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The world’s largest asset manager is increasing pressure on its portfolio companies to stem their impact on climate change. In his annual letter to CEOs, BlackRock chief executive Larry Fink said climate change is the biggest priority for its clients, and a financial risk that has become even more pronounced during the pandemic.
“I believe that the pandemic has presented such an existential crisis—such a stark reminder of our fragility—that it has driven us to confront the global threat of climate change more forcefully and to consider how, like the pandemic, it will alter our lives,” wrote Fink.
The missive conveys distinctly more urgency than last year’s, in which the CEO acknowledged climate change’s threat to financial markets and committed to reducing its carbon exposure. In the latest letter, Fink—whose fund manages US$8.7 trillion in assets—called on CEOs to disclose how their businesses would operate in a net-zero carbon economy by 2050 and pledged to divest shares in firms that do not meet BlackRock’s intensifying climate standards. Here’s what you need to know about BlackRock’s commitment, and its asks from others:
Climate-friendly investment schemes: BlackRock plans to offer new passive funds that exclude fossil-fuel companies, giving investors the option to choose these over traditional funds “to allow clients to achieve their net zero objectives.” It also plans to introduce a “climate objective” for new sustainable funds starting this year, which could include “carbon reduction targets or a tilt towards issuers better prepared for the energy transition.”
A renewed commitment to renewables: The fund manager is committing to expand its renewable investing portfolio to include energy sources beyond solar and wind power; though the firm did not set specific targets for these investments.
Green infrastructure: Fink is calling on governments around the world to funnel more money into infrastructure projects that can withstand inevitable extreme weather events, and deliver clean energy. “These challenges will require creative public-private partnership to finance them, as well as better disclosures to attract capital,” said Fink.
Full disclosure: For their net-zero disclosures, Fink recommended companies use one or both of two globally recognized reporting standards—the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board—and that they start disclosing financial risk related to climate change before regulators make them. The firm is also urging the financial sector to adopt a single climate reporting standard, an idea the International Financial Reporting Standards Foundation is reviewing as part of a push for mandatory disclosure. Meanwhile, BlackRock is developing its own tool called Aladdin Climate to help companies assess and manage their climate risk.
Willing to divest: BlackRock promised last year to drop firms that made over a quarter of their revenues from thermal coal from its actively managed portfolios. The fund manager is broadening its criteria for potential divestment to any firm in its active portfolio that doesn’t meet its “Heightened Scrutiny Model.” That means BlackRock may sell shares in companies that have high carbon intensity, are not prepared for a transition to net-zero emissions and/or aren’t engaging with the firm on their climate risk. “Where we do not see progress in this area, and in particular where we see a lack of alignment combined with a lack of engagement, we will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns,” reads the letter.
What it means for Canada: In the past, Fink’s annual letters have led to change in the financial industry. Some institutional investors are already following the course this year’s letter charts. Last week, Ontario Teachers’ Pension Plan committed to achieving net-zero carbon emission by 2050 and increasing its “climate-friendly” holdings; the Caisse de dépôt et placement du Québec set the same target in 2019. The Canada Pension Plan Investment Board, the country’s largest fund, has not set net-zero targets, however, and while financial regulators in Canada are exploring the option, they haven’t announced plans to make climate-risk disclosure mandatory. Following BlackRock’s January 2020 letter, several institutional investors in Canada told The Logic they had planned to take further action on climate change regardless. Still, Canada’s informal and piecemeal approach to managing financial climate risk saw BlackRock vote against directors at six Calgary-based energy companies in the 2020 proxy season.
