The world’s largest institutional investor is pledging its financial support behind sustainable investing and more environmentally-conscious business strategies.
Larry Fink, CEO of BlackRock, outlined the investment firm’s renewed focused on the environment and social issues in his annual letter to CEOs and shareholders. The January 14 letter discussed how sustainability factors are linked with long-term economic growth. He cited the hazards of rising average annual temperatures and the need for a smaller carbon footprint among consumers and businesses.
When making investment decisions the firm will rely upon ESG measurement tools to evaluate risk. He wrote that all active portfolios will consider ESG risk on the same level as credit and liquidity risk by the end of 2020.
“Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” Fink wrote. “From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.”
Environmental activists demanded that corporations and major investors take stronger action on business practices that cause long-term damage to the environment. In December, several shareholder proposals were submitted to BlackRock calling on the firm to apply pressure on companies to meet climate standards. In response, BlackRock announced that it will move away from industries considered to be heavy polluters such as coal and will offer new funds that do not include fossil fuels.
“BlackRock’s announcement to divest from fossil fuels will support the de-risking of portfolios and sends a strong signal in support of the decarbonization of the economy,” said Maximilian Horster, managing director at ISS ESG, the responsible investment arm of Institutional Shareholder Services. “In order to have a lasting impact on the climate, however, it is also important to support companies’ transition to a low-carbon economy via engagement and voting.”
The ISS Climate Voting Service enables investors to make their voices heard regarding climate-linked concerns they might have with portfolio companies.
BlackRock joined Climate Action 100+ this week, an advocacy group that pressures businesses to support environmental issues and acknowledge climate change. Companies signing on to the engagement initiative are expected to adhere to the Paris climate accord. More than 370 investors have joined the group, according to its web site.
“The year 2019 was yet again one of the hottest years on record just like the previous five years,” Horster said. “These climate-linked extremes seem to be the new normal. It is not surprising that climate-conscious investing is becoming the new normal, and an announcement from the world’s largest investor is testimony to this.”
BlackRock, which manages $6.8 trillion in assets including major oil companies, signed on to several other climate and environmental protocols. It was a founding member of the Task Force on Climate-related Financial Disclosures (TCFD), signed the UN Principles for Responsible Investment, and signed the Vatican’s 2019 statement advocating carbon pricing regimes.
The firm joined with France, Germany, and global foundations to establish the Climate Finance Partnership, one of several public-private efforts to improve financing mechanisms for infrastructure investment. The firm’s ESG-focused strategy will be more pronounced in funds where BlackRock can select stocks but less so in passive funds that are tied to the S&P 500.
Leaders of activist organizations expressed support for BlackRock’s announcement while vowing to maintain pressure on investors and corporations to respect pledges to address climate change.
“We absolutely should celebrate Larry Fink’s pledge to transform one of the largest players in the global economy,” wrote Michael Brune, executive director of the Sierra Club, in an essay for the CNBC web site. “It takes leadership and a certain kind of courage to admit that change is needed. Now we must keep the pressure on. To make sure BlackRock takes the necessary next steps, we’re going to need even more people keeping a close eye on its actions— and getting loud if these actions violate the principles Fink set out in his letter.”
“BlackRock’s renewed promise to actively engage, and when necessary, vote against companies that are not making sufficient progress on sustainability and climate risk will help to build a more transparent capital market system,” Ceres CEO and President Mindy Lubber said in a statement.
Beyond environmental issues Fink wrote that BlackRock’s investment decisions will address social issues such as how a company’s business practices affect public health.
“A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term,” Fink wrote. “But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.”
– Michael Laff, ISS Communications