BlackRock, the world’s largest asset manager, is moving beyond its call for sustainability as “the new standard for investing” to focus even more on climate change and demand that public companies disclose their plans to help achieve a net zero global economy by 2040.
In his latest letter to CEOs, BlackRock CEO Larry Fink writes that “no issue ranks higher than climate change on our clients’ list of priorities. They ask us about it nearly every day.”
Fink, in turn, is asking CEOs to disclose how their own net zero plan is incorporated into their long-term strategy and reviewed by the board of directors. Net zero refers to a policy whereby an economy emits no more carbon dioxide than it removes from the atmosphere by 2050 so that global temperatures don’t rise more than 2ºC since the Industrial Revolution.
‘Climate risk is investment risk,” writes Fink, repeating last year’s warning. “But we also believe climate transition presents a historic investment opportunity.”
He noted that during the first 11 months of 2020, despite the coronavirus pandemic, investments in sustainable assets by mutual fund and ETF investors around the world surged 96% to $288 billion and that during 2020 81% of a “globally representative selection of sustainable indexes” outperformed their parent benchmarks.
For its part, BlackRock, in its letter to clients, outlined its plans to achieve compatibility with net zero by 2050.
Among its commitments: developing Aladdin Climate to provide a wide range of climate data, risk measurement and implementation capability that help advisors and investors manage their physical risks of climate change and transition risks due to changing policies and technology.
In addition, BlackRock committed to providing more disclosure about the climate risk of its own portfolios, including publication of temperature alignment data for its own equity and bond funds by year-end; more scrutiny of the policies of the companies it invests in, including their management of climate-related risk; new investment product launches focused on explicit temperature alignment goals; and support for shareholder proposals that address material risks including climate-related ones.
BlackRock also committed to voting against management of companies whose stocks it owns through its index funds if those companies show no progress in addressing significant climate-related risks, and it committed to consider selling those same shares if those stocks are held in their active portfolios.
Challenges of Walking the Walk
Jon Hale, head of sustainability research for the Americas at Morningstar, welcomed BlackRock’s new net zero criteria and commitment to support more ESG-related shareholder proposals. “The firm is a major shareholder in virtually every public company, so its vote makes a difference and sends a broader message to other companies,” said Hale.
He noted, however, that BlackRock has trillions of dollars tied up in standard index funds, which are not on track to net zero and questioned whether it’s enough for the firm “to jawbone investors about the merits of sustainable alternatives and hope they make the switch. How will BlackRock itself get to net zero if it can’t transition its AUM from standard index funds to sustainable index funds?” asked Hale.
Chris Snyder, a director in the energy, sustainability and infrastructure segment at Guidehouse, a consulting firm, also applauded BlackRock’s net zero goals but noted that a shift to net zero will require substantial shifts in mobility, energy and operations for companies, including an ability “to track supply chain impacts in ways that only a few leaders are doing today.” Investors, too, “will need to learn new ways to assess firms, and what is real progress versus simple greenwashing,” Snyder said.
–– Check out Will 2021 Be the Year Advisors Embrace Sustainable Investing? on ThinkAdvisor.