"Thus, while some are skeptical about Fink’s announcement, the letter itself is a clear signal to the global business community that if corporations do not make plans to confront the climate crisis, they risk their very survival." | Photo by L.W. on Unsplash
The climate momentum has reached BlackRock; now let’s get down to business
BlackRock, the world’s largest fund manager, with investments close to US$7 trillion, officially concluded that climate risk is investment risk and that it will consider how companies are confronting climate change in its investment decisions.
On 14 January 2020, BlackRock, the world’s largest fund manager, with investments close to US$7 trillion, officially concluded that climate risk is investment risk and that it will consider how companies are confronting climate change in its investment decisions. In his letter to CEOs of the world’s largest companies entitled “A Fundamental Reshaping of Finance,” Larry Fink, BlackRock’s Founder and CEO, said:
“Over the 40 years of my career in finance, I have witnessed a number of financial crises and challenges – the inflation spikes of the 1970s and early 1980s, the Asian currency crisis in 1997, the dot-com bubble, and the global financial crisis. Even when these episodes lasted for many years, they were all, in the broad scheme of things, short-term in nature. Climate change is different. Even if only a fraction of the projected impacts is realized, this is a much more structural, long-term crisis. Companies, investors, and governments must prepare for a significant reallocation of capital.”
Bill McKibben, a long-time climate activist and founder of 350.org, described Fink’s letter as nothing short of “seismic,” since BlackRock holds almost 10 cents of every dollar circulating in the world today. He said, “This is the biggest pot of money in the world[. T]he climate crisis [is] so grave that no one can turn away … activist pressure has reached a point that even the richest companies are not immune.” Tim Buckley, Director of Energy Finance Studies at the Institute for Energy Economics and Financial Analysis, clarifies the game-changing impact of Fink’s letter: “If the world’s largest investor makes it clear the rules have changed, then other globally significant [actors] will rapidly replicate and reinforce these moves, reducing stranded asset risks for all.”
Two things must be clarified at the outset. First, BlackRock said it will reduce investments in thermal coal, not all coal (metallurgical or coking coal, used to produce steel, is also a significant contributor of emissions). Second, BlackRock’s shift currently applies only to its actively managed funds, not its passive investments in index funds, which are sizeable. Nonetheless, this is a big step forward for climate, because BlackRock’s sheer size (over 90% of Fortune 100 companies do business with BlackRock) means its investment decisions can affect all investments, all the way down to home mortgages. Fink’s announcement helps establish climate risk as a mainstream risk management issue, not one just for environmentalists. It also confirms two things that have driven climate activism:
1. Consumer activism works.
If we think that what we demand, choose, or even ask as individuals is irrelevant in the grand scheme of things, this case shows the opposite. In an interview with CNBC, Fink said one fundamental driver for his letter was climate change becoming the top issue clients raise with BlackRock. Wherever he goes, investors bombard him with questions about the climate crisis, shifting investments away from fossil fuels, and avoiding stranded assets.
And while the concern of some may be primarily financial rather than climate stability, the takeaway is that consumer demands, choices, and questions matter. Concern about the climate has gone beyond the vegan and fossil-free movements to include the average person worried about his pension. Mark Carney, former head of the Bank of England, earlier warned that pension fund assets might become worthless unless companies confront the climate emergency. Individuals took notice and asked. The climate movement has benefited. This collective concern has pushed fund managers to a tipping point, forcing them to scrutinize the long-term viability of the businesses they invest the public’s money in.
2. The youth are crucial to the climate movement.
Several CEOs have cited their own children as reasons they are greatly concerned about climate change. At the 2019 Fortune Global Forum, a CEO said, “I cannot go to a meeting… without hearing [this:] when we go back home at night, [we’re asked]: ‘Mom and Dad, what is your company doing for the planet?’” A study published in Nature confirmed that children can indeed influence their parents’ perceptions on climate change, especially among conservative parents and among fathers, who were previously the least concerned about it.
More importantly, as millennials take the helm of businesses and governments, as they become CEOs, policymakers, and heads of State, they will change the way business decisions are made, with a strong emphasis on sustainability and profit with purpose.
Thus, while some are skeptical about Fink’s announcement, the letter itself is a clear signal to the global business community that if corporations do not make plans to confront the climate crisis, they risk their very survival. Businesses worldwide would therefore do well to incorporate sustainability into their strategic plans immediately.
This opens a clear window of opportunity for climate and rights advocates to engage more deeply with investors, pension fund managers, businesses, and policymakers to consider climate risk in investment decisions.
Rights advocates can leverage the heightened attention on climate to define what it means for sustainability to be the new standard for investing. For example, they can:
– dialogue with banks and financial institutions to jointly develop criteria to determine which “green” proposals are in fact sustainable and which ones are mere greenwashing;
– propose to fund managers and financial institutions clear, detailed metrics to determine how climate considerations and broader environmental and social safeguards can be considered in investment portfolios;
– engage with bodies like the Task Force on Climate-related Financial Disclosures (TCFD) to continually improve how businesses can voluntarily report on climate-related risks and information. Contributing to a robust disclosure system increases the reliability of information about business exposure to climate-related risks, encourages more businesses to join the initiative, and helps channel funds to support the transition to a more sustainable global economy;
– scrutinize the disclosures themselves to keep the pressure on businesses and especially on directors to responsibly discharge their fiduciary duty of ensuring they make sound, sustainable decisions;
– undertake enforcement and liability actions as appropriate; and
– push policymakers to make climate-related financial disclosures mandatory. Governments play a crucial role in influencing private sector activity through regulation. Businesses understand laws with sanctions because non-compliance hurts their profits.
To speak in a language private sector understands, “a sustainable portfolio will maximize profits over time.” Climate change and rights advocates can take advantage of this current business climate to clarify what having a sustainable portfolio truly means.