BlackRock sets a precedent with move to sustainable greener future
Asset manager’s decision to divest from thermal coal and incorporate climate risks into its practices sends a message to global firms
Ring the alarm! Climate risk to the financial system has gone mainstream and there is no going back. Banks, asset managers, and insurers can no longer sit back but will have to take active steps to address climate risks in their balance sheets.
Regulators are sitting up all over the world especially after the catastrophic bushfires in Australia and BlackRock’s landmark decision to incorporate climate risks into its business practices. One cannot afford to take a sit-and-wait approach any more considering what is happening in Australia and other parts of the world.
Climate change will have financial and economic consequences on the stability of the financial system and even though we are uncertain of the magnitude of the effects, we know it will be significant especially for a vulnerable continent such as Africa with limited adaptive capacity.
For example, physical effects of climate change such as rising seas from sea-level risks and other consequences of the build-up of anthropogenic carbon emissions could hit financial stability by, for instance, eroding the value of homes against which banks have lent hundreds of billions of dollars.
According to scientists, human-induced activities have already caused about 1°C above pre-industrial levels since 2017 and is rising at 0.2°C-0.25°C per decade. Every decade of delay will continue to cause further long-term changes in the climate system, causing more damage. Reaching and sustaining net zero global anthropogenic CO2 emissions will require drastic and systematic action across all sectors of the economy. The financial sector can play a critical role in ensuring a sustainable financial system and future due to their role in society.
According to scientists, the target is not only geo-physically possible if we start acting now but it is also economically and financially possible. All that is required is the political will to drive change. BlackRock, now leading the pack, has made a long-awaited decision. Chair and CEO Larry Fink, in a highly anticipated letter to CEOs, acknowledged the urgency of climate change and its affect on the soundness of individual firms and to the stability of the global financial system.
In the letter, the world’s largest asset manager, which has $6.9-trillion in assets under management including oil producers such as BP, Shell, and ExxonMobil, announced that it will be divesting from thermal coal and demanded greater disclosure from all firms on their climate risks and carbon emissions.
Even though BlackRock’s coal investments are less than 0.01% of its assets and therefore will not have much direct effect, it’s a step which will move the needle towards greater disclosure as its green investment’s portfolio grows. Threatening to vote against management that doesn’t take action, board of directors can no longer be disillusioned about the material effect of climate change as an investment risk.
The firm plans to improve its internal processes by incorporating robust climate analysis into its risk management systems that it sells to many other financial firms and double its sustainable offerings to 150 over the next few years.
Why the drastic decision? BlackRock is motivated by self-interest and pressure from its asset owner clients about the risk of climate change to their investments. Activists accused BlackRock of green washing and said that the firm is preventing oil companies from being held accountable for their actions. BlackRock has directly voted against multiple shareholder resolutions brought by Climate Action 100+.
Over and above that, a report produced by Institute for Energy Economics and Financial Analysis found that BlackRock lost $80bn of investor money due to its investments in fossil fuel companies. Of these losses, about 75% are due to investments in four companies: ExxonMobil, Chevron, Royal Dutch Shell and BP.
All have underperformed in the market over the past 10 years and will continue to decrease in value to increasing pressure to transform their businesses and as risk of stranded assets. The firm has joined Climate Action 100+ a coalition of asset managers launched in 2017 that puts pressure on big carbon emitters to divert from fossil fuel investments.
With BlackRock on the board, members of the campaign are hoping to see faster and more meaningful progress in moving towards a zero-carbon economy.
“Given BlackRock’s size and influence, their commitment to accelerating engagements with the largest corporate greenhouse gas emitters sends a powerful signal to companies,” said Mindy Lubber, CEO and president at Ceres.
Will BlackRock back its words with action and avoid a greenwash backlash? The proof they say is in the implementation and a good test will be whether BlackRock’s active and passive funds will vote against the expansion of capex by fossil-fuel firms they invest in. We wait with bated breath.
Antwi, a sustainable finance & climate change specialist who worked at Absa Capital/Barclays and Standard Bank Investment Bank, is founder and CEO of Nochua International
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