When the CEO of the world’s largest asset manager speaks, the world tends to listen. So it was last week when BlackRock’s Larry Fink announced the company would put climate change centre-stage across its $7 trillion portfolio after what critics have called years of prevarication.
The news came via two letters to fellow CEOs and clients, the latter detailing wide-ranging plans in response to the climate crisis including removing some coal companies from its active funds, boosting transparency in its voting and engagement with investee companies, and increasing the number of sustainable funds the firm offers.
BlackRock has traded on climate-conscious statements before like a paper in 2016 where it warned that investors could no longer ignore climate change.
But Fink’s annual missive follows a year of mounting criticism of the company’s climate record that saw Japan’s ¥150.7 trillion ($1.35 trillion) Government Pension Investment Fund withdraw millions from a BlackRock-run passive mandate on stewardship concerns and eco-warriors step up their pressure on the asset management industry’s biggest fish.
It also comes against the backdrop of nagging awareness that the manager, headquartered in the US where ESG integration lags European rivals, could be missing out. With responses from the ESG and asset owner community to Fink’s promises ranging from “significant” to “a game-changer” – and expectations that more US asset managers will follow suit – it feels like this time something is different.
Loose wording aside, it is Fink’s pledge to be “increasingly disposed” to use BlackRock’s voting rights to influence sustainability in the thousands of listed companies in which it invests that has prompted most enthusiasm.
It marks an overhaul of the firm’s engagement and stewardship policies on which ESG integration in its vast passive allocations depends.
“The promise included in Larry Fink’s letter to vote against management at companies that do not make sufficient progress to account for climate risks is hugely welcome and a step change for the entire investment industry,” says Edward Mason, head of responsible investment at £8 billion ($11 billion) Church Commissioners for England which has “some” active mandates with the firm – Fink has promised to integrate ESG into all active management decisions in 2020.
In another step change, BlackRock will reveal its voting records quarterly rather than annually and disclose what topics it discusses with companies during meetings.
“On key high-profile votes, we will disclose our vote promptly, along with an explanation of our decision,” writes Fink.
Up until now the manager has tended to work directly with investee companies through its own internal stewardship teams rather than wield its voting power to effect change.
A strategy that kept “everyone in the dark” about the companies it meets, the topics discussed, and most importantly the outcome of those engagements, says Jeanne Martin, campaign manager at ShareAction, a pressure group which found BlackRock supported less than 10 per cent of climate-related shareholder resolutions last year.
“The substantial shift and commitment to improved transparency will enable us, and clients, to hold them to account and deliver on these most welcome commitments,” says Mark Mansley, CIO at the UK’s £30 billion Brunel Pension Partnership.
Devil in the detail
The next question is whether the firm limits its voting influence to support resolutions for yet more data and disclosure from investee companies or takes a bolder approach – like voting to force listed companies to actually deal with climate change by embarking on Paris-aligned, transition planning.
The AGM season (it begins in the spring) and disclosure of BlackRock’s own voting records at the end of August, will offer the first glimpse into the extent to which Fink is as good as his word.
“BlackRock can really make a difference around active ownership and voting on climate resolutions. The commitments seem serious, but of course the proof will be in the pudding,” says Johan Floren, head of corporate governance at Sweden’s SEK490 billion ($53.8 billion) AP7 which has a global equity beta mandate with BlackRock.
Integrating climate change into passive strategies doesn’t just come via stewardship. Fink said the firm will double the number of ESG ETFs to 150 over the next few years, including sustainable versions of some of the firm’s flagship index funds.
Along with more choice, he also promises to offer “simpler” ways to integrate ESG in passive investment. This should help build credibility in products like ETFs and open-ended funds, ensuring they have the sustainability criteria investors think they are buying. It’s a big task. Witness, for example, how holdings in ‘BlackRock iShares JPMorgan ESG $ EM Bond UCITS ETF’ include Saudi Aramco and bonds issued by Saudi Arabia – questionable assets for many climate-conscious investors.
Elsewhere, Fink has promised to assess ESG “with the same rigour that it analyses traditional measures such as credit and liquidity risk.”
The firm will now pressure public companies to disclose in line with standards set by the Sustainability Accounting Standards Board (SASB) which sets voluntary financial reporting standards, and the Task Force on Climate-Related Financial Disclosure (TCFD).
In a reflection of BlackRock’s influence, the impact of its public endorsement of SASB standards immediately spiked enquiries from the corporate community on what one of their largest shareholders would require, says Janine Guillot, CEO of SASB.
“We are feeling the impact already with new enquiries from companies interested in getting more information. We are gearing up our guidance for these businesses as they move through their journey.”
But she also flags that BlackRock’s endorsement hasn’t come out of the blue. The firm has supported SASB since 2016 as part of its Investor Advisory Group, and SASB guidelines are already widely used by investors.
Perhaps, she says, the real sign of change comes from BlackRock issuing its own SASB report published on its website in early January, and the “strong message” that it is not asking its portfolio companies to do something it is not prepared to do itself.
Other promises have garnered fewer headlines. BlackRock’s pledge to divest from fossil fuel companies that generate more than 25 per cent of their revenues from thermal coal by the middle of the year only applies to its active investment portfolios. Yet it’s still significant, says Mindy Lubber, Ceres chief executive and president.
“BlackRock’s sheer size and influence will stimulate a hard look at these companies by other asset managers and global owners. Now campaigners like ShareAction’s Martin want to see BlackRock using its voting power to influence banks’ financing coal.
For others, the firm announcing it has signed up to the Climate Action 100+ initiative, the group of 370 fund managers and asset owners that is putting pressure on some of the heaviest polluters to reduce their environmental impact, is particularly noteworthy.
“BlackRock joining Climate Action 100+ brings more of the financial choir to sing from the same hymnal. That’s important for companies, policy makers and civil society to hear!,” says Anne Simpson, investment director at CalPERS, which has no mandates with BlackRock.
The ESG world is often accused of living in an echo chamber where everybody thinks and says the same. Maybe the real significance of Fink’s letters comes from the fact that BlackRock’s size means they have landed on the doorstep of a complex and diverse group of global asset owners and managers that reflect widely different views.
Reactions will likely span applause, scepticism to outright opposition, yet Fink believes it’s time to change his message to them all.
“It appears that BlackRock has decided that the financial risks of climate change are so significant and real they can make a case to their entire client base that climate risk should be a consideration in investment strategy,” concludes Guillot.
Blackrock’s key pledges:
Aim to increase sustainable assets under management from $90 billion today to more than $1 trillion.
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. Its alternatives allocations will no longer make any new direct investment in companies that generate more than 25 per cent of revenues from thermal coal.
To integrate ESG considerations into all active management decisions in 2020.
Publish details on the sustainability profile of every mutual fund, covering areas such as their carbon footprint or data on controversial holdings.
Begin to offer sustainable versions of its model portfolios and double its number of ESG exchange traded funds to 150 by the end of 2021. These models will put ESG-optimized index exposures in place of traditional market cap-weighted index exposures. Over time, BlackRock expects these sustainability-focused models to become the flagships themselves.
It will expand the number of low-carbon strategies.
Disclose voting records quarterly rather than annually and reveal what topics it discusses with companies during meetings.
It will require companies to disclose in line with the Task Force on Climate-related Financial Disclosures and the Sustainability Accounting Standards Board