blackrock is a financial giant it's the largest investor on planet earth with over nine trillion dollars in assets that's a pile of cash equal to about one-tenth of a year's global economic activity that means the money managers at blackrock have a big say in how the world runs here's ceo larry fink talking to cnbc in 2021 and i've been on your show now probably four times every year at the very least for 22 years as a public company and even longer when we were private talking about retirement blackrock is indeed influential in the u.s it
owns at least five percent of most major companies that gives the firm lots of voting power to determine how public businesses operate blackrock rose to the top of the financial system in a short span of time after its ipo in 1999 its stock has increased 7539 percent through december 2020. along the way the company used technology to minimize the risks of investing blackrock as well as the other etf providers have done a great job in bringing a product to investors that provides diversification in investment portfolios at a relatively inexpensive price and i think there's good
reasons for them having grown to scale according to blackrock risk management today means adapting to the changing climate the largest oil and gas producers and the largest carbon emitters are state-controlled enterprises their leadership has this way to push global institutions into action blackrock's relation with the fed is a really useful thing for the public to know about the central bank can do things to make our lives better and it can do more stuff to make some people really rich here's how blackrock shot to the top of the financial industry the company we know today as
blackrock was formed in the late 1980s a young larry fink launched a firm under the blackstone investment group with seven co-founders think's team came together under the management of steve schwarzman we started the business together in around 1988-89 and they wanted to sell it four or five years later after the sale blackrock spent years developing a risk management software that they call aladdin aladdin uses a monte carlo styled algorithm to uncover scenarios in which an investment could fail over the last really 20 years financial markets have become much more complex volumes have increased exponentially at
the same time we've had an explosion in computing power chips have become so much more powerful and inexpensive the combination of financial markets needing increased technology and there being cheap inexpensive ways to really scale up technological innovations has led to sort of the confluence of things things like cryptocurrencies robo advisors and even more basic things simply like equity markets being almost completely electronic now blackrock's tech driven approach made it a major firm over time their managed assets swelled and the company started to buy out its competitors in 2006 the firm required the distressed assets of
merrill lynch and in 2009 it took over barclays global investors at the time bgi owned the intellectual property rights of i-shares today that brand is one of the most heavily traded names in the stock market about 3 million shares of its fund tracking the s p 500 are exchanged every day etfs or exchange traded funds are at the heart of blackrock's empire these funds have taken over investing in the past decade i think we can attest that growth to the attraction of etfs as pooled investment vehicles that allow investors to diversify their portfolio and diversification
has been shown to be one of the key factors for investors to have a successful investment program you can think of etfs as baskets of stocks based on themes for example blackrock offers funds tied to corporations and small towns they also issue funds that track oil and gas exploration and the defense industry etfs give investors a wide range of holdings at a low cost and just to give a sense of of how low those costs can go let's take for example blackrock's s p 500 exchange traded fund blackrock is charging investors 30 cents a year
on every thousand dollars invested and there's great competition among fund providers for low fees and that's been a great thing for investors just three companies dominate the etf market blackrock is by far the largest with roughly a 35 market share of uh domestic market the next two are vanguard and state street both somewhere in say the 15 to 20 market share range etf's reshaped financial markets in a short amount of time more than 80 percent of all assets invested over the past decade have gone to one of the big three according to legal scholars writing
in the national bureau of economic research experts say the financial and technology industries lend themselves to concentration competing s p 500 index funds they're all holding essentially the same portfolio and so they're all going to earn essentially the same return before costs so from the investor's perspective the best thing to do is to buy the one that passes through the least amount of expense to you and because of economies of scale that's generally going to be the largest fund blackrock's popularity grew alongside the explosion of interest and passive investing in addition to individual wealth blackrock
manages sovereign wealth funds and has a burgeoning private equities division the company is also a lender to emerging markets in asia and elsewhere 78 of the firm's revenue is derived from investment advisory fees collected from products like etfs which is why you might have read articles about blackrock or seen their leadership on tv so this letter you think is the most important letter you've ever written more and more clients are looking for a more sustainable portfolio to be more prepared areas that are more impacted by climate change is going to have harder times to finance
their their debt if they don't focus on the impact of climate change in their district and their region their cities blackrock today is positioning itself as a socially conscious voice of the financial industry you might hear their leadership talk about esg so it stands for environmental social and governance and the idea is that there are specific issues whether it has to do with climate change or whether it has to do with boardroom diversity or whether it has to do with how your board of directors is constituted generally that are important issues for investors one of
the central components of blackrock's plan is to issue funds with stricter esg standards on business conduct that's a form of active management and it has the same downside as any form of active management which is it's not clear that it can outperform the performance of a broad market index but of course that's not really the sales pitch the sales pitch to investors is these companies share your values blackrock's leadership believes that these societal issues will impact the bottom line over the long term consider that blackrock owns a 6.7 stake in the oil and gas company
exxon mobil exxon mobil alone is responsible for nearly two percent of global emissions according to an open secrets analysis of climate data blackrock says it raised climate concerns with exxon in 2020 over a series of shareholder meetings it joined a group of activists and its peers to push three board members out in 2021 there's a look at the three new directors this really is reflective of just the changes in frankly capitalism in terms of the importance of esg even from a profitability standpoint or a standpoint of giving up some profitability to get your business in
a different place with the prospect that you will ultimately benefit exxon now says it will end routine flaring of natural gas by 2030 and disclose more climate-related risks the tighter standards on public corporations may help but they also could push polluting activity and risky assets into more loosely monitored private ownership even a company like blackrock that is investing in the entire s p 500 is only investing in a very small part of for example fossil fuel production the largest oil and gas producers and the largest carbon emitters are state-controlled enterprises that are really not amenable
to um to any pressure from uh us money managers blackrock has acknowledged that there's a chance that the green transition will push up prices and political tensions worldwide big public companies and banks are now being cast as a role of an admission police having to cut off businesses or lending to companies often smaller companies that have not yet reduced their own admissions this will have the unintended consequences of fueling a backlash against our big companies and it will promote a narrative big versus small and create greater and greater political polarization blackrock's call for better stewardship
of society was first heard in the european union the investment manager has a byline on the group's framework for sustainable investment regulators in the u.s are focused on climate risk too so we view climate-related financial risk as a risk that falls under our existing mandates really into bank supervision and financial stability and what we're doing at a high level is we're undertaking a broad plan of careful analysis significant public engagement and great transparency regarding our role in addressing climate-related financial risks in past times of crisis the federal reserve system has asked blackrock for help managing
funds the federal reserve has gone to blackrock for particular services that blackrock is good at now those programs were unprecedented and unusual but it's not abnormal for the fed to be buying services from companies in 2008 new york federal reserve leader timothy geithner tapped blackrock to manage the distressed assets of bear stearns and aig geithner and fink share a close personal relationship the two sit on the board of the council of foreign relations and were communicating frequently in the great recession this pushed the money managers into the national spotlight and in the early days of
the chronovirus pandemic the fed system called on blackrock again in the following months the central bank purchased trillions of dollars in various assets and debts including corporate bonds blackrock was tapped to manage this portion of the purchases experts warn that blackrock's work but the fed could raise conflicts of interest what's unusual here is right that the very the topmost people the federal reserve are talking with the leader of the biggest asset management firm and that in these moments of crisis we're just going to this firm not necessarily all other firms the company's 2020 annual report
warns that their importance could lead to more oversight from the fed meanwhile the federal trade commission is reviewing the standards on acquisitions and mergers which could impact the bottom lines of mutual funds and the securities and exchange commission is reviewing derivatives markets which could impact blackrock too the company is now searching for new sources of yield for example blackrock is pursuing real estate investments like student housing apartments retail and office buildings the firm also opened a lab in palo alto to explore artificial intelligence it's even dabbling in cryptocurrency but leadership thinks that it's little more
than a footnote the amount of conversations we're having on climate risk and how they should navigate portfolios is a major component of the conversation the conversations about our deficits and the conversations we're now having on inflation risk is far more dominant with our clients worldwide than the whole conversation about crypto blackrock is focused on the long term it oversees trillions of dollars in assets for a reason leaders in the public choose to trust them with their money one of the things about technology is if you get it right you're really successful because technology helps you
scale that low cost but there's no guarantee that their esg plans will succeed the sec's mission and the mission of anyone who manages money for investors is to protect those investors the question is whether using esg factors actually helps them to do that just saying esg is good for our portfolio companies doesn't make it so [Music] you
