If BlackRock shows true leadership on climate change, the whole world will follow.
The world’s largest asset manager, in the person of its CEO Larry Fink, says it will now be making investment decisions with sustainability as a core goal. Not just vote proxies with sustainability in mind, but make “investment decisions” on that basis. Fink wrote this in his annual letter to the world’s CEOs, in an effort to get executives to take the climate crisis seriously.
In the letter, Fink poses serious questions such as these:
“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? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding?”
Good questions, but a crucial point he leaves unaddressed is the question of ‘what will happen to the value of his firm’s enormous fossil fuels holdings when awareness of these risks reaches a tipping point, and the carbon-exposed economy is dramatically repriced to the downside?’ A fiduciary striving to grow his clients’ buying power into the future should be asking that question. He comes close to it with “In the near future—and sooner than most anticipate—there will be a significant reallocation of capital,” which is a big deal for the world’s largest asset manager to say, but meanwhile, in part due to its scale and in part due to not taking the climate crisis seriously enough, “BlackRock will remain one of the world’s largest investors in fossil-fuel companies” (as reported by the New York Times).
All its passive index funds of course make it difficult to predict the extent to which BlackRock will pursue investing in a decarbonized economy, especially at the expense of staying long in carbon economy stocks. But it’s not written in stone that BlackRock has to primarily offer passive investment vehicles; that’s a deliberate choice it has made. The argument that BlackRock’s hands are tied on fossil fuels exposure ignores its ability to evolve.
Elsewhere in the letter, Fink passes the buck for taking climate action to the public sector, writing “This challenge cannot be solved without a coordinated, international response from governments, aligned with the goals of the Paris Agreement,” and “government must lead the way in this transition,” as though a serious commitment from BlackRock and its $7 trillion in assets wouldn’t change the zeitgeist and the news narrative around sustainability overnight. Policy will follow where you lead, Mr. Fink.
So by its holdings (read: actual market signals) and some of Fink’s rhetoric, BlackRock is leaving its clients dangerously exposed to the fossil fuels economy and all the risks, financial and otherwise, that come with it.
Not that I mean to be too negative: It’s great to see BlackRock trying to change the global conversation among investors. Fink notes that “[a]wareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.” He even connects these dots to long-term portfolio performance: “Ultimately, purpose is the engine of long-term profitability.”
This point is indisputable, and it is the primary factor for longer-term investors. So what Mr. Fink should be asking himself about every firm his company invests is this: Is this business serving the purpose of lowering risks for the economy, or do its activities serve the purpose of raising the risks we all face? If BlackRock really is going to be making investment decisions with sustainability as a core goal, this is always the first question it should ask, company by company.
Has Fink written all of this now because he agrees that the issue is crucially important? Maybe, or maybe this is more about the fact that “Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” and he feels the need to signal that he’s doing something. But his motivations don’t matter. What matters are the actions—not speeches or marketing copy—that BlackRock takes from here on. We’ll be watching, not because we care in the least about being a watchdog, but because there’s so much at stake.
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