BlackRock to Stop Holding Positions in Coal Companies

BlackRock

According to BlackRock CEO Larry Fink, the most important thing to investors these days is climate change. He has started addressing this by getting out of coal companies.

BlackRock’s Larry Fink wants to make the world’s largest fund company more “socially responsible,” and has taken the first step by announcing that the firm will no longer invest in companies that derive more than 25% of their revenue from thermal coal.

This only affects their actively managed funds, as we haven’t gone far enough that we wish to tinker with the composition of indexes with index funds, although that’s certainly possible one day and wouldn’t take all that much of an adjustment, where we would just exclude companies that we object to.

What makes this move interesting is that it is plenty wise in itself to shun the coal industry, given how bad their stocks are and the less than stellar outlook that they have. Fink is doing the right thing here, and scoring some points along the way, whether for the right reasons or not.

Perhaps he actually took some time out to look at the charts of these companies, and came out of the room covered in soot and a brand-new plan. None of the coal companies affected have spoken out yet, but their charts tell a pretty big story by themselves.

Peabody Energy is down 71% over the last 12 months and down 80% since last June. Arch Coal is down 11% over the last year and down 26% since last April. Alliance Resource Partners stock dropped by 35% over the last 12 months. These are all terrible stocks and holding any of these speaks to the lack of regard the firm has not for the climate, but for the financial welfare of their clients.

BlackRock is the world’s largest holder of coal stocks, so if people still own them, they need to run and not walk to the exits and flee before these stocks get beaten down even more than they have been with the coming exit of BlackRock.

If investors are really clamoring for this, it only makes sense for the company to address this, although we still may wonder how the question was posed and whether or not this many people would actually be willing to sacrifice profits for this, or whether this may just be the social issue that they find most pressing and weren’t really given the opportunity to make a practical comparison with it.

If we ask people what they find to be more important, climate change, overpopulation, poverty, wealth inequality, or what have you, and they choose climate change, we also need to confirm this choice practically by asking if they would be willing to sacrifice their money for the choice.

There will be some who will, and these are the people that you target, provided that there is at least enough left over to sell unrestrained funds to. This is what we have special environmentally focused funds for, and while we may want to segment on this basis, we can’t forget the original segment. This just isn’t such a big issue with at least a good number of respondents, even though it may be for some, who would want to wash their hands of any company and be willing to pay the price. If that’s what people want, they should get it.

This is what funds are doing, and they call them ESG funds, and BlackRock will be rolling out more of them in conjunction with this PR stunt. If not for the fact that these stocks are something that they should want to be ridding themselves of anyway, we might wonder whether or not just getting rid of a type of stock like this and not even offering them to people with no objections is acting in their clients’ best interests, although fund companies do not have such an obligation. We’re on our own here.

The biggest thing about this announcement isn’t that BlackRock is getting out of coal, it is that they are in coal this much to start with, and that should actually scare us a lot because it wreaks of the incompetence of their managers.

If they didn’t dump these turkeys yet, which they didn’t, we have to wonder if they are even allowed to sell things, because if you ever were allowed to do such a thing, these stocks should be at the top of the list. It’s one thing to buy Peabody Energy after it loses 80% of its value, and quite another to hold it through this collapse. There just isn’t any reason to do such a thing besides bad management.

The lesson we need to learn here is the one that tells us that it’s preferable to manage our own portfolios even if we don’t know that much about what we are doing, rather than to turn our money over to funds that will go so heavy with junk like this and need an excuse like wanting to combat climate change to finally do the right thing, after this much damage has already been done.

We should certainly not want to be hanging on to the coat tails of a managed fund that is so terrible at what they do, they stay invested in companies well past what would be sensible, and expose you to such big losses. The upshot of this announcement really needs to be that BlackRock could not find any other reason to sell these stocks than this, which speaks loudly to their incompetence.

No wonder the majority of these funds do not even beat the market, which should be easy to do as long as you are focused on avoiding below average ones, but if you won’t part with the worst of them, what chance do you have?

This Doesn’t Make Any Difference Whatsoever with Carbon Emissions

A fund holding stocks like this right now is downright shameful, and we need to worry a lot more about how funds are changing our own climate and making our skies darker with such terrible investments. You don’t need to know any more about the coal industry than people railing against both the companies and especially the stocks to realize that this is not something we want to have our own money in.

It is reasonable enough that people may have non-financial preferences like this with their investing and may wish to sacrifice profits to it, but a lot of people stop thinking once the word climate change enters into things, and may not even be thinking about the price they might pay. They especially will not have thought very much about the practical consequences of this, and in particular, how this may actually affect climate change.

If this really was about having your fund pull out of coal and this making at least some kind of difference in the carbon footprint, then it can make sense to decide to stay out of them. What happens here is people hear the words coal and climate change and stop thinking right there, without even getting to the question of how this is supposed to help in any way.

The coal companies will still be selling their coal to those who wish to buy it, and BlackRock’s investing in the companies or not does not affect their business at all. Every last lump that we want to buy will be burned, with or without us in the stock.

All this does is transfer the ownership of the shares to someone else, and there is always a someone else because you need to sell the stock to someone. Whether or not BlackRock’s clients own them or someone else does instead makes no difference to the company and does not affect its business in any way. If people think that it helps the companies when they own their stock and hurts them if someone else owns their shares, they need a beginner’s lesson in how stocks work.

The only thing affected by such things is that the remaining shareholders will be hurt by this, by the price of their stocks being driven further in the ground by all the extra selling that this exit requires. We’ve seen a lot of this damage already with these companies. While we can say that shareholders only have themselves to blame as their losses continue to mount, when we consider that the only thing that we’ll be doing is making their lives more miserable, and there are a lot of ordinary people affected here, this is not such a high and mighty ambition.

It’s more fun to pretend that we’re changing the world though, and so perhaps people don’t want to look too hard beyond the point that you can just pat yourself on the back for investing in more climate-friendly companies and enjoy the pretense of making a difference.

On the other hand, if how this all really works was exposed more, perhaps people would not be so eager to pursue this strategy, especially since there is at least a theoretical potential for loss on their part involved. We should at least try to get our heads straightened out so we can make a more informed decision instead of just allowing ourselves to be duped.

We can presume that Fink, being the CEO of a trillion-dollar fund company, would be wise to this since this is all so basic, and should at least feel the need for full disclosure, but he’s obviously looking to score some points for his company, not educate people on the issue.

At the very least, he should be telling people that while this will not have any material effect on the companies involved and cannot be expected to make any difference to climate change, we are divesting from these stocks due to our investors objecting in principle, where this personal objection has been placed ahead of their wishing to allow us to seek out the highest profits for them as we can. We will therefore be setting aside the financial interests of our clients with this one and choose not to pursue this path going forward.

At least people would be properly advised on what is going on, rather than letting themselves be left to their own mistaken imaginations. Maybe their principles are worth that much to them, when we strip away the façade of this decision. We should not want them to be fooled by this though.

BlackRock Should Not Be Promoting a Delusion by Pretending This Matters

The reason why we remain concerned about this strategy of investing is that while people do have the right to invest as they please, they should at least know enough about what they are doing that they aren’t given over to delusions like this. If people are doing this because they think that it somehow could matter even a little to battling climate change, they are simply deluded, and that can’t be a good thing overall.

BlackRock isn’t helping things by stirring the pot like this, and actually even lighting a big fire beneath it, and they have a duty to their clients to at least make these issues more transparent than they are.

If Fink himself is also fooled, this speaks very badly of his understanding of the most basic features of stocks traded on secondary markets, and if he does get it, he needs to be more up front with how this matters, and not portray it as the positive change that he insinuates it is with all his talk about his company wanting to be more socially responsible.

Fink has told us that companies cannot achieve long-term profits without embracing purpose, and although it’s not easy to make sense of this, apparently a façade of purpose is enough to him. Perhaps this objective needs to be reformulated as a company cannot achieve its profit potential without pandering to the foolishness of the masses when warranted. That one at least makes more sense.

We may also wonder how this lack of transparency fits into his company’s idea of purpose. Is it really purposeful to put on such a charade to try to score some points with clients so disingenuously? The only real purpose is to try to make more money, which always will be the underlying purpose of a business, and not following this enough will see you out of business. They are following theirs here, hoping to attract more of those long on concerns about climate but short on understanding of stocks, with this coal issue being a way to have their banging drums heard more by creating publicity like this.

We may wish to capitalize on this by waiting until these stocks become even more distressed, especially with all that selling from the world’s largest holder of coal stocks underway. This will by its very nature create artificially high selling pressure, which will result in an oversold condition. Provided that we understand that stock investing is by nature morally neutral and certainly practically neutral may wish to look for opportunities here, and turn BlackRock’s further losses as they scramble to exit the room to our benefit as these markets correct for this after the fact.

A little understanding of stocks, especially the fact that this has nothing at all to do with the company’s operations, along with knowing that when you exit big positions this puts down the price of stocks even further, can go a long way. How BlackRock could be so heavily invested in coal right now casts a big enough shadow on them though.

We do need to be careful with distressed stocks that are so out of favor with the investing public that even BlackRock is pulling out of now. These are not long-term plays by any means, and any move that we should be making should be designed to just capture the adjustment to the overselling, in other words just riding the rebound and then getting off.

We’re not seeing any of this materialize yet, and jumping the gun on a bottom play is a terrible idea, as you need to wait until we start moving the right way enough before we jump on these, and we also need to be quick to jump off if the move fails, as they often do. The key here is to keep your losses small and, especially to have them small enough in comparison to the potential move that the risk can be justified by the potential returns.

This is something we want with every investment, but is especially important with bottom plays since they are riskier and we need to get paid enough when they hit to make up for this.

Meanwhile, those who hold funds with BlackRock that have this garbage in them can just thank BlackRock for taking out the garbage, something that should have been done some time ago, as it is starting to really smell now. BlackRock is clearly losing their sense of smell, and thankfully, this climate charade came to the rescue this time, but we can’t always count on that.

John Miller

Editor, MarketReview.com

John’s sensible advice on all matters related to personal finance will have you examining your own life and tweaking it to achieve your financial goals better.