our services. The fact that they have gone over a trillion makes us the largest active stewards in the playbook and this is a growing segment of the market. In terms of split between North America and the rest of the world roughly speaking 60% of assets are based out of North America and the rest are spread from around the world and that’s not just Europe but also from emerging markets and from developed Asia and New Zealand and so on. The wide and growing asset base and it’s in demand in Europe obviously because it has been the longest but there’s been increased demand elsewhere particularly in Asia and slowly coming to North America. And of course fundamentally it gives us right across Federated Hermes, a stronger and better insight which added to our ESG metrics allows us to have more fundamental data to our stock picking ability and create performance over the long-term.

Answer (Thomas Donahue, Chief Financial Officer, Vice President, Director and Treasurer):  Patrick, this is Tom. On the economics of it we’re looking at EOS as a growth business and if you talk to our investment people particularly John Fisher when we were discussing the acquisition of Hermes that was his number one reason for being interested in purchasing Hermes was because the ability to get information from EOS in to help our portfolio managers make better decisions and get better performance in our funds.

*Note of Explanation: EOS is a provider of stewardship services that had been offered within Hermes.  According to FHI’s website:  “Our engagement activities enable long-term institutional investors to be more active owners of their assets, through dialogue with companies on environmental, social and governance issues. We believe this is essential to build a global financial system that delivers improved long-term returns for investors, as well as better, more sustainable outcomes for society.”

 

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