BlackRock chief executive Larry Fink called for companies to disclose their plans to become net-zero or face the consequences, in his annual letter to CEOs sent out last week.
The head of the world’s largest asset manager wrote that the world is now facing a “tectonic shift” in the reallocation of capital towards environmentally sustainable assets. According to Fink, this transition will demand “a transformation of the entire economy” that will leave no business unaffected and reshape “asset prices of every type”.
Fink stressed that the coronavirus pandemic had only served to accelerate this shift, with companies and individuals now compelled to address the global threat of climate change more seriously and alter their investment priorities accordingly.
“In March, the conventional wisdom was the crisis would divert attention from climate,” Fink wrote. “But just the opposite took place, and the reallocation of capital accelerated even faster than I anticipated.”
With BlackRock’s position as a major shareholder in many of the world’s largest companies – and its significant portfolio of $8.7tn in assets under management – the CEO letter sends firms a clear message: either embrace change and ramp up sustainability efforts or risk falling behind.
“Where we do not see progress in this area…we will not only use our vote against management for our index portfolio-held shares, we will also flag these holdings for potential exit in our discretionary active portfolios because we believe they would present a risk to our clients’ returns”, Fink’s letter cautioned.
The message follows a year of record growth for ESG stocks. In 2020, 81% of sustainable indexes outperformed their parent benchmarks, while investors in mutual funds and exchange traded funds invested $288 billion worldwide in sustainable assets – a 96% increase on 2019. BlackRock shared in this success, with its iShares ESG Aware ETF attracting $9.5bn of inflows and ranking fifth among US funds acquiring new assets, according to Morningstar.
These successes were not just witnessed in broad ESG indexes, however, but within industries themselves. Fink noted that companies with better ESG profiles acros various industries – including automotive and oil and gas – performed better than their peers and enjoyed a “sustainability premium.”
Statistics like these serve to dispel the myth that investing in climate -conscious causes comes at the cost of future gains – and underscore the notion that climate risk has now become an investment risk. BlackRock is by no means the first investment firm to realise this, with 30 fellow asset managers, including Fidelity, UBS Asset Management and M&G announcing in recent months their commitment to ensuring their portfolios have net zero emissions by 2050.
Moreover, with US President Joe Biden setting climate action front and centre of his presidential agenda through his Green New Deal, and a number of the world’s largest carbon emitting countries pushing for increased climate legislation, BlackRock’s latest call acts as a stark reminder to the private sector to step up and play its part.