January 17, 2020; PBS NewsHour
In a theme that may become increasingly common, the investment firm BlackRock announced last week that it is beginning to shift its investment policy to support greater sustainability. This shift, according to BlackRock founder and CEO Larry Fink, is made less out of environmental conviction and more out of a desire to reduce financial risk for its investors.
As Fink writes in his annual letter to corporate chief executive officers, “Climate change has become a defining factor in companies’ long-term prospects. Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity—a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance” [emphasis in the original]. “Climate risk,” Fink adds, “is economic risk.”
Last fall, NPQ noted that the University of California had divested its pension fund assets from fossil fuels for a similar reason, with the university’s chief investment officer and investment committee chair explaining their rationale as follows: “We believe hanging on to fossil fuel assets is a financial risk. That’s why we will have made our $13.4-billion endowment ‘fossil free’ as of the end of this month, and why our $70-billion pension will soon be that way as well.”
BlackRock has not completely divested from fossil fuels, but Fink has announced the following steps:
- Making sustainability integral to portfolio construction and risk management
- Exiting investments that present a high sustainability-related risk, such as thermal coal producers
- Launching new investment products that screen fossil fuels.
In an interview with PBS NewsHour correspondent William Brangham, Brian Deese, global head of sustainable investing for BlackRock, explained the rationale for BlackRock’s shift in greater detail:
A lot of the way that, traditionally, people have approached investing has assumed that the climate was going to stay relatively stable.
But if you look at what’s happening, whether it’s the wildfires in Australia or California, floods in the Midwest increase, hurricanes and flooding that we have seen across the country, it just isn’t viable to assume that stability going forward.
And when we look closely at it, we increasingly recognize that those risks are not fully appreciated in financial markets. And so we believe that we are going to see a massive reallocation of capital. And we want to be ahead of it and make sure that we are taking those risks into account when we’re delivering investment solutions.
Brangham also asked Deese how much of a role last September’s climate change protests played in shifting BlackRock’s thinking. Deese was not shy at acknowledging that the rise of a global social movement seeking action now to address the world’s climate emergency had indeed had an effect on the investment firm.
As Deese put it, “As we actually think about investment risk, that pressure and society’s frustration and expectation on companies is part of driving us to believe that we are going to see this big reallocation of capital. It’s both those physical risks that come from climate change, but also that society has different expectations of companies. And going forward, the future savers and the future investors are the young people today, and they have different expectations, and they are going to speak with their capital…. So that actually has investment implication, and we believe that that’s only going to increase across time.”—Steve Dubb