Climate Risk is Investment Risk – How Investors are Changing the Conversation

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James_Turner_New_Energy_SolarJames Turner17 January 2020

On 14 January, Larry Fink, the Chairman and CEO of BlackRock, published two letters.  The first of these was his annual CEO letter in which he stated that climate change “has become a defining factor in companies’ long-term prospects[1].  He explained that his career has spanned the inflation spikes of the 1970s and early 1980s, the 1987 stockmarket crash, the Asian currency crisis, the dotcom bubble of 1999-2000 and the global financial crisis.  But that none of these events can be compared in scale or impact with the impact that climate change will have.  The second letter was sent to the clients of BlackRock explaining what BlackRock is doing about climate change.

The rhetoric of Fink is significant because BlackRock is the world’s largest asset manager with nearly US$7 trillion in investments[2] and because the asset manager is taking tangible and meaningful steps to back up that rhetoric.  The group is implementing a five-point action plan that puts sustainability at the core of the investment and risk platforms employed in managing its investment funds.

BlackRock has told clients that it is in the process of removing, from its actively managed portfolios, stocks, and bonds of companies that get more than 25% of their revenue from thermal coal production.  The firm expects to divest these holdings fully by mid-2020 and will be scouring its portfolios for other exposure to “heightened ESG [environmental, social and governance] risk[3].

BlackRock is also doubling its offerings of ESG-themed ETFs, to over 150 over the next few years.  ETF clients will be able to tailor their options – screening out certain sectors or companies that they don’t want to invest in, tracking flagship indices relatively closely while still increasing their ESG scores, or investing specifically in companies with the highest ESG ratings.  BlackRock also said it is working with major index providers to create sustainable versions of their flagship indices.

BlackRock is also asking companies to publish their climate-related disclosure materials and advising that the group “will be increasingly disposed to vote against management when companies have not made sufficient progress on sustainability-related disclosures and the business practices and plans underlying them[4].

Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable”, Fink says in his letter to CEOs.

Many could argue that BlackRock is not a frontrunner on moving to focus on climate-related investment risk and that the move is long overdue[5].  Larry Fink’s letter states that “climate change is almost invariably the top issue that clients around the world raise with BlackRock”.  However, there is no doubt that the actions of BlackRock reflect the growing recognition in investment markets[6] that climate risk is investment risk and that investment managers have a fiduciary responsibility to clients to manage that risk.

This language reflects that of Kenneth Hayne[7], the Australian banking royal commissioner, who said in a speech in 2019 to a climate change roundtable that directors’ duty to act in the best interests of the company meant that boards had to “recognize both the nature and extent of climate-related risks and the speed with which change will have to be made: to develop strategic plans in response; and to report to shareholders and the wider market about what they have done, are doing and will do in response”.

Speed of change is becoming increasingly important, not simply because of the devastation that can be rent by natural disasters like the bushfires in Australia, but because, as Fink said to CEOs in his letter “capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself.”

Arguably those changes are already apparent.  As the New York Times article[8] on BlackRock’s intentions points out:

Had Mr. Fink moved a decade ago to pull BlackRock’s funds out of companies that contribute to climate change, his clients would have been well served. In the past 10 years, through Friday, companies in the S&P 500 energy sector had gained just 2 percent in total. In the same period, the broader S&P 500 nearly tripled.”

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