BlackRock CEO Larry Fink BlackRock CEO Larry Fink

BlackRock, the world’s largest asset manager, is putting sustainability at the core of its investment strategies and climate-related risk at the center of its proxy votes and engagement with companies in which it invests.

“Every government, company and shareholder must confront climate change,” BlackRock CEO Larry Fink writes in his latest annual letter to CEOs. More specifically, writes Fink, they “must prepare for a significant reallocation of capital” that could happen even faster than changes in the climate. “I believe we are on the edge of a fundamental reshaping of finance.”

BlackRock itself announced in a separate letter to shareholders that sustainability is its “new standard for investing” along with planned changes to investment strategies to accommodate the new standard, including:

  • Introducing sustainable (ESG-optimized) versions of flagship model portfolios this year, including target allocation ones, that will replace traditional market-cap weighted index exposures.
  • Doubling the number of ESG ETFs over the next few years to 150
  • Simplifying and expanding ESG iShares, including ETFs with a fossil fuel screen, ultimately three ESG ETF suites in the US and EMEA: one that screens out certain sectors or companies; one that enables clients to improve ESG scores meaningfully while still closely tracking market-cap weighted indexes; and one that enables clients to invest in companies with the highest ESG ratings
  • Launching a dedicated impact investing solution in the first quarter that aligns with the World Bank’s IFC Operating Principles for Impact Management.

The letter to shareholders included many more plans, among them plans to fully integrate environmental, social and governance factors into active portfolios and advisory strategies by the end of 2020, elevating ESG risk to the same ranking as credit and liquidity risk in the firm’s investment analysis and divesting of investments in companies deriving more than a quarter of revenues from thermal coal production.

BlackRock also expects to integrate proprietary measurement tools that analyze physical climate risks and sustainability-related characteristics of companies into Aladdin, its risk management and investment technology platform, and to enhance disclosure of sustainable characteristics for all products by the end of this year, including data on controversial holdings and carbon footprints.

According to  the National Aeronautics and Space Administration and the National Oceanographic and Atmospheric Administration, the 2010s were the warmest decade on record and 2019 was the second hottest year.

Beyond investment products and strategies, BlackRock plans to disclose its proxy votes on a quarterly rather than annual basis, though key high-profile votes will be disclosed more promptly along with an explanation of its decision.

“But the goal cannot be transparency for transparency’s sake,” writes Fink in his annual letter. “Disclosure should be a means to achieving a more sustainable and inclusive capitalism.”

Sustainable investing advocates welcomed BlackRock’s announcement though there was some skepticism.

Andrew Behar, CEO of As You Sow, a nonprofit organization dedicated to increasing environmental and social corporate responsibility, said in a statement, “It is positive to hear BlackRock make a clear statement on divestment of coal; however we do not see the same rhetoric about oil and gas or the banks that fund continued extraction of fossil fuels. Let’s see if their ESG funds are actually fossil free, including no coal-fired utilities, and if BlackRock votes their shares in support of Paris [climate accord] compliance and net-zero shareholder resolutions.”

If it does, those votes are likely to have a wide impact on other investors and the companies they engage with. According to Jackie Cook, director of sustainable stewardship research at Morningstar, “BlackRock’s commitment to exercising its votes against management, including votes on director reelections … strengthens investor positions in ongoing engagements with companies over sustainability concerns and focuses other fiduciaries on their own proxy voting practices. It positions proxy voting as a central strategy in advancing the low carbon transition.”

— Check out The Muni Bond Market’s Biggest Credit Risk: Climate Change on ThinkAdvisor.