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BlackRock chairman and CEO Larry Fink isn’t just talking the talk now.
MOVING THE NEEDLE

A $7 trillion Wall Street powerhouse is finally matching its climate-change rhetoric with action

Heather Landy
By Heather Landy

Editor of Quartz at Work

From our Obsession

Climate Consciousness

Every decision counts.

BlackRock chairman and CEO Larry Fink signed two letters today that could change the face of Wall Street as we know it. The first, to CEOs hoping for a slice of the nearly $7 trillion in assets that BlackRock manages, makes a compelling argument that climate change “has become a defining factor in companies’ long-term prospects.” The second letter, to BlackRock clients, explains what the firm is doing about it.

The pairing of the two letters could easily represent a tipping point for sustainable investing, a growing but still-niche strategy that puts environmental, social, and governance (ESG) concerns on par with the quest for financial returns.

Fink has a track record of galvanizing the corporate world’s thinking. Two years ago, he made waves on Wall Street by asking CEOs to clarify their purpose and contribute to society. Last year, the Business Roundtable lobbying group, representing 180 of America’s most powerful CEOs, updated its statement on the purpose of companies, declaring that corporations have a responsibility to society. It was a stark change from the group’s previous position, which identified stockholder returns as “the paramount duty” of boards and management.

But since Fink’s 2018 letter to CEOs, he has been criticized for mainly investing rhetoric to his cause, while still overseeing huge investments in fossil-fuel companies and the like, and still paying BlackRock’s portfolio managers to simply optimize for profit. (He’s also gotten backlash from critics on the other side, for advocating a form of “corporate socialism.”)

Fink has some cover here, in the sense that most of the money under BlackRock’s management doesn’t belong to the firm—it’s merely a steward of other people’s assets. But today’s letters make clear that even Fink sees opportunity for BlackRock to do much more than it historically has with its considerable clout. So much so that the firm is committing to a range of specific actions to make good on its promises.

What is Fink asking of CEOs this year, and what is BlackRock itself pledging to do to help move the needle in tackling a huge issue like climate change? Read on.

Exiting investments in thermal coal producers

What Fink told CEOs: “Every government, company, and shareholder must confront climate change.”

What BlackRock told clients: The firm is in the process of removing, from its actively managed portfolios, stocks, and bonds of companies that get more than 25% of their revenue from thermal coal production. “With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector,” BlackRock’s executive committee said. The firm expects to divest these holdings fully by mid-2020 and will be scouring its portfolios for other exposure to “heightened ESG risk.”

Offering new sustainable-investing recommendations

What Fink told CEOs: “[B]ecause capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself.

What BlackRock told clients: The firm is creating ESG versions of its most popular models for portfolio allocations, based on index exposures optimized for sustainability factors instead of traditional market-cap weightings. BlackRock is also making sustainable versions of its iShares exchange-traded funds, coming later this year, and working on a sustainable version of its LifePath target-date strategy for retirement funds. “We intend to make sustainable funds the standard building blocks in these solutions wherever possible,” the executive committee said.

Finding new ways to analyze climate risk

What Fink told CEOs: “Climate risk is investment risk.”

What BlackRock told clients: “We want investors to be able to clearly see the sustainability risks of their investments,” the executive committee said. To that end, the firm is building new tools, including one to analyze physical climate risks and one to measure companies on sustainability characteristics. By the end of 2020, it will provide “transparent, publicly available data” on the sustainability of BlackRock mutual funds—“including data on controversial holdings and carbon footprint.”

Promoting ESG-themed products

What Fink told CEOs: “In the near future—and sooner than most anticipate—there will be a significant reallocation of capital.”

What BlackRock told clients: The firm will double its offerings of ESG-themed ETFs, to 150, over the next few years. ETF clients will be able to tailor their options—either screening out certain sectors or companies they don’t want to invest in, tracking flagship indexes relatively closely while still increasing their ESG scores, or investing specifically in companies with the highest ESG ratings. BlackRock also said it’s working with major index providers to create sustainable versions of their flagship indexes—as it happens, last year S&P Dow Jones Indices unveiled an ESG-compliant S&P 500—and it’s expanding its own lineup of actively managed funds to focus on sustainability and the transition to a low-carbon economy.

Threatening to vote against management that doesn’t take action

What Fink told CEOs: “While government must lead the way in this transition, companies and investors also have a meaningful role to play.”

What BlackRock told clients: The firm, which is a founding member of the Task Force on Climate-related Financial Disclosures, has spent several years “urging management teams to make progress while also deliberately giving companies time” to come up with disclosure practices in line with the recommendations of the nonprofit Sustainability Accounting Standards Board. Now, BlackRock says, it is asking companies to publish their disclosure materials. “Given the groundwork we have already laid and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management when companies have not made sufficient progress,” BlackRock’s executive committee said.

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