It’s the story that stole headlines this week. BlackRock, the world’s largest investor (and, as of yesterday, the first to top $7 trillion in AUM), announced plans to put sustainability at the heart of its investment strategy.
The news was issued in CEO Larry Fink’s annual letter to business leaders, now a staple in the corporate governance calendar. Previous years have seen Fink rail against short-termism, “wrenching political dysfunction,” the disconnect between profits and purpose and the failure of businesses to contribute more to society.
What unites these topics is an emphasis on social and governance concerns over and above environmental. This year, however, Fink’s directed his full focus towards climate change. The word ‘climate’ is mentioned no less than 30 times; last year, it wasn’t mentioned at all.
A lot can happen in a year. From January 2019, barely a day went by without an apocalyptic climate-related headline (we know because we write about them each week). The world endured its second hottest year on record, Alaska its hottest. California wildfires and Australian bushfires made international news, proving that a healthy economy can’t withstand, nor insulate you from, climate risk. Droves of demonstrators took to the streets to protest government inaction. BlackRock itself came under growing pressure to take meaningful action on climate change.
In recent years, issues such as social purpose and corporate short-termism have taken centre stage. Climate change, by comparison, has been a fringe concern and generally the reserve of the asset management marketing department. No longer. Fink warns that climate change is catalysing “a fundamental reshaping of finance.” He continues: “Climate change is different. Even if only a fraction of the projected impacts are realised, this is a much more structural, long-term crisis. Companies, investors and governments must prepare for a significant reallocation of capital.”
Research from McKinsey—an organisation that has historically been sceptical about climate change and its impact on business—lends weight to Fink’s words. This week, the consultant issued a report exploring the ways in which the Earth’s changing climate will impact global socioeconomic systems in the next three decades. In short? Markets are premised on the context of a stable climate; climate risks undermine the capacity of the entire system.
Fink’s letter to CEOs tends to yield mixed reviews. On the one hand, it has—on occasion—been derided as an exercise in great spin, lacking teeth. On the other, it sets the tone for shareholders and company executives alike.
This year, BlackRock appears to marry meaningful action with environmentally friendly rhetoric. The letter included a number of sweeping changes, including plans to double the number of sustainability-focused ETFs to 150 and cut companies that derive a quarter or more of their revenues from thermal coal from its actively managed portfolios.
BlackRock isn’t the first asset manager to make sustainable investing a priority; its European counterparts have been doing this for years. But the pivot marks a major step for a US company, and as such is likely to increase the pressure on other financial behemoths.
Has BlackRock preempted a seismic change to the way in which business leaders and investors approach climate risk? It’s too early to say, but expect to find out at next week’s World Economic Forum at Davos.