When BlackRock chairman and CEO Laurence Fink sits down to pen his annual letter to chief executives, investors are all ears, given that the world’s largest asset management company manages $9 trillion in assets. This year, climate change was at the top of Fink’s list.
At a time when corporations are under public pressure to divest their holdings in fossil fuels, Fink believes that’s “a bad answer,” countering that there are better ways to fight climate change.
“Keep in mind, if a foundation or an insurance company or a pension fund says, ‘I'm not going to own any hydrocarbons,’ well, somebody else is, so you're not changing the world,” Fink told a virtual audience at the MIT Golub Center for Finance and Policy’s eighth annual conference, “Financial Policy and the Environment.”
Fink believes that pension funds, foundations, and endowments “should have a loud voice with companies to move forward.”
Furthermore, as more governments divest, “they're not changing the demand curve” for fossil fuels, he said. “They're changing the supply curve, which leads to higher inflation.”
Meanwhile, Fink’s opponents argue that BlackRock should be doing more if it believes in investing sustainably. Activist groups Reclaim Finance and Urgewald, for example, published a report in January showing that BlackRock held $85 billion in assets connected to coal.
Fink, however, has his own ideas on how to create a net zero carbon world by 2050. Here are some of the recommendations he offered in his talk:
Invest in other green technologies besides solar and wind
Fink believes that climate change has great potential for new businesses, especially innovators that want to create new solutions that are clean.
“I think the next 50 unicorns are going to be technologies that create something related to sustainability,” he said. “The world does not need another unicorn food delivery service.”
Apply ESG to both publicly traded and non-publicly traded firms
In regards to the usefulness of environmental, social, and governance metrics, Fink argued that public and private companies alike should be more transparent about their impact on the climate to provide a better understanding of how every organization is moving the needle.
“I'm a big believer in transparency,” Fink said. “We are not dictating how a company goes forward, but we are asking each company to be transparent and tell us your pathway. And through that transparency, I do believe we move faster as a society.”
Use government policy to create an industrywide standard
Without clear reporting requirements from the government, the onus is on large companies to track not just their own progress, but that of their smaller suppliers.
More and more companies are voluntarily disclosing their practices to the Task Force on Climate-related Financial Disclosures. But having to disclose scope three emissions (those that result from activities or assets not owned by the reporting organization but that the organization indirectly impacts) will “create a real problem between big companies and small companies,” Fink said, because big companies, banks, and asset managers will feel pressured to track the behaviors of their suppliers.
“No company wants to be considered the environmental police,” Fink said. “This is one of the things that I'm worried about.”
Understand that climate risk is an investment risk
At this point in our understanding of global warming, companies that don’t act on climate change are an investment risk, Fink said. And as such, BlackRock has no issue reallocating capital away from those companies that are “not moving fast enough” and toward other companies that are.
Analytics and data are essential to making informed investing decisions. Helped by strategic acquisitions, BlackRock now has its own satellite imaging and quantitative tools, such as Aladdin Climate, that can incorporate climate change into valuation and “show where climate risk is the most impacted.”
“Whether it's the water table or heat or issues related to farming … we can see what facet is going to have the biggest impact from different changes in temperature and what that means,” Fink said.
Attract private capital to emerging regions
Fink said the gap between the emerging world and the developed world “has widened dramatically” in the wake of the pandemic, causing “greater and greater inequalities worldwide.”
“Right now, it's estimated only 150 billion dollars is flowing into the emerging world. Now that may sound like a lot of money, but it's not,” Fink said. “There's just less capital today going into the emerging world than any time in my 40-plus years of being in finance.” If “we want to decarbonize,” then we have to help the emerging world move forward, too, he argued.
Doing so requires rethinking the roles of the International Monetary Fund and the World Bank, encouraging them to accept more risk so investors don’t have to shoulder it all. Historically, lenders to the emerging world were banks that were backed by the World Bank and the International Monetary Fund, but “the financial crisis all but stopped banks lending to the emerging world.”
“It is estimated we need a trillion dollars a year dedicated to the emerging world over the next 30 years,” Fink said. “We need to find ways of reengaging these wonderful, historical institutions, and they need to be thought about in a different way to really bring the capital forward.”
Above all, Fink reiterated that the process of tackling climate change “cannot be emotional” and instead should focus on policies that work in the long run.
“Unfortunately, so much of the policies are greenwashing,” Fink said. “Nothing is more greenwashing than divestiture. Because it doesn't change the [carbon] footprint of the world.”