ESG: BlackRock 'breaks new ground' with circular economy fund

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By:
Louise Bowman
Published on:

Partnership with Ellen MacArthur Foundation aims to raise awareness of circular opportunity in financial sector.

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BlackRock has launched a new thematic fund, the BGF Circular Economy Fund, which aims to drive investment in businesses already benefiting from, or contributing to, the transition to a circular economy. 

The fund, launched on October 2, has been established in partnership with the Ellen MacArthur Foundation, which is providing the investment firm with expert insights and guidance on circular economy principles and practices.

The fund was launched with $20 million seed capital from BlackRock. 

“If the world is going to consume resources in a more sustainable way, demand will change,” says Evy Hambro, global head of thematic and sector investing at BlackRock. "I saw [Dame] Ellen [MacArthur] speak a year ago and it was a lightbulb moment.

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Evy Hambro,
BlackRock

"There are two conditions necessary for asset managers to be successful here. They need access to the right products and they need to bring in house the knowhow to achieve this. We have structured a product to capture the opportunity.”

BlackRock will use information and insight from the foundation to inform the investment methodology of the fund. The foundation takes a small pass-through fee from the fund for the input, amounting to around 2% of its overall funding. 

The foundation works with several global partners, including Intesa Sanpaolo, which has worked with it since 2015 and allocated €5 billion between 2018 and 2021 to support transformative corporate projects based on the circular economy.

“The model of take, make and waste is embedded in the system,” explains Andrew Morlet, CEO of the Ellen MacArthur Foundation. “We want to keep materials in the economy for longer in order to create new value: this is a tremendous opportunity for new forms of value creation.”

The BGF Circular Fund will focus on stocks of companies that benefit from the circular economy and/or contribute to its advancement. They fall into three broad categories: adopters, enablers and beneficiaries.

Positive impact

Adopters are adopting the principles of a circular economy in their business operations in a manner that has a meaningful and positive impact on their own valuation. An example is Adidas, which aims to use recycled polyester in all shoes by 2024 and has made 11 million pairs of shoes from upcycled marine plastic waste.

Enablers are those that provide innovative solutions enabling others to become circular, such as Norwegian recycling firm Tomra.

Companies that benefit from the transition to a circular economy include, for example, aluminium can producers that will benefit from a move away from hard-to-recycle plastic packaging.

“As an investment idea the circular economy is quite nascent,” says Sumana Manohar, director at BlackRock, who is one of three portfolio managers on the fund with Hambro and Olivia Markham. 

“What does it mean in terms of how businesses will look in the future? I genuinely believe consumers are changing the way that they spend so there are genuine opportunities for companies that are frontrunners.”


This is the first time that we have built a portfolio in this way at BlackRock 
 - Evy Hambro, BlackRock

Quantitative thresholds have been put into the investment process and a universe of about 800 companies globally – both winners and losers from the transition to a circular economy – has been identified by both partners. BlackRock then selects targets for the fund. 

“The universe definition provides the pool but the fishing is done by BlackRock,” says Manohar. “We can leverage the expertise of 100 different analysts.”

Hambro explains that the fund has required a new approach by the firm. “We are breaking new ground on risk and tested a series of different methods of portfolio construction,” he explains.

 “We were able to capture risk parity but we wanted to capture confidence levels on certain companies as well. So we are tiering risk parity and confidence levels – 40% of the fund is invested in the top 10 companies in which we have the most confidence. This is the first time that we have built a portfolio in this way at BlackRock.”

The fund excludes investments in the coal sector and in oil and gas producers. Hambro dismisses any suggestion that the fund might sit uncomfortably with any of BlackRock’s existing mining investments, and sees it as more of an evolution for the firm.

“We have been thinking about what is next for us in the resources space for three years. This is a natural extension.”

Criticism

In July this year a report from the Institute for Energy Economics and Financial Analysis accused the US fund manager of being a laggard on addressing climate change and claimed that ignoring global climate risk had cost the firm $90 billion in value destruction from its investment in just four companies: ExxonMobil, Chevron, Royal Dutch Shell and BP.

The firm has attracted criticism over its voting record on climate-related shareholder proposals, despite CEO Larry Fink’s several declarations on the importance of tackling climate change and investing sustainably.

Hambro says that the fund does not sit neatly within an environmental, social and corporate governance (ESG) categorization, which varies widely by client anyway. “At one end is basic screening, at the other end is impact investment and this sits in the middle. This is not an ESG fund but ESG is integral to its processes. However, it is not an impact investment fund either.”

Morlet explains that in limiting global warming to 1.5c, renewable energy can provide only 55% of the solution – the rest will come from how we make and use things. He believes that materials substitution represents multiple trillions of dollars-worth of opportunity.

The plastics piece is moving very quickly,” he says, identifying the fashion and food industries as those where future challenges will be significant: “60% of fashion today is made from plastics and there is an enormous challenge with the disposability of fashion. There is also 30% waste across the value chain with food.”

“The problems of the linear economy are becoming more apparent and the public is starting to demand better products and services,” he adds. 

“The finance sector is an important part of accelerating this transfer and by working with BlackRock we are hoping to raise awareness of the challenge in the financial community.”