BlackRock has this week made major announcements highlighting renewed efforts to integrate climate change into its investment process – putting greater pressure on boards to act on the firm’s climate-related concerns raised during engagements.
In his annual letter to CEOs, BlackRock chair and CEO Larry Fink notes that climate change ‘has become a defining factor in companies’ long-term prospects.’ The impact of climate change on economic growth and prosperity is ‘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,’ he adds.
The firm, which as of December 31 had roughly $7.4 trillion in assets under management, simultaneously released a letter to clients announcing several initiatives designed to put sustainability at the center of its investment approach. These include:
- 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 for fossil fuels
- Beefing up BlackRock’s ‘commitment to sustainability and transparency in [its] investment stewardship activities.’
Some observers have criticized BlackRock for not voting often enough in line with previous pronouncements about the need to focus on ESG issues. Although he does not address this directly, Fink writes in his letter that last year the firm voted against or withheld votes from 4,800 directors at 2,700 companies and suggests it is losing patience with companies that don’t take action after engaging with the asset manager.
Fink writes: ‘Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable.
‘Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them.’
The decision to exit investments that present ‘a high sustainability-related risk’ has reportedly been welcomed by environmental activists as an important step.
Investors are increasingly taking into account questions about the effects of climate change and are seeing that climate risk is an investment risk, Fink says in his letter to CEOs, adding: ‘Indeed, climate change is almost invariably the top issue clients around the world raise with BlackRock... They are seeking to understand both the physical risks associated with climate change [and] the ways that climate policy will impact prices, costs and demand across the entire economy.’
The firm’s conclusion is that ‘sustainable investing is the strongest foundation for client portfolios going forward,’ according to Fink. He urges governments, companies and shareholders to all tackle climate change.
As part of this, he calls for better disclosure to investors both regarding climate change and how companies serve all stakeholders, such as in terms of workforce diversity, the sustainability of supply chains and customer data protection. ‘Each company’s prospects for growth are inextricable from its ability to operate sustainably and serve its full set of stakeholders,’ he writes.
‘While no framework is perfect, BlackRock believes the [SASB] provides a clear set of standards for reporting sustainability information across a wide range of issues, from labor practices to data privacy to business ethics. For evaluating and reporting climate-related risks, as well as the related governance issues that are essential to managing them, the [Task Force on Climate-related Financial Disclosures (TCFD)] provides a valuable framework.’
BlackRock has already issued SASB-aligned disclosure on its website, and the firm will be releasing a TCFD-aligned disclosure by the end of 2020. Fink says this year the asset manager is asking companies that have not already done so to release disclosure in line with industry-specific SASB guidelines, or a similar dataset, by year-end, and disclose climate-related risks in line with the TCFD’s recommendations.
In its letter to clients, BlackRock states that the firm is accelerating its efforts to integrate sustainability into technology, risk management and product choice.
For example, the asset manager this year will start offering sustainable versions of its ‘flagship’ model portfolios using ESG-focused index exposures in place of traditional market cap-weighted index exposures. In addition, all active portfolios and advisory strategies at the firm will by the end of the year be fully ESG integrated, so portfolio managers will be accountable for ‘appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions.’
BlackRock’s risk and quantitative analysis group, which evaluates all investment, counterparty and operational risk at the firm, will also be evaluating ESG risk during its regular monthly reviews with portfolio managers to provide oversight of portfolio managers’ consideration of such risk in their investment processes, the firm states.
The changes include a move to leave thermal coal producers. ‘Thermal coal is significantly carbon-intensive, becoming less and less economically viable and highly exposed to regulation because of its environmental impacts,’ the firm states. ‘With the acceleration of the global energy transition, we do not believe the long-term economic or investment rationale justifies continued investment in this sector.’
As a result, BlackRock is removing from its discretionary active investment portfolios debt and equity securities of companies that generate more than 25 percent of their revenues from thermal coal production. It aims to complete this process by mid-2020.
Among other things, the firm says it will:
- Provide transparent, publicly available data on sustainability characteristics – including data on controversial holdings and carbon footprint – for BlackRock mutual funds by the end of the year
- Work with index providers to expand and improve the availability of sustainable indices
- Expand its range of active strategies focused on sustainability as an investment outcome, including funds focused on global energy transition
- Have its investment stewardship team intensify its focus on and engagement with companies on sustainability-related risks
- Move from annual to quarterly voting disclosure, starting this quarter
- Disclose its vote promptly, along with an explanation of its decision, on important high-profile proposals
- Start including in its annual stewardship report the topics discussed during each engagement with a company.
The release of the letters to clients and CEOs comes shortly after BlackRock announced it had joined Climate Action 100+, a group of investors that engages with companies to improve climate disclosure and align business strategy with the goals of the Paris Agreement on climate change.