The world’s largest asset manager has bowed to years of pressure on sustainable finance and climate change, making a slew of pledges in a letter to clients published today.
In a second letter (to companies) released at the same time, BlackRock’s CEO Larry Fink said “climate change is almost invariably the top issue that clients around the world raise with BlackRock,” adding that investors want to understand climate risks – physical and transitional – and know how they can modify their portfolios in response. Fink’s letter is an annual milestone for the financial world, and its content is seen as a bellwether for Wall Street.
“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself,” Fink continued. “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital”.
“We are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products and engages with companies,” said the letter to clients. “We believe that sustainability should be our new standard for investing.”
As part of this claim, by the end of the year BlackRock promised that all its active portfolios and advisory strategies would be “fully ESG integrated”, with portfolio managers “accountable for appropriately managing exposure to ESG risks and documenting how those considerations have affected investment decisions”.
The body responsible for monitoring BlackRock’s investment risk – as well as operation and counterparty risk – will incorporate ESG into its monthly reviews with portfolio managers, meaning that “BlackRock as a whole… considers ESG risk with the same rigour that it analyses traditional measures such as credit and liquidity risk”.
Fink also said that ESG analysis would now be put "at the heart of Aladdin" – BlackRock's ‘Asset Liability and Debt and Derivative Investment Network’ platform, which allows the asset manager and its clients to keep track of investments and manage risk.
"Larry Fink's position on climate is like voting against climate policy in parliament and sending an open letter to the prime-minister that you are actually for it" — Mark van Baal.
Aladdin is the dominant platform used by the market and makes up the majority of the $785 million (€708 million) in technology services revenue made by BlackRock in 2018. According to Fink, "proprietary measurement tools" for ESG risks such as different carbon pricing scenarios and physical climate risks will continue to be developed and integrated into Aladdin in 2020.
Stewardship and voting
Many of the reasons that BlackRock has been portrayed as the villain of sustainable finance in recent years are linked to stewardship and voting: it has a poor voting record on climate change and refused to join Climate Action 100+ – the main collaborative engagement platform on green issues – because it “has engaged with more companies on climate-related financial disclosures and climate risk than the ClimateAction100+ aims to do”.
Last week, it made the high-profile decision to join CA100+, two years after its launch – although it declined to tell RI which companies it would lead engagement on as part of the new efforts. Today’s letter goes further on stewardship on engagement, noting that it is especially important for its index holdings.
From this quarter, BlackRock will disclose its votes quarterly instead of annually and on key votes “we will disclose our vote promptly, along with an explanation of our decision”. More information on company engagement, including topics discussed, will be given in the firm’s stewardship annual report, it added.
Head of campaign group Follow This, Mark van Baal – who wrote a New Year’s Resolution for CA100+ published on RI today – said in a statement following the two letters that BlackRock must now bolster its voting performance when it comes to climate change, pointing out that the firm voted against “almost all climate-related shareholder resolutions” in recent years.
“Larry Fink's position on climate is like voting against climate policy in parliament and sending an open letter to the prime-minister that you are actually for it,” he observed.
BlackRock insists that it is committed to offering sustainable funds and strategies “at fees comparable to traditional solutions”. As well as launching a Global Impact Equity fund this quarter, based on the World Bank’s impact principles, it is currently creating a low-cost sustainable pension product, a sustainable cash product and more active strategies focused on topics like “low-carbon transition-readiness”.
It will also double the number of sustainable ETFs it offers to 150 over coming years and will create ESG-based versions of its existing flagship model portfolios and iShares funds. “Over time, we expect these sustainability focused models to become the flagships themselves,” BlackRock said of the former.
It is worth noting that BlackRock is part of the working group that recently put forward some controversial proposals to European policymakers on which products should be eligible under a planned ‘green’ label for retail products. The current proposals would allow funds with 80% of their investments in non-green assets to be labelled as green.
The letter says BlackRock is engaging with the big index providers to create ESG versions of their main indices. “We believe that ESG benchmarks should exclude businesses with high ESG risk such as thermal coal, and we are engaging with index providers on this topic,” it added.
Data and Disclosure
Fink used his letter to lay out his demands to CEOs on ESG disclosure, saying that investee companies must begin publishing reports in line with guidelines from the Sustainability Accounting Standards Board and the Task Force on Climate-related Financial Disclosures (TCFD). Importantly, BlackRock is demanding that CEOs must “include your plan for operating under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realised”.
“In the absence of robust disclosures, investors, including BlackRock, will increasingly conclude that companies are not managing risk,” Fink said, warning: “We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them”.
By the end of the year, BlackRock said it plans to publish data on ESG issues like controversial holdings and carbon footprints for all its mutual funds, and perhaps segregated accounts, too.
Its active portfolios are currently selling out of public debt and equities attached to companies with more than 25% of revenues from thermal coal production, and its alternative investments strategies will make no future investments in such businesses. It will explore similar approaches for other thermal coal-reliant companies, as well as considering more exclusions from sectors posing ESG risks.
Although sustainability is used to refer to climate change throughout much of the two letters, there are some pledges that go beyond green. As well as looking at excluding high ESG-risk sectors (this currently includes controversial weapons at BlackRock) and launching the Global Impact Equity fund, it will begin mapping its “engagement priorities” with the Sustainable Development Goals, citing gender equality and affordable and clean energy, it said.
Reaction to the letters has been largely positive, although many regard the new commitments with some suspicion, given how long it has taken BlackRock to be vocal about sustainability risks.
“Larry Fink talks a lot about companies’ purpose, but there are questions left unanswered about what BlackRock’s own purpose is, and how its stewardship delivers the social, environmental, and financial performance that its clients are looking for,” said Jeanne Martin, Campaign Manager at NGO ShareAction.