Climate risk is investment risk: Fink

The reallocation of capital towards sustainable companies is happening in real time and will accelerate, according to Larry Fink who is investing in technology and people to develop systems that can prove “climate risk is investment risk”.

BlackRock has partnered with Rhodium Group, an independent research firm which uses climate science, economics, big data and cloud computing to provide evidence-based insights into climate scenarios. And BlackRock plans to add new climate risk metrics to the Aladdin platform.

“We want to show how climate risk does not just impact a region or city but each company and how they will be impacted. We have very lofty goals, but we are not there yet,” he said.  “We are spending a lot to get that data. We want to prove that climate risk is investment risk. And if we do then we will see an even bigger reallocation of capital.”

Speaking as part of a McKinsey/ FCLTGlobal Sustainable Transition Series , Fink said 2020 has shown evidence that if companies are moving forward in a sustainable, durable way their P:Es are better than their industry peers.

“We think this will be a seismic reallocation of capital,” he said. “Exxon Mobile is not the largest energy company in the United States anymore, its NextEra. We are seeing this [reallocation of capital] happening in real time and its accelerating.”

Fink said BlackRock has experienced a doubling of demand for its sustainable strategies this year compared with 2019, with a possible tripling of demand before year end, adding that 80 per cent of sustainable strategies outperformed regular indexes this year.

“That demand is real, it’s growing and it’s consistent. There is so much evidence of this reallocation of capital. This is happening.”

Fink was part of a panel chaired by FCLT CEO, Sarah Williamson, that also included Kevin Sneader, partner at McKinsey, and Bernard Looney, the new chief executive of BP who in August laid out the company’s strategy to achieve net zero by 2050.

Achieving the ambitious strategy requires BP to reinvent the company, Looney said, including the biggest reorganisation of the company in its 111 year history.

“Generally [investors] agree with the direction, and in general they like that the vision is bold, and the world needs some bold solutions,” he said. “But some want to be convinced we can execute on this. This is not altruism, we have shareholders we have to create value for, the question is the timeframe over which that is created. Transparency is the currency for trust and we have to get on with executing the strategy we have laid out and be transparent about it so people can see we are doing what we said. In time, investors will be more convinced we can create value by doing the right thing by the world.”

Fink said it was important to keep in perspective that change takes time.

“This won’t happen in one quarter or one year. This is about the long term and we are helping companies move forward, preserving their business as they evolve their businesses,” he said. “All stakeholders are judging companies more and more on this and the best companies working towards that objective will be trading at higher P:Es. For BlackRock this is a journey not a sprint, we are helping companies moving forward, but also applying pressure.”

Fink said that since his 2020 letter, there had been a 400 per cent increase in companies reporting under SASB.

Through transparency we will be much more able to judge over a long term how a company is moving towards those objectives,” Fink said. “We are making a huge difference in terms of engagement and conversations and moving more companies towards those objectives than we ever have. Through that process of transparency we can evaluate those companies and see how they’re doing. This is not a short-term thing, we don’t want to be destroying capital either.”

BP’s Looney, now aged only 50, became CEO of the company in February this year. He said it is hard to be a successful company “if you are going against the grain of society”.

“That is not a long-term sustainable outcome. We want to have a strategy our staff are highly engaged in and can be proud of. Energy transition is complex, but we like complexity, that’s where we play and can add value.”