BlackRock Inc. founder and CEO Larry Fink this week said the company will shift how investments are allocated and exit stocks that “present a high sustainability-related risk,” including from some fossil fuel projects.
The overhaul by the No. 1 asset manager in the world, with nearly $7 trillion in investments, was announced in Fink’s annual letter, which could be a watershed moment for the investment community. Fink also pledged BlackRock would vote against management teams that are not making progress on sustainability.
Nearly five years ago, BlackRock had noted how the rising impact of climate change was impacting investments. However, the firm’s estimable sponsorship of global oil and natural gas projects is not ending in the near term, and it will in fact remain one of the top investors in energy projects.
“Under any scenario, the energy transition will still take decades,” Fink wrote. “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.
“Governments and the private sector must work together to pursue a transition that is both fair and just; we cannot leave behind parts of society, or entire countries in developing markets, as we pursue the path to a low-carbon world.”
However, the reasoning to withdraw from riskier investments has become clear, Fink said in the letter.
“Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” he wrote. “From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself…
“In the near future -- and sooner than most anticipate -- there will be a significant reallocation of capital,” he said. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance...Even if only a fraction of the science is right today, this is a much more structural, long-term crisis.”
More fund offerings also are to focus on environmental, social and governance (ESG) initiatives.
BlackRock intends to double ESG exchange-traded fund offerings to 150 over the next few years, “including sustainable versions of flagship index products, so that clients have more choice for how to invest their money.”
The dynamic “will accelerate as the next generation takes the helm of government and business” as CEOs and chief investment officers (CIO), Fink wrote. “As trillions of dollars shift to millennials over the next few decades, as they become CEOs and CIOs, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability.”
BlackRock earlier this month joined Climate Action 100+, a group of asset managers pushing fossil fuel producers to detail how they plan to meet carbon dioxide reduction targets laid out in the 2015 United Nations (UN) global climate accord. In 2019, the group pressured BP plc to describe how its strategy aligned with those goals, and last May, almost all shareholders (99%) voted in favor to mesh goals with the UN agreement.
BlackRock’s “investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors,” Fink said. “And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
The world is “facing the ultimate long-term problem,” wrote Fink. “We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading. Every government, company and shareholder must confront climate change.”
Also Tuesday, the Global Association of Risk Professionals (GARP) said it has launched a certificate in sustainability and climate risk to help professionals understand and manage the potential economic and operational impacts of a changing climate on their organizations.
“As businesses start to recognize climate change as a financial risk, managers will increasingly need to add climate risk management to their skill sets -- not only those working in finance but also in disciplines such as supply chain management, operations and technology,” said GARP Risk Institute Co-President Jo Paisley.