Larry Fink’s annual finger-wagging letter to chief executives has become a feature of the corporate governance calendar, often setting the agenda for global companies and shareholders alike.
In recent years the head of BlackRock has railed against short-termism and political dysfunction, argued for US companies to repatriate overseas cash, and warned businesses they must contribute more to society.
His latest missive, sent on Tuesday morning, centred on climate change and its impact on investment risk. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” the chief executive of the world’s biggest fund manager wrote.
It was released alongside an open letter to BlackRock’s clients which set out a series of changes geared at putting sustainability at the centre of its investment approach. These include increasing the number of sustainable funds it offers, removing some coal companies from its active funds and being more transparent over its engagement and voting at investee companies.
BlackRock will also ask the companies it invests in to disclose information in line with guidelines from two influential bodies, the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures.
How closely the $7tn company sticks to these goals — and whether its rivals follow suit — will be closely watched.
“This is pretty bold,” said a BlackRock shareholder. “The key will be that it is acted on within a clear and near timeframe.”
Why is BlackRock doing this?
BlackRock has been talking about the risks of global warming for years and issued a landmark paper in 2016, where it warned that investors could no longer ignore climate change. Yet critics argue that the world’s largest asset manager has failed to live up to its own rhetoric.
A report by Majority Action, a non-profit, found that last year BlackRock supported just 12 per cent of climate change resolutions, which typically call on companies to disclose the risks they face from global warming or outline their plan for transitioning to a low-carbon world. The company’s stewardship team discussed environmental issues with 316 companies in 2019, representing just 15 per cent of the businesses it met with.
Environmental activists have argued that if BlackRock took global warming seriously there would be “rapid changes on climate change” at a corporate level. Extinction Rebellion held a protest outside its London offices last October, while groups such as BlackRock’s Big Problem have sprung up, accusing the asset manager of contributing more to climate change than almost any company on earth.
At the same time, BlackRock has faced growing calls from shareholders, clients and influential figures such as Al Gore and activist investor Chris Hohn to step up on climate change.
Pension fund clients in particular have piled on the pressure. The $1.5tn Government Pension Investment Fund of Japan withdrew billions of dollars from BlackRock last year as the world’s biggest pension fund put environmental, social and governance concerns at the centre of its investment ethos.
Other shareholders have also become more vocal, with a coalition filing a climate change resolution with the asset manager ahead of this year’s annual meeting.
BlackRock’s announcement is an attempt to ward off some of this criticism and reposition itself as a responsible investor. As former senior executive at the company says: “This is a determined effort to regain lost ground.”
“There has been a lot of internal debate and a feeling of missing the bus on climate change,” they added. “You have to conclude that the decisive factors were business and reputational risk.”
What are BlackRock’s competitors doing?
Although there has long been a small group of fund houses who placed greater emphasis on environmental considerations, many big asset managers are now paying attention to the issue in response to pressure from politicians, the public and clients.
As Mr Fink acknowledged in his letter to company bosses this week, the priorities of millennial investors are driving change. According to data from research company Cerulli Associates, more than two-thirds of investors under 30 would prefer their investments to have a positive social or environmental impact.
Groups including Columbia Threadneedle, Pimco, Schroders, Aviva Investors and Axa Investment Managers have poured money into ESG in recent years. Several have ditched thermal coal, including BNP Paribas Asset Management and Candriam.
Legal & General Investment Management, the UK’s largest asset manager, has sold out of oil major Exxon across some of its holdings, accusing it of falling behind on environmental issues. The £1tn asset manager is also using annual meetings to vote against the chairs of businesses that fail to confront the threats posed by climate change.
Diana Best, senior strategist for the Sunrise Project, part of BlackRock’s Big Problem campaign, said BlackRock’s announcement “raises the bar for competitors such as Vanguard and State Street Global Advisors”.
Many big US asset managers have been slow to respond to climate change. Vanguard, the world’s second-largest fund house, has faced criticism over its lack of action when it comes to global warming, as has JPMorgan Asset Management. Both companies backed climate-critical resolutions at annual meetings last year just 10 per cent of the time, according to Majority Action.
Both Vanguard and JPM AM have said voting is just one element in how they address climate issues.
State Street Global Advisors, the world’s third-largest asset manager, backed climate resolutions 27 per cent of the time, compared to 95 per cent of the time at BNP Paribas AM.
How big a change will this be?
The range of measures announced by BlackRock varies in significance.
It trumpeted its announcement that it would add companies generating more than a quarter of their revenues from thermal coal production to its investment exclusion list in the next six months. But the policy will apply only to BlackRock’s $1.8tn of active funds. As a result, the divestment will affect just $500m of holdings out of BlackRock’s total pot of $7tn, or 0.007 per cent of assets overall.
BlackRock’s $135bn alternatives business will exclude such companies only for future direct investments, but will not make divestments in its current holdings.
The exclusion criteria fall some way short of what climate campaigners had been demanding, allowing BlackRock’s valuable natural resources franchise to continue investing in the majority of fossil fuel companies.
For example, Glencore, the world’s biggest exporter of seaborne thermal coal and a big trader of it, derives just 6 per cent of its revenues from the commodity. Apart from a handful of producers, the biggest coal companies are private.
By comparison, Norway’s $1tn sovereign wealth fund, the world’s largest, said last year it would divest from miners producing more than 20m tonnes of thermal coal, a measure which includes Glencore, BHP and Anglo American.
“The world’s biggest miners and polluters will not be losing any sleep over this,” said Extinction Rebellion, the protest group.
However BlackRock’s new approach to being more open about its voting at shareholder meetings and engagement with investee companies, as well as warning it will be “increasingly disposed” to vote against directors where companies have not made sufficient progress, was welcomed by corporate governance experts.
Natasha Landell-Mills, head of stewardship at Sarasin & Partners, said: “I do think this is different. They go further than I’ve seen before, and the investment implications are clearer, so this a matter of fiduciary duty.”
Additional reporting by Chris Flood and Neil Hume
What BlackRock has pledged
● Integrate environmental, social and governance considerations into all active management decisions in 2020.
● Divest from fossil fuel companies that generate more than 25 per cent of their revenues from thermal coal by the middle of 2020 in its discretionary active investment portfolios.
● Alternatives business will no longer make any new direct investment in companies that generate more than 25 per cent of revenues from thermal coal.
● By the end of 2020, BlackRock will publish details on the sustainability profile of every mutual fund, covering areas such as their carbon footprint or data on controversial holdings.
● Begin offering sustainable versions of its model portfolios.
● Double its number of ESG exchange traded funds to 150 by end of 2021.
● Expand the number of low-carbon strategies — no timeframe.
● Disclose voting records quarterly rather than annually.
● Disclose what topics it discusses with companies during meetings.
● Require companies to disclose in line with the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board from this year, warning it will be “increasingly disposed” to vote against directors where companies have not made sufficient progress.
● Set a goal of increasing sustainable assets under management more than tenfold this decade — from $90bn today to more $1tn.