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BlackRock’s Fink: ‘Tectonic Shift’ in Passive Investing Is Coming

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BlackRock CEO Larry Fink, who views climate change as a key risk for the global economy, expects a “tectonic shift” in passive investing once more public companies disclose their carbon footprint.

“The tectonic shift in finance” to address climate change is not going to occur on the active side, which is already addressing the issue, but on the passive side after more companies release their TCFD (Task Force on Climate-related Financial Disclosures) and SASB (Sustainability Accounting Standards Board) disclosures, Fink said in a Brookings Institution webinar hosted by Sanjay Patnaik, the director of its Center on Regulation and Markets.

Sustainability Disclosures

With more disclosures from public companies, BlackRock, the world’s largest asset manager with close to $9 trillion in assets (including more than $2 trillion in passive assets), and other asset managers will be able to customize sustainable indexes for investors, stripping out those companies that don’t align with their values.

“We’re going to be able to design and democratize indexes or portfolios that closely approximate the liability you’re looking for but with more sustainable attributes, and that will be the tectonic shift in finance,” Fink said.

He stressed, however, that disclosures by public companies won’t be enough to achieve the net zero carbon emissions goal needed to prevent the world from overheating. Private companies, too, will have to make those disclosures.

“If regulation is only going to be for public companies, we are going to see a huge arbitrage, and that arbitrage is existing right now,” he said.

A public company could sell its polluting plant to a private enterprise, which would enhance its sustainability rating but would not reduce carbon emissions in the world, Fink explained.

“It’s not decarbonizing when you just move the assets around,” said former SEC Chair Mary Schapiro, vice chair of global public policy for Bloomberg L.P. , who also participated in the webinar.

The SEC’s Role

The SEC has “real power” to inform public markets about climate change risk and can work with private companies as well, Schapiro said, but it “can’t tell companies to reduce their carbon emissions. Congress does that and the administration can set targets.”

The SEC can, however, “write disclosure standards to improve quality of data and comparability” of that data for the marketplace, said Schapiro, adding that she hopes the agency does that in concert with regulators in Europe and other other regions. The SEC currently does not require companies to specifically disclose risks posed by climate change — neither physical risk nor transition risk — but it does require that companies disclose material risks that could affect their operations and business.

The Public Markets

In the meantime, more public companies are releasing disclosures based on SASB and TCFD standards, said Fink. He expects most companies will issue “some form of reporting” on those issues in the next three to four years but said a global standard for reporting is necessary. “The faster we do that, the faster we can move forward.”

Also, the capital markets are already doing some of the work to address climate change. Markets are repricing companies based on their carbon footprints, Fink said. The shares of publicly traded renewable energy companies are trading at price-to-earnings multiples of 26-27 while hydrocarbon companies are trading under 10 P/E.

The latter companies, however, may just choose to go private, said Fink. “If they do that, if society doesn’t look at this holistically, we are not going to succeed.”

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