BlackRock CEO Larry Fink’s latest annual letter to CEOs “A Fundamental Reshaping of Finance” immediately made waves in the financial community and the media because of its urgent call for all companies to recognize and account for the risks of climate change. The letter said the failure to account for these risks would put billions of dollars of shareholder value in danger. At the same time, BlackRock announced a number of new initiatives that “place sustainability at the center of our investment approach,” including launching new investment products that screen fossil fuels, exiting thermal coal investments, and committing to greater transparency in their investment stewardship activities.
But what does it all mean for the financial world and the global fight against climate change?
While this letter is a big boost for climate finance from one of the largest investment funds in the world, questions remain about BlackRock’s voting record and what actions they will actually take to mitigate their climate risk. Nevertheless, Fink said BlackRock will ask companies they invest in to disclose their climate risk, sending another warning to businesses to start on their disclosures aligned with recommendations from the Task Force on Climate Related Financial Disclosures (TCFD).
It’s a big boost for climate finance
Without question, having the CEO of a nearly US-$7-trillion investment firm dedicate his entire annual letter to climate is a big deal. We welcome it. Whether BlackRock follows through on some of the statements in the letter (more on that below) is a different matter. But to have Larry Fink put his voice behind the threat of climate change to the financial sector is important. Fink treats climate change with the seriousness it deserves, elevating it to a level above past financial crises:
“Climate change is different. Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis,” said Fink’s 2020 letter to CEOs. “Companies, investors, and governments must prepare for a significant reallocation of capital.”
Wall Street (and Bay Street) analysts can’t ignore what he’s saying. For those of us who work in the intersection of climate change and finance, a lot of what Fink says is content we’ve heard before. Most notably, Bank of England Governor Mark Carney has delivered several speeches warning about the risk of stranded assets due to sudden market movements from climate change. What Larry Fink is saying may not be new, but he is by far the most high-profile asset manager to say it. To have the message come from him substantially raises the profile of climate risk amongst investors, especially retail and middle-tier organizations who have been lagging in their climate action. It is also a big boost for the growing momentum behind climate finance.
Questions remain on BlackRock’s voting record
BlackRock has come under intense scrutiny for its shareholder voting record on climate. According to a study by Ceres, BlackRock finished 43 amongst 48 large fund companies in supporting climate-related shareholder proposals during the 2018 proxy season. They voted in support just 10 per cent of the time.
Fink’s letter says BlackRock intends to change this—although by how much, is not clear:
“We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” said Fink’s 2020 letter to CEOs.
Should we believe this is going to change how BlackRock invests? Fink’s past letters also made calls for a different approach. His 2018 letter to CEOs called for companies to focus not just on profits, but to make “a positive contribution to society.” Is there evidence that BlackRock’s investments somehow changed course because of that?
In contrast, the US-$3.1-trillion investment firm State Street Global Advisors released a phased plan to actively vote against board members at big firms that have low ESG ratings and fail to say how they will improve their ESG score – a score State Street developed. This action builds off of State Street’s multi-year effort to increase the diversity of boards, which resulted in 583 companies adding or committing to add women to their boards, said the company.
We hope that in the era of governments declaring climate emergencies, and millions of people taking to the streets in climate protests, that this time will be different. In the week before the letter, BlackRock announced it joined the Climate Action 100+, an investor initiative to get the world’s largest emitters to reduce emissions and issue TCFD-aligned reports. With the combination of the release of the 2020 CEO letter, does this mean BlackRock will support the ever-increasing number of shareholder resolutions for companies to set targets aligned with the Paris Climate Agreement? Or is it just hiding behind grand gestures and headline announcements? Fink’s letter says the company will be taking a different approach from the past. We’ll see.
Don’t expect any big divestment moves
The immediate question that arises from Fink’s letter is how the newly found commitment to recognize climate risk fits with BlackRock’s current investments. BlackRock is currently one of the world’s largest investors in oil and gas expansion, with an estimated $87.3 billion invested in fossil fuels.
BlackRock simultaneously announced with the letter that they would be divesting from companies that generate more than 25 percent of their revenue from thermal coal production. This action, however, only applies to their actively managed funds—not the passive funds, such as index funds, that make up the bulk of their nearly $7 trillion in assets.
The 2020 letter to CEOs also lays out Fink’s view that while changes in climate risk are happening quickly, fossil fuels will remain the majority source for energy for several decades:
“Under any scenario, the energy transition will still take decades,” said Fink’s 2020 letter to CEOs. “Despite recent rapid advances, the technology does not yet exist to cost-effectively replace many of today’s essential uses of hydrocarbons. We need to be mindful of the economic, scientific, social and political realities of the energy transition.”
Many will challenge BlackRock on this position, given the rapid increase in electric vehicles, the steady decline in the cost of renewables, and the growing number of businesses and countries committing to net-zero by 2050. While that target may sound far off, it requires that significant cuts in emissions start happening now. Several private-sector studies released this year forecast oil production to peak in the early 2020s.
The Principles for Responsible Investment (PRI) released a climate scenario report last year called the Inevitable Policy Response. It outlines a scenario where governments suddenly change course on how they deal with climate change and implement significant policy changes, such as mandates for 100 percent emissions-free vehicles and carbon pricing. Does it make sense to keep investing in fossil fuel companies as business as usual when there’s the growing possibility of a volatile transition? Fink’s letter implies that BlackRock can manage its carbon-intensive assets through this type of sudden transition. That’s a bet they are willing to make, but others are less willing.
Financial media commentator Jim Cramer says it’s time to sell fossil fuel stocks. BlackRock’s focus on sustainability, Microsoft’s pledge to go carbon negative, Tesla’s stock’s meteoric rise, Exxon’s stock’s drop, and sunken oil markets are all reasons why Cramer says fossil fuels are in a “death knell phase.”
You need a plan for TCFD
Fink’s warning about the risks of climate change is rooted in a desire for greater transparency from the companies BlackRock invests in. Blackrock wants to know what a company’s plan to address climate change is, and specifically, how they intend to adapt to a world that reduces emissions in order to keep global warming below 2 degrees.
How should a company do that? When it comes to climate change, BlackRock gives their stamp of approval to the TCFD framework.
“For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the TCFD provides a valuable framework,” said Fink’s 2020 letter to CEOs.
BlackRock says they will be asking the companies they invest in to disclose climate-related risks:
“Disclose climate-related risks in line with the TCFD’s recommendations, if you have not already done so,” said Fink’s 2020 letter to CEOs. “This should include your plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized, as expressed by the TCFD guidelines.”
The world’s largest asset manager wants all of the companies it invests in to do a TCFD-aligned report. Even if BlackRock is not an investor in your business, the sheer size of their portfolio means a lot of businesses are going to start with TCFD-aligned reporting—and those that aren’t will stand out, and not in a good way. Blackrock itself says they will be releasing their own TCFD-aligned disclosure by the end of 2020.
So if you aren’t working on a TCFD-aligned report, you should get started ASAP.
2020 is ramping up to be a breakout year for climate finance
We feel strongly that 2020 is set to be a breakout year for climate finance. Recent events, from the Bank of England Governor Mark Carney becoming the UN Special Envoy on Climate Action and Finance, to the European Union releasing a green taxonomy for investments, to the Bank of Canada announcing it will undertake research into climate stress tests, are bringing us closer to a low-carbon future. BlackRock’s CEO letter needs to be seen in this context. On its own, it may not be a big deal, but the addition of such a powerful private sector voice is significant at a time when many governments need to take bigger steps in the fight against climate change. Climate risk is investment risk. The question every business should be asking after reading Fink’s letter is: What’s our plan?
