BlackRock's awakening: Wall Street head recognises climate emergency

In January 2020, a letter written by the CEO of one of the world’s largest investment firms, BlackRock and addressed to CEO’s of the companies in which BlackRock invests, has caused not just ripples, but waves across financial markets.

Larry Fink has been talking about responsible investing for the last few years, but he finally seemed to put his money where his mouth is, announcing a sea-change in the way the company will invest in the future. Sustainability, he said would be at the centre of the firm’s investment approach.

This means BlackRock will divest from any company that makes more than 25% of its revenue from thermal coal, launch new investment products that screen fossil fuels, and strengthen its commitment to sustainability and transparency in its investment stewardship activities.

For the $7-trillion asset management company, this is nothing short of revolutionary.

BlackRock, Vanguard and State Street are the world’s biggest investors in fossil fuel, overseeing a collective $300-billion in fossil fuel investments, a number that has grown by 34.8% since 2016, according to the Guardian newspaper. 

“I believe we are on the edge of a fundamental reshaping of finance,” Fink wrote.

“In the near future – and sooner than most anticipate – there will be a significant reallocation of capital. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.”

He added: “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors.”

Last year, Fink drew criticism from climate activists who accused him of paying lip-service to environmental, social and governance issues (ESG). “Fink talks about ESG, yet BlackRock consistently votes against shareholder climate proposals and has a worse track record than other large global asset managers,” says Tracey Davies, founder of Just Share, a non-profit shareholder activism and responsible investment organisation.

Last year, Just Share was one of 12 shareholder advocacy groups and investors from around the globe that called on BlackRock to vastly improve its climate engagements. The letter calls out the fund manager for its poor contribution to environmental goals, especially in light of growing urgency to tackle the risk of climate change on the global economy.

“BlackRock holds significant positions in carbon-intensive companies in emerging markets, like Sasol,” says Davies. “These companies are often overlooked by progressive global institutional investors. In South Africa, which is one of the world’s biggest carbon emitters, and where local institutional investors are failing to tackle climate risk, the example set by BlackRock will have a significant impact on actions taken by other investors.”

At this point, one could argue that talk is cheap, but Davies is cautiously optimistic. “This is a big signal, BlackRock is one of the kings of capital and they seem to have recognised that climate change will fundamentally change the financial system.” 

Fink was under pressure to make a public statement, given BlackRock’s size and scale, says Jon Duncan, head of the Responsible Investment Programme at Old Mutual. “But what is important now is that he shows leadership.

“It will be interesting to see how aggressively they exercise their shareholder rights and how far they go in terms of adjusting their product offering,” he says. 

In 2019, the firm employed a chief investment officer for its sustainable investing group and created a head of Global Sustainable Research and Data. 

It also developed a large global stewardship team to ensure the company is not “an absent landlord” and to ensure more effective shareholder engagement on sustainability issues, says Duncan. 

“Their global effort is laudable and we will be watching closely as they extend their stewardship practice.” 

While BlackRock intends to back up words with action and divest $500-million immediately from fossil fuel companies, South African banks, pension funds, endowment funds and asset managers are well behind. 

In 2019, FirstRand adopted a climate risk shareholder resolution that requires the bank to adopt and disclose a policy on fossil fuel lending by the end of October 2020.

In the same year, Nedbank committed to not finance new coal-fired power, and Standard Bank and FNB said they will no longer provide finance for the development of the proposed Thabametsi and Khanyisa independent coal-fired power stations. 

However, they stopped short of limiting existing financing of fossil fuel operations and made no commitments on the future financing of oil and gas operations. 

Davies says: “The South African financial sector is waking up to the realities of climate risk, but the pace at which it is adapting to manage this risk is still far too slow. Shareholders must accept that the scale of the crisis we face, and the pace at which we need to change to address it, require them to think critically about the issue and not to simply defer to management.”

Carbon neutral investment funds are few and far between in South Africa, but Duncan says 2020 will see these coming to the market as demand builds. 

However, he cautions against the setting of unrealistic expectations. “South Africa is not Denmark, we can’t have a carbon-neutral economy tomorrow. We can’t simply turn Sasol and Eskom off tomorrow, the consequences would be material. Rather, we need a phased transition so we don’t leave anyone behind and cause as little social and economic disruption as possible.”

The transition to a low-carbon economy is the single biggest risk and opportunity facing the economy over the next 20 years. How do large asset owners transition their asset register so that it is aligned with the Paris Accord, without creating social and economic turmoil? 

Should one disinvest from a company simply because it is a large energy user (Eskom dependant), and thus has a large carbon footprint?

“I don’t think it’s reasonable to disinvest immediately as there could be significant social and economic consequences. South Africa is an emerging market and we have argued on the global stage for more carbon headroom to grow our economy – carbon emissions are set to grow up to 2025; they flatten between 2025 and 2035 and decline from there,” says Duncan. 

In a statement on its website, asset manager Allan Gray concurs. “We don’t believe disinvestment is the solution. Simply selling a position, or encouraging a listed company to, for example, sell its coal assets, just moves the asset from one hand to another. In fact, a responsible, listed company selling dirty assets to an irresponsible, unlisted company may make the situation worse. 

This approach, says the asset manager, is different from putting new capital into the fossil fuel sector. “We will not invest in coal, or oil initial public offerings as these add capital to the sector.” 

What SA investors can expect this year is more pressure from institutional shareholders on boards of companies to ensure their companies reduce their carbon footprint. 

While large asset managers have previously lobbied behind the scenes, this is slowly spilling into the open, as witnessed at the Sasol, FirstRand and Standard Bank AGMs in 2019.

The Sasol AGM was significant, not because of what was achieved – because Sasol flatly refused to table any carbon resolutions – but because six fund managers came together to publicly express their disquiet at Sasol’s lack of any kind of a plan to reduce its carbon footprint. 

Duncan believes these collective efforts, as well as individual efforts, will grow in the coming year. “We don’t want companies like Sasol to fail, but we do want to see their commitment to reducing their emissions.” 

From 2020, Allan Gray has committed to reporting on climate change-related engagements in its annual Stewardship Report and will include data on the carbon intensity of its top equity holdings in the portfolio. 

This enables retail investors to at least measure their progress towards climate-neutral investing.

Allan Gray will also introduce climate change risks into its risk-rating methodology. “We ask questions such as: Is the company a substantial emitter of greenhouse gases and are they able to materially reduce emissions or not? Does management acknowledge the issue and what are they doing about it?”

The asset manager will discount a company’s valuation if it doesn’t believe it can evolve and thrive in a low-carbon future. It may well also limit the size of its investment based on climate risk factors, particularly emissions. 

Whether all of this is cheap talk, or not, remains to be seen. Fund managers locally and globally recognise that the climate crisis poses risks to listed companies that are not fully documented, or understood. The growing incidence of such risks being realised is a very real threat to shareholder value and fund managers have a fiduciary duty to take steps to mitigate against this. BM