Is there a Facebook, UBER, Tesla or Microsoft of Finance? Is there a Google, Netflix, Amazon or Apple of Funds Administration? Apart from some of the familiar investment banking names, there are 3 Main players in the global ETF (exchange-traded fund) Market, a highly sophisticated and influential place when it comes to global finance, and for some time now, technology as well. When it comes to the Fintech and WealthTech space, the technology and the sums of money involved with these companies, what these 3 companies believe in and how their strategy looks could well lead to one of them saving the Climate.
The 3 rivals are: BlackRock, Vanguard and State Street, also known by some as the “BigThree”, and between them they dominate the funds management sector with over $13 trillion under management on behalf of Clients. The “BigThree” are well known for a lot of reasons, one of them is the amounts of these funds they have invested in leading companies on the NYSE, Dow Jones and NASDAQ. We mean shares owned or managed in companies like Facebook, Microsoft, Goldman Sachs, etc… It is quite a story how this sector has evolved and since 2020 the Climate agenda is beginning to heavily influence their investment decisions, somewhat supported by the technology platforms that they operate on.
When we mention the Climate agenda, and please do bear in mind the amount of money that the “BigThree” have invested in Global Markets, this is a disruption for the better for many. In May of this year, BlackRock released an Update to their Clients telling them that they will be accelerating their investment strategies in sustainable assets. Indeed, the First Quarter of 2020 was a record for sustainable flows. BlackRock’s Carbon Beta tool, developed last year to stress test issuers and portfolios for carbon pricing scenarios, was a big hit in the first Quarter which was a record quarter. When it comes to heightened ESG (Environmental, social and governance) issues companies that generate more than 25% of their revenues from thermal coal production are no longer being considered as investment targets and BlackRock have no investments currently in this sector.
Back in March the FT covered a story that was published just as the shares of BlackRock and State Street both started dipping heavily on the back of market chaos. The “BigThree” saw their assets under management drop by $2.8tn within a matter of days . The share prices of BlackRock and State Street bottomed out a few days later before starting a slow climb. Can they repeat the highs of February though? In the case of BlackRock they seem to be a bit closer than State Street:
One of the reasons that BlackRock has done markedly better than State Street might be due to the Federal Reserve appointing BlackRock to run its corona-virus induced bond-buying programme. Some suggest this gives BlackRock an unfair advantage over the other of the “BigThree” as well as other companies in the fund administration sector. But perhaps the Fed had to make its’ decision because of the Tech involved in working with BlackRock? If they were in a StartUp pitch against State Street and Vanguard, pitching to the Fed, who would have won? Comments aside, it is worth considering more recent news about their vast technology platform – Aladdin:
Aladdin = Asset, Liability, Debt and derivative investment network. Of the “BigThree”, BlackRock’s technology has been more widely touted on the market as both the development of Aladdin and the acquisition of iShares have delivered huge benefits to the US giant as well as revenues from sales of the technology platform to competitors and asset managers.
The FT back in February 2020 suggested that Aladdin means that BlackRock is a player on the Fintech scene, and probably rightly so. They go on to mention other systems like SimCorp’s Dimension who deliver investment management solutions to the World Bank. However, apart from listing State Street and Vanguard as Clients of Aladdin there is no mention of the technology platforms used by the others of the “Big Three” in the FT Article.
State Street haven’t been standing still though, they are “laser-focused on the long-term”, Ronald O’Hanley, Chairman and CEO of State Street tells stakeholders in a message recently. Their acquisition of Charles River Development (CRD) and its flagship front-office Charles River Investment Management Solution is one of the leading achievements that O’Hanley is keen to highlight to stakeholders.
John Plansky, CEO of Charles River Development highlights in the message to State Street’s Stakeholders his commitments: “We want to out-innovate our competition. The Charles River acquisition allowed us to do that. With the development of State Street Alpha, we emerge as a front-office specialist, as a technology specialist, as a big data specialist.”
Brian Franz, CIO of State Street continues by stating: “Looking to the future, we are addressing ways to use emerging technologies such as machine learning, cognitive computing, artificial intelligence and robotics to drive innovation and convert data into insights.”
In the meantime, Vanguard – true to the fundamental principles that have been left behind by legendary founder John C. Bogle – have been more “decentralized” in their approach to technology. Vanguard’s Bogle was recognized as “one of the four investment giants of the 20th Century.” And, of course, there should be no surprise then that Vanguard has already been dabbling heavily with the New York StartUp: Symbiont, involved in Blockchain technology. Today, Vanguard went even further by getting top institutions like Citi, BNY Mellon and State Street involved in working with the new Blockchain pilot.
“Bogle does the American investor a real service by carrying on his crusade.” Warren E. Buffett Chairman, Berkshire Hathaway Inc. It seems his spirit continues within Vanguard under the leadership of Tim Buckley who is the current CEO of Vanguard. Much like Apple seems to be thriving even without the charismatic innovative leadership of Steve Jobs.
In the meantime, at BlackRock, Technology has been a part of the business since the outset, with Larry Finks, CEO of BlackRock, first implementing the current Aladdin system as far back as 1988! Since then BlackRock acquired Barclays Global Investors in 2009 which added iShares to their technology offering. On the surface, therefore, it does look like their CEO has had data and technology at the forefront of the company’s priorities for longer than some other firms in this sector.
On the 10th of June 2020 Morgan Stanley ran a US Financials Conference where Sudhir Nair, Global Head of Aladdin Institutional Business at BlackRock and Robert Lawrence Goldstein, COO & Global Head of BlackRock Solutions shared some of their thoughts related to BlackRock’s technology solutions.
Sudhir expresses his opinions with enthusiasm highlighting many interesting areas where Aladdin is helping global markets: “We know that Aladdin played a critical role in migrating our 250 third-party technology clients’ employees to working from home, the resiliency and efficiency of Aladdin’s workflows around portfolio construction trading, compliance, operations, helped their staff support record trading volumes, even though they were getting used to working from home and doing their jobs at their kitchen tables.
“It’s amazing that 12 years after the global financial crisis, so many firms still don’t have an enterprise view of risk and answering a basic question, like, what’s my exposure to airlines or hospitality? In Aladdin, that’s a one-click exercise. But for many organizations that don’t have a technology like Aladdin, it’s still a 1-week project.
“In addition to the strides we’ve made with Aladdin Enterprise, which is focused on our institutional client base, we’ve also been laser-focused on Aladdin Wealth.
“The wealth management industry is going through dynamic transformation due to regulation, technology and different client demands. Wealth managers have really never been more client-centric than they are today.
Robert Goldstein goes on to discuss the acquisition and integration of eFront: “We just celebrated, last month, our 1-year anniversary since the acquisition. The acquisition added private markets capabilities, allowing clients to have that Holy Grail, that holistic view of their portfolio across liquid and illiquid, public and private markets instruments, further reinforcing Aladdin’s value proposition as the most comprehensive investment operating system in the world.
“We’re also accelerating efforts to develop and make available sustainable ESG (Environmental, social and governance) data and analytics within Aladdin. As a leader in financial technology, as a leader in risk analytics, we are committed to addressing the need for better data and technology, and one of our major focus areas is climate risk. Last month, we actually announced a partnership with Rhodium Group for data on the physical impacts of climate change. And this data, coupled with our leadership in financial modelling and the ability to bring it back to an actual investment portfolio, that’s the power of Aladdin, is going to allow us to develop what we believe are incredibly vital, new risk capabilities for our clients in the industry, redefining a new standard for measuring climate risk.
“Asset owners, asset managers, asset servicers are going to have to be great at using technology. We have a clear technology strategy for this, something called “Tech 2025”. Building scale through initiatives like our cloud announcement with Microsoft Azure, and building to think of Aladdin not as a system but as a platform.”
So, it is clear that the sustainable element of global finance is starting to be more and more of a consideration for large finance and banking institutions and not just for the StartUp sector who have already been focused on this sector for some time now. If big business is now focussed on the same priorities as StartUps… Then it can only be an amount of time before the next Unicorn will help make huge strides in environmental awareness. That is, indeed, if Aladdin, Alpha or Vanguard’s new partnership with Symbiont doesn’t come up with something amazing first.
#DisruptionBanking would like to thank BlackRock for their openness in helping our readers to understand ESG and how this affects the technology drive their teams are currently undertaking to ensure it fits the need to monitor carbon emissions more. We hope in the future to share more with our readers about the links between Banking, Tech and the Environment.
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Author: Andy Samu