We believe the sharp increase in the proportion of BBB-rated constituents has made the investment-grade bond sector riskier than in recent years. BBB-rated bonds are typically the most vulnerable of all investment-grade debt in a recession. Any downgrade of such bonds would relegate them from the investment-grade universe to the high yield universe (making them “fallen angels”), which would negatively re-rate their value.
Analysis by Morgan Stanley has found that significant volumes of BBB-rated bonds were downgraded in previous credit downturns. In the 2007-09, 2000-03 and 1989-91 downturns, between 23% and 45% of investment-grade bonds were downgraded to junk. If downgrade rates were to remain at such levels, the next downturn could see approximately $600 billion of BBB bonds consigned to junk status.2
BlackRock to Hold Companies and Itself to Higher Standards on Climate Risk
World’s largest asset manager to take tougher stance against corporations that aren’t providing a full accounting of climate change risks
BlackRock Inc. BLK -0.21% said it would take a tougher stance against corporations that aren’t providing a full accounting of environmental risks, part of a slew of moves by the investment giant to show it is doing more to address investment challenges posed by climate change.
Among the moves, BlackRock said it would be increasingly disposed to vote against management and boards if companies don’t disclose climate change risks and plans in line with key industry standards.
BlackRock is also pulling back from thermal coal producers in actively managed debt-and-equity portfolios by mid-2020, a move that will lead to $500 million in sales. It will expand the range of sustainable investment products as well as double to 150 the number of exchange-traded funds that address environmental, social and governance challenges.
BlackRock is the world’s largest asset manager, with about $7 trillion under management. It has risen on the back of index funds that trade on exchanges and through these funds has extended its reach across nearly every company and is part of the retirement accounts of millions of people around the world. The firm also sits at the backbone of Wall Street as its software is used by banks to monitor their risks.
The firm said it is putting the focus on sustainability because the costs of climate change have ramifications on the price of assets and the financial ecosystem.
“Climate change has become a defining factor in companies’ long-term prospects,” BlackRock Chief Executive Laurence Fink said in his annual letter. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”
The letter is a reflection of Mr Fink’s towering influence over companies. But the letter has rankled some rivals who have sometimes grumbled about what they consider to be a moralistic tone.
The rise of index funds transformed three firms into major forces in corporate America and thrust them into the public spotlight. The biggest—
- BlackRock,
- Vanguard Group and
- State Street Corp.
—hold roughly a fifth of the S&P 500 through funds they run for investors. They can cast critical votes and have the ears of chief executives. How they exercise this power—or choose not too—has ripple effects across markets.
All three have faced questions over their responsibilities as shareholders on behalf of investors in funds they run. In years past, these firms have targeted gender diversity in boardrooms among other issues.
Lately, there has been increased pressure on them to do more on climate change.
BlackRock’s offices around the world have been frequented by activists who blast the firm for being slow to act on green issues. The firm has debated a question internally: how can BlackRock ensure it has public support to operate in the countries where it does business as it continues to grow?
The firm said it would provide more information on data on the carbon footprint and other potentially controversial holdings in its mutual funds. It also said it would disclose more details of its conversations with the companies its funds invest in. BlackRock also recently said it had joined Climate Action 100+, the world’s largest group of investors by assets pressuring companies to act on climate change.
The moves come as regulators are scrutinizing ESG funds across the asset-management industry in an attempt to determine whether those claims are at odds with reality.
“Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy,” Mr. Fink said in his letter.
He added that “while government must lead the way in this transition, companies and investors also have a meaningful role to play.”
One Cause of Market Turbulence: Computer-Driven Index Funds
In many ways, this stampede toward passive investing — in which people put their money into funds that track indexes and broader market themes as opposed to relying on human stock pickers — is uncharted territory.
.. the key question is how this transformed market holds up during a financial storm that lasts more than a few days.
.. Cheaply priced exchange-traded and index funds .. They now own close to 40 percent of stocks in the United States
.. BlackRock.. is the leading issuer of exchange-traded funds, with $1.3 trillion under management
.. The popularity of E.T.F.s has concentrated unparalleled financial power in BlackRock and Vanguard, the two biggest providers of index funds and E.T.F.s. Together, they sit on $10.5 trillion in assets and control 65 percent of the 1,700 exchange-traded funds that exist.
.. As the flows have grown in volume, much of these funds have gone toward index heavyweights like Amazon, Apple and Facebook, pushing their valuations ever higher.
.. Active fund managers — human stock pickers .. because they are the ones who buy when others sell.
Why Breaking Into the Boardroom Is Harder for Women
Businesses prefer veteran female directors over untested ones, research shows
Women looking to land their first board seats have a much tougher time than men, recruiters and corporate directors say.
.. BlackRock Inc., the world’s biggest money manager, this month for the first time said that companies in which it invests should have at least two women on their boards.
.. The proportion of women on S&P 500 company boards grew just one percentage point to 22% last year—up from 16% in 2007
.. her male boss’s network opened more doors than hers.
.. Recruiters told her that board clients preferred experienced CEOs and finance chiefs.
.. “To gain their first corporate board seat, women still have to overcome strong cultural issues that most men don’t have to overcome,” said Bill George, a former head of Medtronic
.. Many businesses prefer veteran female directors over untested ones
.. These women say they frequently get feelers about additional directorships.
.. “The only executive women whom many male directors know are already loaded up with board seats,” Mr. George said. “These men need to widen their aperture.”
.. Goldman Sachs Group Inc.’s board, where Mr. George holds a seat, has no rookie women but three male first-timers.
.. Being a board neophyte disadvantages a male candidate less because men typically enjoy better connections with powerful men
.. “Women on the whole are outside the trusted networks of public company boards,” .. “So they end up with the bar that requires board experience.”
.. “When boards want tech or digital innovators, we see opportunities for women without board experience that didn’t exist five years ago,”
.. Facing the imminent departure of its only female member last year, the board decided to seek a woman savvy about cybersecurity—“an area where we weren’t particularly strong,”