BlackRock shakes up business to focus on sustainable investing

BlackRock has unveiled sweeping changes in an effort to position itself as a leader in sustainable investing after criticism that the firm has failed to use its clout to combat climate change.

The world’s largest fund manager, with $7tn in assets, will double the number of sustainability focused exchange traded funds it offers to 150. It will also cut companies that derive a quarter or more of their profits from thermal coal from its actively managed portfolios, as it aims to increase its sustainable assets ten-fold from $90bn today to $1tn within a decade. 

The changes were announced in a letter sent to clients on Tuesday and released concurrently with chief executive Larry Fink’s annual letter to chief executives, in which he warned climate change represented a risk to markets unlike any previous crisis.

“Climate change is different. Even if only a fraction of the projected impacts is realised, this is a much more structural, long-term crisis,” Mr Fink said. “Companies, investors, and governments must prepare for a significant reallocation of capital.”

Mr Fink wrote in his letter to clients that BlackRock will now assess environmental, social and governance (ESG) “with the same rigour as traditional measures such as liquidity and credit risk”. The fund manager will also push companies to disclose their climate risk according to standards set by the Sustainability Accounting Standards Board (SASB) and the Taskforce for Climate Related Financial Disclosure (TCFD), and will vote against management at companies that do not make sufficient progress to account for those risks.

“Our investment conviction is that sustainability — and climate-integrated portfolios can provide better risk-adjusted returns to investors,” Mr Fink wrote. “We believe that sustainable investing is the strongest foundation for client portfolios going forward.”

Last week, BlackRock joined the Climate Action 100+ initiative, a group of 370 asset owners and managers which advocates for environmentally friendly shareholder proposals and pushes companies to align their businesses with the Paris climate agreement. 

This comes after climate activists targeted BlackRock for failing to take meaningful action on climate change to back up the environmentally friendly rhetoric found in previous editions of Mr Fink’s annual letter.

A group calling itself BlackRock’s Big Problem, which represents a consortium of climate activist organisations including the Sierra Club and Divest Invest, has implored the firm to “divest from fossil fuel companies that won’t change their practices”. It has also called on the company to use its power as a shareholder to publicly pressure “industry laggards” to improve their environmental performance.

BlackRock’s change of stance captures a stark shift in mood among several leading investors, more of whom have been persuaded in the last year that prioritising ESG considerations will drive stronger returns rather than requiring financial trade-offs.

Mr Fink has been an influential voice in corporate America’s debates about capitalism in recent years. His 2018 letter, telling chief executives they should articulate what wider social purpose their companies serve beyond generating returns for shareholders, is credited with shifting boardrooms from a focus on “shareholder primacy” to a new model focused on a wider range of stakeholders and sustainable long-term performance. 

“Climate change has become a defining factor in companies’ long-term prospects,” Mr Fink said. “I believe we are on the edge of a fundamental reshaping of finance.”

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