In a move that will resound across the world of energy investing, BlackRock, the world’s largest asset manager, this week warned of a “fundamental reshaping of finance” as the impacts of climate change become better understood.
BlackRock CEO Larry Fink said in an open letter that his company will end support for thermal coal, screen fossil fuel investments more closely, and redesign its own investment approach to put sustainability at its core. As part of the shift, BlackRock will exit investments it decides have a high-sustainability-related risk.
"Climate change is almost invariably the top issue that clients around the world raise with BlackRock," Fink wrote in his influential annual letter aimed at other CEOs.
“We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading. Every government, company, and shareholder must confront climate change.”
Further, Fink wrote, “because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital.”
Bill McKibben, a prominent environmental activist, called Fink's letter a "remarkable breakthrough."
"It indicates that the facts on the ground of the climate crisis are so grave that no one can turn away, and that activist pressure has reached a point that even the richest companies are not immune," McKibben told The Guardian.
Justin Guay, director of global climate strategy at the Sunrise Project, an environmental group, called BlackRock's move "the first, not the last step, toward real climate action."
"But given BlackRock's sheer size, it's a big one," Guay told GTM. "Money talks, and BlackRock is speaking volumes with their coal policy given they are the largest investor in coal in the world and they're beginning to move on."
BlackRock, which claims $7 trillion of assets under management, has come under harsh criticism from climate activists in recent months for voting against climate resolutions facing many of the companies in which it is invested.
A study by ShareAction found that U.S. asset managers had a poorer record than their European peers in using their proxy on company boards to drive climate action. UBS Asset Management voted for climate resolutions 90.2 percent of the time compared to BlackRock’s 6.7 percent.
But going forward, BlackRock will use its position on the boards of thousands of companies to vote against the management of firms that “are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them," Fink said.
Last week BlackRock joined the Climate Action 100+ initiative. Signatories, which now collectively have $42 trillion of assets under management, pledge to reduce emissions in line with the Paris Agreement and back enhanced corporate disclosures and strong governance that ensure boards are accountable for climate risks and opportunities.
BlackRock is not planning to divest itself fully from fossil-fuel companies, though it will begin offering investors more options for limiting their exposure to such industries.
“Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors," Fink said in the letter. "And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
Fink called on companies to provide meaningful disclosures and greater transparency or face the consequences, not just in the boardroom but also on their balance sheets.
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
Despite being the world’s most profitable company, the IPO of Saudi Aramco garnered a muted response from investors in the West, with climate risks seen as one reason. In the end, however, Aramco's $25.6 billion IPO drew major investments from within Saudi Arabia and neighboring allies.
This week Saudi Aramco confirmed plans to launch a new corporate venture fund targeting renewables and energy efficiency investments, among other sectors.
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Additional reporting by Karl-Erik Stromsta