IEEFA update: BlackRock – On climate, the world waits for a financial leader

In the financial markets, there is without doubt a first among equals.

At US$6.5 trillion assets under management (AUM), BlackRock’s Larry Fink could be the leader the world so clearly needs.

In the mining world, BHP’s Andrew Mackenzie has stepped up as a leader, voicing what is clearly needed for sustainable economic growth. In the world of public finance regulation, there is no clearer voice than that of the Bank of England’s Mark Carney. In science, James Hansen has spoken with conviction and clarity for decades. In the environmental movement, Bill McKibben’s eloquence is clear, while in climate communication, Katharine Hayhoe stands out from the pack. Greta Thunberg has made a significant impact representing the next generation, while Christiana Figueres has rallied the political world from the front.

AND THEN THERE IS BLACKROCK, A FUND MANAGER EQUIVALENT IN VALUE TO THE THIRD LARGEST ECONOMY IN THE WORLD, which has acknowledged that addressing climate across its entire portfolio is a “necessity, not a choice,” but has yet to act on its words.

IEEFA calculates that, over the past decade, BlackRock has lost investors US$90 billion in value destruction and opportunity cost by investing in just a few select fossil fuel-heavy holdings and largely ignoring climate-related financial and stranded asset risks.

Back in September 2016, BlackRock’s report: Adapting portfolios to climate change: Implications and strategies for all investors, made it clear there is “no place to hide.”

The report acknowledged climate factors are underappreciated and underpriced, and suggested cutting fossil fuel subsidies as the obvious place to start to unlock capital flows into zero-emissions energy infrastructure and accelerate the technology-driven disruption of the energy and transport sectors.

In October 2016, BlackRock’s Joanna Cound, head of public policy in Europe, called on governments globally to make businesses pay a price for the pollution they generate. A higher and consistent carbon price was seen as the best tool to allow quantification of carbon risk within portfolios.

IN MAY 2017, THE GLOBAL HEAD OF BLACKROCK’S INFRASTRUCTURE INVESTMENT GROUP, JIM BARRY SAID, “COAL IS DEAD.” That’s not to say all the coal plants are going to shut tomorrow. But anyone who’s looking to take beyond a 10-year view on coal is gambling very significantly.”

In May 2018, BlackRock Vice Chair Philipp Hildebrand led a detailed study that called sustainable investing a “why-not moment.” The report stated that stocks with poor environmental, social and governance exposures tended to have higher risk profiles, and BlackRock concluded that better managing risks would provide a more stable and robust portfolio.

Fast forward to April 2019, and BlackRock’s language is even more compelling. Climate risk has become ‘Clear, Present and Underpriced.’ They provide detailed, actionable information, ‘firmly rooted in peer-reviewed science.’ Crime will increase, mortality rates will climb, labour productivity and crop yields will both decline. And in that context, based on quantitative modelling, portfolio risks will rise.

ALSO IN APRIL, THE BANK OF ENGLAND’S EXECUTIVE DIRECTOR SARAH BREEDEN WARNED THAT CLIMATE CHANGE POSES SIGNIFICANT RISKS TO THE GLOBAL ECONOMY and the financial system, and could drive stranded assets of US$20 trillion. Adhering to the Paris Agreement is the obvious requirement, with the best path that of a smooth and orderly transition.

With all these policy statements and quantitative evidence, IEEFA finds it entirely inconsistent that BlackRock entered 2019 as the largest shareholder in the fourth largest U.S. coal mining company. BlackRock owned 14% of Cloud Peak Energy until a month before the company filed for Chapter 11 Bankruptcy in May 2019. Over the past decade while the U.S. equity market more than doubled, Cloud Peak Energy went down 100%. With its failure to match rhetoric and action, BlackRock lost investors all of their capital.

Only three years before, the biggest coal miner in the U.S. went into Chapter 11. BlackRock lost investors US$2bn as the top shareholder with 11% of Peabody Energy.

THERMAL COAL IS IN TERMINAL DECLINE, BUT BLACKROCK IS STILL ‘INVESTING.’

In the last three years, General Electric (GE) lost two-thirds of its market value, a massive wealth destruction. In the same period, the S&P 500 rose 40% making the opportunity cost for GE investors even more. And BlackRock was one of the top shareholders in GE, losing investors some $19bn.

BlackRock was not focussed on the financial risks of climate change a decade ago. But three years ago, BlackRock said it was. GE and Cloud Peak suggest otherwise.

One might argue that BlackRock’s failure to act upon the Paris Agreement in 2015 was understandable in light of the lack of political action subsequent to this global consensus. Today however, the lost value, the negative competitive outlooks, the overwhelming scientific evidence and the financial risks of climate change are crystal clear.

The majority of BlackRock’s AUM are in passive index funds, making BlackRock the world’s largest universal owner. Knowing that there is a potential US$20 trillion black hole approaching financial markets, one might ask why is BlackRock invested in fossil fuels at all in their passive funds?

BLACKROCK HAS TO ACT POSITIVELY UPON ITS OWN CLIMATE RHETORIC by changing its default passive funds benchmark to a low carbon index. The move would have a massive ripple effect across global financial markets. A decision to vote decisively in favour of climate issues at all company general meetings would likewise force a rethink among the world’s most powerful boards, removing climate deniers from positions of trust and defunding fossil fuel lobbyists virtually overnight.

If BlackRock moves, the rest of Wall Street will follow, rapidly. And Larry Fink could tell Greta Thunberg her message was heard, and acted on, decisively.

That would be a great legacy.

Tim Buckley (t[email protected]) is Director of Energy Finance Studies, IEEFA Australasia.

Related links:

IEEFA Report: Inaction is BlackRock’s Biggest Risk During the Energy Transition

IEEFA report: GE made a massive bet on the future of natural gas and thermal coal, and lost

IEEFA update: Norway’s GPFG sovereign fund to invest up to $14bn in unlisted renewables