BlackRock’s New Approach to Climate Capital Shifts Still Lacks Red Lines on Fossil Fuel Expansion

Executive Summary: 

In early February, BlackRock published a new letter to clients on how to manage the energy transition to a net zero economy. Even amidst distracting partisan backlash from Texas and West Virginia, BlackRock confidently stated that it is no longer a question of if the energy transition to a decarbonized economy will happen, but rather how and at what pace. BlackRock is making it clearer than ever that the transition to a clean energy economy is inevitable and good business means acting accordingly.

Together with the letter, the asset manager released a report introducing research and analysis as well as a framework for how to approach the transition to net zero. BlackRock is implementing the measures needed to help investors either navigate, drive, or invent the transition. But ignoring climate transition, BlackRock argues, is not an option. 

Achieving this necessary shift in thinking in the financial world was undoubtedly hard for BlackRock. But what comes next will be even harder. The accelerating climate crisis means that the gap between current progress and the action needed is ever-growing. BlackRock deserves credit for its leadership thus far, but successfully navigating and leading the transition will require bold choices. BlackRock is not setting itself up for a successful transition unless it establishes clear guardrails – meaning explicit corporate policies which lock in absolute emissions reductions and restrict expansion of oil and gas production and deforestation-risk commodities. If BlackRock is to successfully drive the energy transition in line with what climate science says is necessary, it will have to face these details. 

Core reflections: 

• BlackRock deserves recognition for the amount it has shifted in the past few years and its role in normalizing climate risk and the indisputable need to proactively drive the energy transition. It should make more maneuvers to position itself as a market leader.
• In order to help clients drive the transition, the company needs to augment its customer-facing tools and products with policy goals and specific parameters that are aimed at preventing capital going to companies that are expanding their emissions.
• The speed and shape of the energy transition have not yet been determined. But that is not an excuse for inaction. BlackRock cannot do this alone but will have to be an early leader. That includes implementing guardrails and no-go zones for investments that the IEA and others recommend and, in the short term, walking away from companies and deals that another investor may fund if said companies are incompatible with a liveable future.
• Investment policies must work hand-in-hand with stronger stewardship and engagement policies that reinforce rapid and aggressive decarbonization in key sectors, including red lines around fossil fuel expansion. 

Section 1: What We Like 

BlackRock accepts the inevitability of the climate transition pathway and aims to accelerate it because it’s clearer than ever that good business means working within the transition. Its position is bolstered with important new data and analysis, and it offers a multipronged framework for how clients should be approaching this challenge. A few noteworthy highlights for us include:

• The Transition Is Already Underway
  “The issue, however, is no longer whether the net zero transition will happen but how – and what that means for your portfolio.”

• • BlackRock is listening and responding to its clients, noting it has had hundreds of conversations with clients to inform its thinking and create a framework for clients to navigate the transition. 
  • This acknowledgement communicates to industry and governments that no one can stay on the sidelines. Investors and financial institutions will be factoring in the energy transition in short and long term investments. The energy transition is inevitable and the sooner financial institutions and portfolio managers embrace it, the more advantageous it will be to them and their clients. 
  • BlackRock identifies that the speed and shape of the transition are absolutely essential but not predetermined. Aggressive action to get in front of it and to minimize volatility is necessary for long term success. Governments, companies, and investors must work together to avoid intensifying climate impacts. The responsibility cannot be on government action alone. 
    • Our take: Rather than just orderly, we need a rapid and just transition – one that prioritizes Indigenous and human rights, people most impacted by climate change, support for transitioning workers, and that rapidly scales renewable energy and leads to absolute emissions reductions that meet scientific targets.
    • Our take: BlackRock must take a firmer position against corporate lobbying which undermines international and domestic climate policy, while also pushing trade associations to actively champion climate policies that accelerate transition. BlackRock largely fails to acknowledge the significant role corporations and trade associations — some of which BlackRock is a key member of — play in lobbying and greenwashing that obstructs urgent action from governments and corporations worldwide.
• Transition Results in Net Economic Gain
  
  
  • BlackRock concludes that navigating the transition to a net zero economy isn’t just about minimizing risk, it also opens up areas for responsible growth and opportunity. It sees exciting and innovative investment opportunities for clients and aims to position clients to benefit from the transition.
  • BlackRock confirms that positive and negative repricing of green and heavy emitting sectors is already happening. This is only the beginning of a much larger repricing trend and will increase dramatically over the next decade. 
  • BlackRock admits price volatility is part of the transition. Increasing fossil fuel prices are not a counter-indicator to the transition to a decarbonized economy but should be seen as part of it.
    • Our take: The solution to price volatility is speeding up the transition away from fossil fuels and massively scaling up renewable energy capacity. 

• • Building off of Larry Fink’s 2022 letter to CEOs, BlackRock agrees that some companies will be able to manage the transition to the new economy and some will not. There will be winners and losers and the losers will be those who don’t engage in the transition.
    • Our take: Like it does in any other investment context, BlackRock must identify companies that do not have a viable business plan for the rapidly evolving economy. Early and often, BlackRock must assess which companies do not have viable transition plans and then exclude, restrict, and/or phase out exposure to those companies across its entire portfolio as quickly as possible. Some companies will have to disappear while others will be able to access capital again only when they are on track to reduce emissions in line with a 1.5°C world

• BlackRock Wants To Be the Industry Leader on Net Zero

• • BlackRock is investing heavily in building climate risk analysis software and technologies that aim to provide clients with as much information as possible. This assumes that when armed with better analysis most clients will choose to move investments towards strategies which navigate climate risk and accelerate the transition
    • Our take: Disclosure and data will be essential in socializing and reinforcing the transition. However, good information alone is not enough. BlackRock should implement an active strategy for supporting and engaging clients at every investment level and asset class, create incentives for employees that help achieve that goal, and ensure that every new fund created is aligned with its corporate goal of achieving net zero emissions by 2050. Again, normalizing these behaviors across the entire investment industry is paramount.

• • BlackRock has introduced a number of new funds that provide clients with more opportunities to invest in the transition and “green to the core.”
    • Our take: Climate funds, ESG funds, and fossil free funds will no longer represent a small, niche subset of a client’s portfolio. BlackRock will increasingly make its default or priority offerings in line with the transition to net zero and this shift will impact every client on some level. BlackRock is implying that broad market, mainstream indices will have to transform or play less of a dominant role in the future.

• • BlackRock has a competitive advantage over other asset managers. 
    • Our take: Most other large asset managers are failing to incorporate climate risk management and climate alignment at the core of their businesses. This puts BlackRock at the front of the pack, offering it a competitive advantage. This is a shot across the bow to the rest of the finance industry and an important first move from one of the largest, most influential financial institutions on the planet. But it must continue to take steps if it wants to continue to lead. 

Section 2: Where BlackRock Falls Short

Despite the industry significance of this new framework and analysis for managing the transition to net zero, BlackRock fails to offer concrete climate policies that explicitly deliver necessary absolute emissions reductions across its portfolio, and still offers an unacceptable lifeline to continue fossil fuel development. 

• The Framework is Missing an Important Word – “Exclude”
  • BlackRock has built an impressive approach to tackling net zero, incorporating: increased data, transparency, and disclosure; an evolving approach to climate engagement and stewardship; and now a client framework for investing and navigating the transition. This is three quarters of the way there but misses the direct, rigorous exclusion policies that make achieving net zero possible.
  • BlackRock must fully exit companies that fail to demonstrate and implement viable transition pathways aligned with absolute emissions reductions in line with a 1.5°C pathway. BlackRock must ditch “the dodos” (as Fink called them in his letter to CEOs) to avoid negative impacts for clients and to accelerate the transition. This exit will not happen overnight but must begin now.
  • BlackRock cannot continue to pump new capital into industries, companies, and/or sectors which exacerbate the climate crisis and put us out of reach of achieving a 1.5°C pathway. 
  • One of the first and most impactful capital shifts BlackRock should make is to exclude new IPOs and bond issuances that get primary market funds into fossil fuel companies. 
  • BlackRock must include company wide exclusions and “no go” zones applied to index, active strategies, and its alternatives business. If red lines are not given, BlackRock will leave the door open for heavy emitters and fossil fuel expanders to continue to find new capital and lock in fossil fuel supply for decades to come, rendering the 1.5°C goal impossible.

• No Expansion. No Exceptions. 
  • BlackRock’s approach and outlook on oil and gas is dangerous, too simplistic, and likely overinflated.
    • In its reference scenario, the IEA concludes that capex for new oil and gas fields must be very limited to cover only the projects already in development. Capex on existing fields is required but must be ratcheted down. 
    • BlackRock gives fossil gas too much of a role in the transition. The lower carbon claim offers a false cover for gas, which has significant and sizable climate impacts along the entire production cycle, particularly because of methane leakage and the increased use of LNG. Fossil gas is composed of 70 – 90% methane, a potent greenhouse gas that has an 80 times greater climate heating effect over its first 20 years in the atmosphere than CO2.
  • BlackRock highlights the need for oil and gas in the future of the transition without outlining specific red lines around expansion. This leaves open a likely scenario where oil and gas companies can continue to raise capital for new development and expansion, blowing us past 1.5°C and likely locking in supply that we cannot use. Not only is this game over for the climate, this is likely to result in stranded assets. 
  • The IEA has made it absolutely clear that there is no room for new fossil fuel expansion if we want to reach planetary net zero emissions by 2050. No expansion must be core to BlackRock’s approach to managing the transition. 

• BlackRock Must Advocate for Industry-Wide Changes
  These must include:

• • Actively engaging with index providers to incorporate climate risk analysis into broad market indices and underlying benchmarks.
  • Countering lobbying efforts by trade associations which undermine stronger regulations, standards, and climate policies necessary to accelerate and achieve a rapid and orderly transition.
  • Supporting industry standards, regulations, and initiatives which close the implementation and ambition gap identified in the report.

Section 3: What BlackRock Has Not Addressed

With this latest framework and client letter, BlackRock has added to its existing commitment to tackle the climate crisis and provided more insights into its approach to net zero. However, there are a number of lingering questions and issues which have not been sufficiently addressed by the asset manager. 

• Net Zero Interim Targets

• • Larry Fink’s 2021 annual letter focused largely on the firm’s commitment to achieving net zero emissions across its entire AUM by 2050. In it, Fink committed to releasing interim targets by the end of 2021. BlackRock’s 2022 CEO and client letters as well as its new paper fail to include these interim targets. As the world’s largest asset manager and signatory of the Net Zero Asset Managers Initiative, this failure to clearly articulate BlackRock’s plan and policy to align with a 1.5°C future is deeply problematic.
  • BlackRock notes “nearly 90% of the world economy now have net-zero commitments, while about half of major companies and financial institutions do,” and increasingly they are “turning pledges into concrete targets” – except BlackRock, which missed the moment to announce interim targets in its client letter or paper. This is a glaring omission.
  • BlackRock must urgently release interim targets that will ensure 100% of companies in its portfolios have credible transition plans which lead to absolute emissions reductions in line with a 1.5°C pathway, are actively working on those plans, and are on track to hit the 2050 global target.
  • We again call on BlackRock to commit that by 2030, 100% of its AUM is on track to reach zero emissions by 2050 or sooner.
    
  • The concept of any one company achieving “net zero” emissions removed from the context of global emissions is counter-productive and opens the door for improbable carbon accounting and assumptions which enable continued emissions. Companies should aim to achieve “zero first”, meaning they should aim to reduce emissions to an absolute zero by 2050. And as an universal owner of the global economy, BlackRock plays a critical role in helping achieve a “planetary net zero” but the company must avoid the pitfalls around “net.” (See the final section of our analysis of BlackRock’s 2021 client letter for an explanation of the pitfalls of net zero.)

• Indigenous and Human Rights

• • Often, land rights violations are the first signs of impending forest destruction and subsequent carbon emissions resulting from deforestation and land conversion that are inherent to the business models of industrial agricultural companies and consumer goods companies’ supply chains; not to mention the triple climate threat of fossil fuel expansion in Indigenous territories in tropical forest regions like the Amazon.
  • BlackRock’s Investment Stewardship Global Principles call on companies to “disclose how their business practices are consistent with the sustainable use and management of natural capital, including natural resources such as air, water, land, minerals and forests. These disclosures should address companies’ impact in the communities in which they operate.” However, a vague request for information is wholly insufficient to address the risks of rights violations and knock-on climate and biodiversity impacts. BlackRock must adopt a policy on Indigenous and community rights that outlines, among other things, what protections BlackRock requires for Indigenous peoples and forest communities, and what BlackRock will do if companies don’t provide these disclosures, or if disclosures reveal companies aren’t respecting the rights of Indigenous peoples and other communities.

• Deforestation

• • BlackRock’s Investment Stewardship Global Principles call for companies to adopt no-deforestation policies, recognizing the importance of forest protection to the climate, global biodiversity, and Indigenous and community rights protection.
  • However, this commitment is absent from the client letter and transition report, and lacks necessary details like what criteria must be included in such policies, and what BlackRock will do if companies don’t adopt such policies.

• Rejection of offsets and carbon trading

• • Often companies’ net-zero plans include use of CO2 removal to offset some emissions, either by using market-based carbon credits, by investing in “nature-based solutions” such as tree-planting, or by technological approaches such as bioenergy with carbon capture and storage or direct air carbon capture with storage.
  • There are many problems with these approaches. First, it is reckless to rely on futuristic technologies that many experts doubt will ever really work at the required scale. Some approaches would require huge amounts of land for new monoculture tree plantations, for example, and would be likely to lead to conflicts over food, water, ecosystems, and livelihoods. Net zero targets can thus hide both insurmountable technical challenges, as well as deep inequity and injustice.
  • Further, “net zero” targets also often seek to compensate for greenhouse gasses (GHGs) through the purchase of carbon credits, or “carbon offsets.” But there is not enough planetary capacity to remove and compensate for continued rising GHGs. Therefore, it is impossible for “net zero” plans that rely heavily on carbon offsets to keep us below 1.5°C of warming. Carbon credits or offsets tend to be purchased by countries or corporations in the global North from projects in global South countries, far from where the GHGs were produced. International carbon offsets also tend to increase the burden of climate action for countries and communities in the global South. When emissions reductions from projects in global South countries are purchased as carbon offset credits by global North countries and corporations, the countries where the projects are located are not able to claim those GHG reductions towards their own national climate targets.
  • In order to avoid this minefield of false promises and false solutions, BlackRock should reject any claims by companies it invests in – and refrain from making claims itself – that their GHG emissions are “reduced” through the use of offsets or carbon credits. GHG emissions must be drawn down, and forests and other crucial ecosystems need to be protected, they cannot be not “exchanged” for each other. 

Conclusion

Since Larry Fink first said that sustainability will be at the center of the asset manager’s business moving forward in his 2020 letter to CEOs, BlackRock has made important steps bringing its business in closer alignment with that vision. Now it must go further.

BlackRock rightfully states that the speed and shape of the transition is not yet determined. Inaction and/or failure to move fast enough will have immense consequences leading to increased volatility as the climate crisis intensifies. While the transition pathway isn’t clear, BlackRock has the power to affect the outcome. As a leader in the global economy with $10 trillion in AUM and currently one of the largest investors in fossil fuels, heavy emitters, and deforestation-linked commodities, BlackRock can and must take responsibility for driving down absolute global emissions.