BlackRock issues ultimatum on net zero
BlackRock chief executive Larry Fink is stepping up his climate change activism with a blunt warning to 1000 global chief executives of carbon-intensive companies to lift their game or be dumped by the world’s largest fund manager (reports The Australian)
29th January 2021
Resources Rising Stars
BlackRock chief executive Larry Fink is stepping up his climate change activism with a blunt warning to 1000 global chief executives of carbon-intensive companies to lift their game or be dumped by the world’s largest fund manager (reports The Australian Financial Review).
Fink says CEOs making “insufficient preparation for the net zero transition” and giving a “low reception to our investment stewardship engagement” will be axed from BlackRock’s funds.
The threat carries considerable weight given BlackRock has $US8.67 trillion ($11.23 trillion) in assets under management, or about 8 per cent of the global funds under management of about $US100 trillion.
As the world’s largest passive manager of money through its iShares franchise, BlackRock owns stakes in just about every major listed company.
Fink’s letter accuses Donald Trump of “lies and opportunism” in the dying days of his presidency and then focuses almost exclusively on a range of measures designed to fight climate change and meet the target of net zero emissions by 2050.
He says the COVID-19 pandemic presented an existential crisis that 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”.
Without being too cynical, it is fair to say Fink has played the climate change activism card brilliantly. He was well ahead of the surge into managed funds offering environmental, social and governance (ESG).
He accurately predicted a fundamental transformation of capital markets from the increased demand for ESG-style products. But he now says the movement in capital has accelerated faster than he anticipated.
“From January through November 2020, investors in mutual funds and ETFs invested $US288 billion globally in sustainable assets, a 96 per cent increase over the whole of 2019,” Fink says in his letter.
“I believe that this is the beginning of a long but rapidly accelerating transition – one that will unfold over many years and reshape asset prices of every type.
“We know that climate risk is investment risk. But we also believe the climate transition presents a historic investment opportunity.”
Climate change is proving to be a lucrative business for BlackRock as it expands its array of ESG funds.
In the year to December 31, the company’s portfolio management software, Aladdin, accounting for the bulk of the 17 per cent rise in BlackRock’s technology services revenue.
As of December 31, BlackRock managed $US200 billion in sustainable funds. The company has more than 200 sustainable funds on its platform, having launched more than 100 sustainable funds in 2020.
In addition, BlackRock manages $US616 billion in assets that utilise additional ESG screens.
During 2020, BlackRock reported $US68 billion of net inflows into sustainable strategies during 2020, up more than 60 per cent on the previous year.
BlackRock, which has been accused by environmental groups of being too soft on fossil-fuel companies, appears to be creating a virtuous circle that will underpin a continuation of its recent record profits.
Aladdin, which earned revenue of about $US1 billion in 2020, is becoming indispensable to regulators, sovereign wealth funds and central banks.
Aladdin is integral to Fink’s climate-change activism because the platform now offers users – such as the Future Fund – the ability to meet their climate objectives by tracking investment portfolios’ trajectories towards net zero emissions.
BlackRock accompanied Fink’s letter with a document setting out the sorts of things it will be doing in 2021 to help achieve net zero emissions. Not surprisingly, several of these require improved data analytics such as those offered by Aladdin.
Fink says BlackRock wants to publish a temperature alignment metric for its public equity and bond funds, where sufficient data is available.
It wants to incorporate climate considerations into its capital markets assumptions and launch investment products with explicit temperature alignment goals, including products aligned to a net zero pathway.
Fink says BlackRock will use stewardship to ensure that the companies its clients are invested in are mitigating climate risk and considering the opportunities presented by the net zero transition.
It will implement a “heightened scrutiny model” in its active portfolios as a framework for managing holdings that pose significant climate risk (including flagging holdings for potential exit).
This heightened scrutiny model focuses on 1000 carbon-intensive companies, which represent 90 per cent of the global Scope 1 and 2 emissions of the companies that BlackRock invests in on behalf of its listed equity clients.
In 2020, BlackRock put 191 companies “on watch” and Fink said these “companies risk votes against directors in 2021 unless they demonstrate significant progress on the management and reporting of climate-related risk, including their transition plans to a net zero economy”.
“In 2021, we intend to expand our Scope 3 reporting to include the aggregate emissions attributable to the investment portfolios we manage on our clients’ behalf, where data permits,” he says.
“While these emissions will continue to reflect the investment decisions of our clients and the progress of the global economy towards net zero, we believe that over time, the initiatives set forth in this letter will serve to reduce the carbon intensity of our assets under management and increase the percentage of assets that are aligned to net zero.”
Fink is careful to remind readers of his letter that BlackRock will give added investment attention to companies that are proactive about climate change.
He says “companies that distinguish themselves in terms of their emissions trajectory, transition preparedness and governance will often represent an opportunity for our clients”.
“We are already one of the world’s largest investors in renewable energy, and we are continuously working to seek out new opportunities in climate innovation in both public and private markets.”
BlackRock has about $US410 billion in its actively managed equity funds. It is these funds that have the discretion to dump stocks.
Geraldine Buckingham, the chairman of BlackRock’s Asia-Pacific operations, says BlackRock will not be naming and shaming the 191 companies on its “watch” list.
”Our investment stewardship approach has always been one very focused on engagement with management,” she says in a phone interview from Hong Kong.
“We are public when we vote because we believe they were public actions and therefore it is approprate that that be disclosed broadly.
“We have literally thousands of meetings with thousands of companies around the world each year and for someone to be put on ‘watch’ – we make that very clear to management that that’s their status.
“But it isn’t a public event and therefore we don’t disclose it publicly.”
Fink and Buckingham emphasised how governments were helping drive the move in capital markets towards net zero emissions by 2050.
”We really think there is a very significant shift happening in the economies around the world and therefore financial markets,” she says.
“The fact that we now have 60 per cent of governments committing to or considering net zero commitments means that we’re going through an extraordinary transformation of economies.
“Companies are going to have to rise to that challenge that will also create opportunities for investors as this really significant shift takes place.
“So, recognising the scale of what we believe is happening is important. And as I said, as a fiduciary we are ensuring that our clients can navigate the risks.”
She refused to comment on Australia’s failure to set a net zero emissions target for 2050.
”It’s not our role to tell government what to do or not to do – it’s our responsibility to respond to context and ensure that we’re working with companies we invest in to ensure the best outcome over the long term,” she says.
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