BlackRock Wants Nothing To Do With Black Rocks Anymore
Larry Fink, chairman and CEO of BlackRock—one of the world's largest asset managers with nearly $7 trillion in assets under management, used his annual letters to CEOs and clients to warn of the implications of the climate crisis on the world of finance.
"Climate change has become a defining factor in companies’ long-term prospects," Fink wrote. "But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance."
Saying that "climate risk is investment risk," Fink added "climate change is almost invariably the top issue that clients around the world raise with BlackRock."
So what is BlackRock going to do to address climate change?
"Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself," Fink wrote. "In the near future – and sooner than most anticipate – there will be a significant reallocation of capital."
BlackRock will begin initiatives that focus the firm's investment approach on sustainability. BlackRock will introduce sustainable versions of its flagship model portfolios, with Fink believing they will become the flagship portfolios themselves in the future.
BlackRock will require its Risk and Quantitative Analysis Group (RQA)—which evaluates all investment, counterparty, and operational risk at the firm, to evaluate environmental, social, and governance (ESG) risk with portfolio managers during regular monthly reviews. According to Fink, RQA will now analyze ESG factors in the investment process with the same rigor as traditional metrics such as credit and liquidity risk.
BlackRock will continue to limit ESG risk in its active portfolios. Fink points out that BlackRock has no exposure to public debt or equity in sectors with heightened ESG risk, such as weapons manufacturers, in its $1.7 trillion in active AUM.
Ironically, Fink, who founded a company named BlackRock, is souring on the literal black rock. He wrote the company will be "exiting investments that present a high sustainability-related risk, such as thermal coal producers." BlackRock’s alternatives business will no longer make direct investments in companies that generate more than 25% of their revenues from thermal coal production.
BlackRock also wants to make sustainable investing more accessible for investors. BlackRock will double its offerings of ESG ETFs over the coming years to 150. They will also work with major index providers to provide sustainable versions of flagship indexes. BlackRock will expand its range of active strategies focused on sustainability such as funds that focus on the global energy transition and impact investing funds that seek to promote positive externalities or limit negative ones.
BlackRock will also use its clout to hold accountable board members and management of companies that are "not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them." Fink noted that BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies last year.
While it's commendable of BlackRock to institute these changes, the company still has trillions of dollars in client funds invested in passive strategies that track every index imaginable. In doing so, BlackRock invests in shares of companies that certainly do not meet the criteria of ESG such as weapons manufacturers, private airplane manufacturers and oil & gas companies.
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