“Climate risk is an investment risk,” BlackRock CEO Larry Fink concluded in his annual letter to CEOs last January. With climate change rewriting the fundamental assumptions of modern finance, he argued, billions of dollars are at stake. “Sooner than most foresee, there will be a significant reallocation of capital,” he wrote Fink. “We believe that sustainable investing is the most solid foundation for client portfolios in the future.”
On this, the financial sector was put on notice. Climate change is now the lens through which Blackrock, and everyone who follows the world’s largest asset manager, will need to assess its next investment. Mindy Lubber, CEO of the nonprofit Ceres, which advocates for climate action in the business community, says BlackRock takes the rest of the industry with him: “When they move, a lot of people follow. “
Now that climate change threatens Wall Street, the net of companies announcing pledges to push for emission reductions has turned into a deluge. BlackRock doesn’t deserve all the credit. It’s just the latest (and biggest) player to shatter illusions that businesses could ignore the climate catastrophe and their role in it. It’s part of a larger shift to stakeholder capitalism, supported by top CEOs who want a company’s goal to be to benefit “all stakeholders – customers, employees, suppliers, communities. and shareholders ”.
BlackRock has vowed to prove that this is more than rhetoric: it has vowed to screen all investments against sustainability criteria and to start opting out from companies such as thermal coal producers. But make no mistake, BlackRock does it for the money. “Actions that hurt the company will catch up with a company and destroy shareholder value,” Fink wrote last year. “At the end of the day, purpose drives long-term profitability.”
Do good, pay dividends
BlackRock has been called the “Swiss Army Knife” of the financial world. It is not a bank. But he manages and oversees huge sums of money as an institutional investor, fund manager, and private equity firm. His savvy maneuvers – and perhaps his focus on environmental, social, and governance (ESG) risks – have helped BlackRock eclipse the stock performance of nearly every other major asset manager over the past two years. BlackRock’s market capitalization has climbed 80% from the depths of the pandemic-fueled market collapse last March (only Schwab recently caught up).
This makes it possible to monitor the superior performance of the ESG investment market at all levels. Funds filtering out bad actors for environmental, social and governance issues generated four times the cash flow in 2020 compared to the same period the year before. Many have outperformed the S&P 500.
A brief history
1988: BlackRock is founded.
1999: The company goes public with $ 165 billion in assets and sells access to Aladdin, its internal risk management tool.
2014: BlackRock sets up its first indices which exclude fossil fuels.
2020 (January): Fink writes “A Fundamental Overhaul of Finance” as his annual letter to CEOs. In it, he predicts massive climate impacts on the financial sector and joins ClimateAction 100+, a global consortium of investors pushing companies to reduce their emissions.
2020 (December): BlackRock’s Aladdin Climate launched, quantifying climate risk for many of the world’s largest pension funds, asset managers and other institutional investors. Aladdin monitors $ 18 trillion in assets for 200 financial companies. BlackRock officially announces that it will “integrate climate risk on our platform as a critical investment risk such as liquidity risk”.
In 2020, Fink established a list of commitments for BlackRock to put “sustainability at the center of our investment approach”. Here are some of the most important:
⛏️ Divestment from thermal coal companies.
🌡️ Request that companies’ climate plans operate in accordance with the objectives of the Paris Agreement for less than 2 ° C of warming.
💰 Offer ESG options for all active portfolios and advisory strategies and possibly convert all financial products to include ESG screens.
📆 Move from annual disclosure to quarterly voting with an explanation of decisions.
👁️ Increase the number of companies under climate surveillance from around 440 companies (including 191 placed “under surveillance” for lack of progress in 2020) to more than 1,000.
👎 Vote against leadership that does not take action: “Where we believe companies do not move with sufficient speed and urgency, our most frequent action will be to hold directors accountable by voting against their re-election.”
🗣️ Take responsibility for lobbying: “We will now seek confirmation from companies, through engagement or disclosure, that their corporate political activities are consistent with their public statements on important political and strategic issues… and for provide an explanation where inconsistencies exist. “
🌎 Start accounting for natural capital: “In January 2021, we will provide a more holistic commentary on our approach to natural capital…[that] will also discuss how we expect the companies concerned to manage the scarce water and energy resources on which they depend to avoid negative impacts that could affect their ability to operate. “
In 2020, BlackRock had significant stakes in over 90% of S&P 500 companies – its average share was 7.7% – giving the asset manager an outsized voice over what companies and leadership teams do. A vote against management by BlackRock could easily tip over into majority support, and BlackRock’s own analysis suggests that 94% of companies fully or partially pass shareholder resolutions when votes exceed 50%.
“BlackRock is unique because of its scale,” says Judy Samuelson, founder of the Business and Society program at the Aspen Institute. As a universal owner with $ 7.8 trillion in assets, he owns stocks in all major industries in the business world. “They can’t get out of a stock,” she said. “They must continue to hold it.”
This is a level of influence that BlackRock intends to use. In its 2021 stewardship report (pdf), the company said it would vote against re-electing directors in companies it says are not moving with enough urgency. But in the first half of last year, BlackRock failed to live up to its rhetoric: the company actually opposed a few more environmental shareholder resolutions than it did one. year before, although rivals such as JPMorgan tripled their support.
BlackRock said it updated its voting policies in July and engaged directly with management to correct perceived shortcomings. Indeed: Between July 1 and December 4, the company voted 22 votes on proposals from environmental and social shareholders, supporting half of them.
ESG investing will soon be just… investing
ESG investing used to be a fringe activity in the financial world, but it’s about to move to the center of it. ESG fund assets soared to $ 1 trillion in 2020, according to UBS. More net money was paid into ESG funds between April and July 2020 than all five previous years.
Why? The returns are higher and the volatility is lower. In a world of negative interest rates, liquidity is rushing around the world in search of higher yields and havens from volatility.
This year, BlackRock said that all of its active portfolios and advisory strategies will take ESG into account, and that it will continue to generate and share more data on company ESG performance (60% of publicly traded companies (pdf) already disclose something about climate risk). “Sustainable investing used to be seen as a compromise between value and ‘values’,” Fink wrote in February 2019. This is no longer the case.
BlackRock also recently launched Aladdin Climate, software that calculates the climate risk of portfolios by analyzing data on a company’s energy, carbon emissions, waste, water, and efficiency metrics. Aladdin Climate now allows BlackRock – and its clients – to test their portfolio under different scenarios, such as the net zero transition under the Paris Agreement.
But as Samuelson of the Aspen Institute (and BlackRock admits) argues, that alone won’t be enough. “ESG funds are not the solution,” she says. “This is noise in the system. The aim is to improve the functioning of financial markets. Ultimately, it should be about having two classes of good deeds and bad deeds. We have to raise the bar. “
Correction: CEO Larry Fink’s annual letter to CEOs in 2020 was last January, not December.