Is BlackRock sustainable investment direction ‘watershed’ finance moment?

As climate change takes hold, finance is due for a ‘fundamental reshaping'.
15 January 2020

A climate strike outside BlackRock offices in 2019. Source: AFP

Your organizations’ approach to sustainability could play a crucial role in its ability to attract future investment.

That’s if precedents are set by BlackRock’s latest decision, at least.

With nearly $7 trillion in client assets, the world’s largest asset manager has announced it is putting sustainability at the heart of its investment decisions.

In a letter to corporate CEOs, BlackRock chairman and CEO Larry Fink said that climate change has become a “defining factor” in companies’ long-term prospects.

“Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity– a risk that markets to date have been slower to reflect.

“But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Fink said.

Climate change and its socioeconomic impact, he said, is “almost invariably” the top issue BlackRock’s clients raise, and it is driving investors to reassess core assumptions about modern finance.

“Will cities, for example, be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds?

“What will happen to the 30-year mortgage– a key building block of finance– if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?

“How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?”

Sustainable investing is, therefore, the strongest foundation for client portfolios going forward and, accordingly, the asset manager will begin exiting certain investments that “present high sustainability-related risk”, such as thermal coal producers.

“We are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25 percent of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020,” wrote the chairman.

“Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” Fink wrote.

New York Times called the move “watershed” and said it would put pressure on other asset managers, such as Vanguard and JPMorgan, to make similar changes to their investment strategy.

The commitment is an apparent turnaround of the investment giant, which has faced past criticism for not taking concrete action on climate change.

As noted by GreenBiz, the firm was ranked 43rd among 48 asset managers in a green investment league table last year, having backed just one in 10 climate-related proposals from shareholders.

Former US vice-president Al Gore has been among critics, stating last month that major asset managers such as BlackRock have been shown to be “full of greenwash”.