An Unexpected Player Makes the Case for Sustainability

BlackRock Inc. (“BlackRock”), one of the three largest asset management firms in the United States, announced in January that sustainability will be a significant consideration in future investment decisions. The firm’s announcement is a drastic change in its investment policy that has been met with mixed support from activist groups. While there is mixed sentiment about the sincerity of BlackRock’s announcement, the firm may be laying the foundation for other investment management groups to mimic as they implement strategies for minimizing the risks of climate change in their clients’ portfolios.

BlackRock manages $6.9 trillion in assets and still has large holdings in major oil producers including BP, ExxonMobil, and Shell. (Partridge, TheGuardian). In its 2019 statement to investors, BlackRock CEO, Larry Fink, clarified that the firm’s primary responsibility was to fulfill its fiduciary duty of protecting and growing the value of its clients’ assets. (Fink, BlackRock). Fast forward to Fink’s 2020 letter to chief executives of companies in which BlackRock invests on behalf of its clients, titled “A Fundamental Reshaping of Finance,” where Fink states that the climate crisis is changing how investors perceive the long-term prospects of companies. (Fink, BlackRock). As investors are reassessing “core assumptions” about modern finance, they are increasingly recognizing that “climate risk is an investment risk.” Id. Fink concedes that the top issue clients raise with the firm is climate change, its physical risks, and how climate policy will impact costs, prices, and demand for the products and services offered by the assets in their portfolio. Id. Fink anticipates a “significant relocation of capital” and proclaims that the firm’s fiduciary duty moving forward is to “help clients navigate this transition.” Id.

The timing of the firm’s announcement comes just days after BlackRock joined the Climate Action 100+, an “influential pressure group” of large investors, which together have more than $40 trillion in assets under management. The Climate Action 100+ group used their influence to call for a reduction of emissions by the largest polluters. (Greenfield and Jolly, TheGuardian). Competing Big Three investment fund Vanguard has not yet aligned with the Climate Action 100+ group and continues to resist activists’ calls to do so. (Jolly and Greenfield, TheGuardian). 

The new measures in BlackRock’s investment approach include lowering exposure to fossil fuel producing and refining companies, divesting investments with significant climate-change and sustainability-related risks, introducing new fossil fuel-screening investment products, integrating sustainability into risk management and portfolio construction, and reinforcing the firm’s commitment to transparency and sustainability across-the-board in its investment stewardship activities. (Partridge, TheGuardian; Fink, BlackRock). BlackRock’s goal is to play a “constructive role in the transition” to reducing carbon emissions. (Partridge, TheGuardian).

BlackRock can only influence firms and investment managers by pressuring them to act more sustainably, as the majority of its investments are held in index funds that generally track the stock market. Id. This fact has not gone unnoticed by critics. Environmental group Extinction Rebellion, just one of the voices calling on investment groups to do more to slow the effects of climate change, remarked that “the world’s biggest miners and polluters will not be losing any sleep.” It and other critics believe that BlackRock’s policy shift will not make any significant difference on corporate management. Id. However, Diana Best from the Sunrise Project, a group that supports campaigns against the climate crisis, praised the announcement, demonstrating that not all activist groups are discounting BlackRock’s commitment to hedging against the risks of climate change. Best remarked that even though “BlackRock will still remain one of, if not the largest, investors in fossil fuels,” the firm’s decrease in capital investment in fossil fuels is “a fantastic start” and “instantly raises the bar” for competitor investment firms. Id.

Is BlackRock setting the standard or, instead, riding coattails? Shortly before BlackRock publicized its investing strategy change, Goldman Sachs Group Inc. announced its aspiration to provide $750 billion for investment in sustainable finance growth areas. (Marsh, Bloomberg Law). The multinational investment bank and financial services company’s environmental policy framework was updated in December to eliminate future financing to projects extracting oil in the Arctic or building new thermal coal mines and plants. (Marshall, Reuters). In late January, Brunel Pension Partnership (“Brunel”), a U.K. pension fund with $39.3 billion in assets under management, challenged its investment managers to align with the firm’s call to reduce exposure to climate risk. (Marsh, Bloomberg Law). Brunel plans to stress-test its portfolios for their ability to weather a range of climate scenarios and announced that it will influence change at the corporate level by divesting or “vot[ing] against portfolio firms’ board members” that fail to make significant steps to meet Paris Agreement benchmarks. Id. As the firm manages the investment portfolio for 10 local governments, Brunel’s influence may have the desired impact. Id.

Only time will tell if the policy changes announced by BlackRock, Goldman Sachs Group, and other large investment management groups will have any influence at all in curbing the capital investment in initiatives causing climate change.