What It Means When the World’s Largest Asset Manager Rings a Warning Bell About the Financial Risks of Climate Change
BlackRock CEO, Larry Fink, in his annual letter released this week to CEOs of some of the world’s largest companies wrote: “I believe we are on the edge of a fundamental reshaping of finance.” I agree. The actions he promises in his new letter on sustainable investing and climate risk are significant and will contribute to a transformational shift within our global economy.
BlackRock, with nearly $7 trillion in assets under management, said it would put sustainability at the core of its investment decision-making, stating that “climate change has become a defining factor in companies’ long-term prospects.”
As a matter of financial risk management, in its actively managed portfolios, Fink announced Blackrock will exit investments that present high sustainability-related risk, such as those in thermal coal because of its high carbon intensity, regulatory risk and the loss of economic viability. Fink said any coal company generating more than 25 percent of revenue from thermal coal will be divested from active mandates by mid-2020. He also announced BlackRock would launch new investment products that screen out fossil fuels and double its offerings of sustainability-focused Exchange Traded Funds. The letter further highlights BlackRock’s commitment to engage its own portfolio companies to reduce climate-related financial risks, and bring more transparency to the disclosure process through its work with the Task Force for Climate-related Financial Disclosures (TCFD) and its support for the Sustainability Accounting Standards Board (SASB), which sets sustainability standards for financial reporting.
When the world’s largest asset manager places sustainability and climate risk at the center of its investment approach, and commits to stronger sustainability advocacy actions, it is game-changing for capital markets. By reaffirming that climate risk is a clear material and financial issue for companies in all sectors, Fink rang the warning bell for companies: those that fail to act will risk value destruction and face strong shareholder actions. Because of BlackRock’s sheer size, its words and actions will reverberate across the capital markets, spurring other asset managers to act and driving change in corporate behavior that will help build a more just and sustainable economy.
This fundamental shift in philosophy and the specific actions that Fink has laid out are issues that Ceres has been engaged with BlackRock on for more than a decade. In 2008, BlackRock joined the Ceres Investor Network, a network made up of more than 170 investors working to advance leading investment practices and corporate engagement strategies. And last week, BlackRock joined the Climate Action 100+ initiative, promising to engage with the world’s largest corporate greenhouse gas emitters to reduce emissions, improve governance and increase climate risk disclosure. As a founding partner of Climate Action 100+, Ceres welcomed the news that BlackRock signed on to the largest global investor engagement initiative in history.
BlackRock’s participation in Climate Action 100+ will help move heavy-emitting companies to align their business strategies with what scientists say is needed to limit the worst impacts of climate change. By adding its hefty voice and influence to the global investor engagements on climate change, BlackRock can effectively drive companies to make a rapid business transition towards sustainability. As part of its participation, the firm has agreed to be transparent about the outcomes of its dialogues with companies. BlackRock will be under increased scrutiny and pressure to achieve the goals of the initiative and align shareholder votes with resolutions filed by other Climate Action 100+ investors.
In its letter, BlackRock committed to rethink its votes against management and boards when companies don’t adequately disclose climate risks and their plans for addressing them. These, too, are issues that Ceres has been tracking and has been in dialogue with BlackRock about for some time and, as such, I am deeply aware of the challenges and upsides of such necessary action. As Fink points out, “every government, company and shareholder,” has a critical role to play and should be acting quickly and decisively to tackle the global climate crisis. And his letter certainly puts meat on the bones about BlackRock changing its own investment practices and significantly advancing the impact of Climate Action 100+ in its work to reduce emissions.
BlackRock’s size and influence over capital markets cannot be underestimated. Think about it - the firm manages nearly $7 trillion in assets on behalf of investors worldwide - that’s nearly one-third of all managed assets in the U.S. and more than the GDP of Japan, Germany and many other countries. Their actions have positioned BlackRock as a leader among the world’s largest asset managers in how they assess and manage climate and other sustainability risks and opportunities. And surely, they will encourage other large asset managers to ratchet up what they are doing on these issues.
Fink’s letter is both a recognition that capital markets are changing to address the climate crisis and a clarion call to companies, other investors and policymakers everywhere that every capital market actor has a fiduciary duty to scale action on the greatest challenge of our time. This is the clear leadership required as we launch into our new decade. Congrats to Mr. Fink for stepping up and laying out a plan for action, and affirming that climate change is not only a threat to our future, but to our economy.