October 3, 2022

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BlackRock’s push on ESG and climate goals is coming at ‘a business-friendly pace’

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SUSTAINABLE INVESTING

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BlackRock CEO Larry Fink told other company bosses and BlackRock clients last week that they need to disclose their plans on what they’re doing to fight climate change using scientifically established guidelines.  

But some investors and activists focused on environmental, social and governance say Fink isn’t forcefully using the bully pulpit that comes with being the world’s largest money manager

“He could take a much stronger stance on it,” says Ethan Powell, founder and president of Impact Shares, a socially responsible investment manager which helps social organizations create exchange-traded funds, including the Impact Shares NAACP Minority Empowerment ETF

BlackRock is “slowly evolving into very moderate activist type posturing, but (Fink is) not really maximizing the bully pulpit,” Powell says. He predicts the company’s activism will “evolve at a very slow, very business-friendly pace.”

In the letter to CEOs, Fink asked companies to disclose business plans that will be compatible with a net-zero economy by 2050, where a company emits no more carbon that it removes from the atmosphere by 2050 to help keep global warming under 2 degrees Celsius. It is part of the science-based guidelines and timeline set forth by the Paris Climate Agreement.

Fink said BlackRock will ask firms to disclose how this plan is incorporated into their long-term strategy and is reviewed by their board of directors.

Graham Sinclair, principal at SinCo, a boutique ESG advisory firm, says Fink’s letter is positive in two respects. First, it gets noticed by the wider public, pointing out that John Kerry, the new White House envoy for climate, referenced it last week in an address. It also references science-based targets that can be benchmarked to show actual progress.

“The hardest thing we’re dealing with now is industrial-scale greenwashing,” he says, in which companies have unsubstantiated claims about their environmental impact.

But net-zero by 2050 is too slow, he adds.

“I’m on the aggressive spectrum, that’s what the climate data shows, we need to dramatically cut carbon pollution. Greta Thunberg speaks powerfully when she says stop your blah blah blah of ‘hypothetical targets and net zero loopholes,’” he says.

When asked to comment, a BlackRock spokesman referred back to both the CEO and client letter.

In addition to managing customized portfolios for institutional investors, BlackRock operates a number of funds open to all, including the iShares ESG Aware MSCI USA ETF the biggest ESG exchange-traded fund with about $13.4 billion under management.

In the client letter, which include pension funds, endowments and other institutional asset owners, Fink states that BlackRock is “embedding sustainability risk into our active investment process” and targeting “holdings that present a particularly significant climate-related risk.”

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That includes companies with current high-carbon intensity, insufficient preparation for the net-zero transition and low reception to BlackRock’s investment stewardship engagement it says.

If BlackRock doesn’t see progress on these goals, it will vote against management in its index portfolio-held shares and possibly disinvest from those holdings in its discretionary active portfolios “because we believe they would present a risk to our clients’ returns,” the letter to clients adds.

BlackRock’s stewardship team last year focused on 440 carbon-intensive companies and of these, the firm says it voted on behalf of clients against 64 directors and 69 companies, and put 191 companies “on watch,” according to that letter. The firm says it is expanding this focus universe to over 1,000 carbon-intensive companies, which is 90{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63} of the companies they invest in on behalf of their clients that have direct and indirect emissions from their business operations. 

Both Powell and Sinclair say BlackRock could go further than just asking companies to disclose their net-zero plans,

Sinclair says the wider list of companies a positive step, However, “it would be even better if they verified it with a third party and ramped up transparency on their team’s work,” he adds.

Powell says it’s good to see movement, albeit slow, by fund managers to reduce holdings in carbon-intense firms. A quick snapshot of BlackRock, Vanguard and Fidelity, three of the world’s largest asset managers, shows they have much less than 10{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63} of fossil-fuel holdings across their funds, ESG-labelled or not, at least according to the funds analyzed by As You Sow’s Fossil Free Funds site.

As You Sow’s analysis may not capture all of the funds held by the asset managers, and only include equity funds. Its analysts define fossil fuel stocks as companies that own coal and oil/gas reserves, are in the coal and/or oil and gas production industry, or are utilities that use fossil fuels.

According to Fossil Free Funds, 6.38{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63} of 312 BlackRock/iShares equity funds hold fossil-fuel companies, representing $104 billion. Vanguard has 6.1{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63}, or $262 billion of fossil-fuel companies in 100 equity funds, and Fidelity has $84 billion, or 5{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63}, invested in fossil-fuel stocks across 297 equity funds.

By comparison, the energy sector makes up 2.3{9e6a73ef7eb6fa22b1de79554ca535a2a0aaa70d898e937e26eb250763832f63} of the S&P 500 index as of Dec. 31, and is the smallest of the index’s 11 sectors.

BlackRock’s climate record has previously been questioned by some politicians. In October, five Democratic U.S. senators, including U.S. Sen. Brian Schatz of Hawaii, questioned the asset manager about why it barely supported climate-change shareholder resolutions, according to Reuters. The company responded that it was reviewing engagement priorities and voting guidelines.

Powell says BlackRock has to balance between placating the demands of the pensions and endowments whose assets it manage while asking American corporations to consider its business activities. He points out many pensions and endowments are looking to divest from fossil fuels, such as recent announcements by New York state pension funds.

Further, he says, the investment industry as a whole isn’t particularly bold or creative when it comes to embracing the power of capital allocation since it focuses almost entirely on risk-adjusted return and making sure investments reflect the broader market. Investment firms are reluctant to talk to clients about the social and environmental implication of capital allocation, he says.

Given the size of a company like BlackRock and its investment might, there isn’t enough green energy out there now to soak up all their capital. But that is the point, he says.

If the investment industry pushed capital flows into green energy ideas, it could speed up research and projects in the market, and perhaps cause the major integrated oil companies to accelerate their green projects faster.

“That’s what I mean about lack of appreciation for the social and environmental implications of their capital allocation. Be bold, be creative, be decisive in your in your beliefs, because that’s how you actually get things done,” he says.

Debbie Carlson is a MarketWatch columnist. Follow her on Twitter @DebbieCarlson1.

More on ESG investing:

If you support green energy, you should buy utilities and oil stocks — here’s why

Your ESG investment may be a ‘light-touch’ fund and not as green as you think

Here’s how you can add sustainable investments to your 401(k) holdings even if your plan doesn’t include ESG funds

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