What does Fiduciary Duty mean for BlackRock’s ability to act on climate?
Climate change poses an enormous systemic risk to our economy. So much so that Larry Fink himself said that climate change will reshape finance. Given the systematic threat of climate change, the only way a financial firm can fulfill its long-term fiduciary duty to its clients is by proactively acting to mitigate the climate crisis. Financial firms that do not take the climate impact of their investments into account are not acting in the best interest of their clients or our economy.
What can BlackRock do about its passive investments in companies driving the climate crisis?
True climate leadership must include taking responsibility for avoiding systemic impacts to the financial system and economy overall. BlackRock’s existing portfolio, unchecked, is driving runaway climate change. The notion that passive funds are derived through objective analyses of the market is simply not true, in reality index funds are “passive in name only.” Selection criteria are created by fund managers, and their methodologies shift regularly. It is past time for fund managers to think seriously about how climate change is a crucial criterion.
Is staying invested and engaging with a company a better strategy for change than pulling investments out of a destructive company?
Any investor – particularly one with the capacity of an asset manager like BlackRock – is a future share buyer and therefore a company is incentivized to engage. Total unwillingness to consider exit as an option would likely decrease the power of an asset manager’s engagement, according to Albert Hirschman in his book, Exit, Voice, and Loyalty. Academic analysis has found that investors that sell shares do not lose the proverbial “seat at the table,” but in fact can continue to engage both publicly and privately.
1 Jahnke, Patrick. “Holders of Last Resort: The Role of Index Funds and Index Providers in Divestment and Climate Change.” 8 February 2019. Available at http://dx.doi.org/10.2139/ssrn.3314906
2 Hirschman, A. Exit, Voice, and Loyalty. Harvard University Press (1970).
3 Goodman et al. “Social Shareholder Engagement: The Dynamics of Voice and Exit.” October 2014. Journal of Business Ethics 125(2):193-210.
If institutional investors stop investing in fossil fuels and other climate-harming industries will private equity just step in?
Private equity is too small to absorb all the fossil fuel equity. According to the latest FSOC report, the entire private equity industry is only around $3.7 trillion, including everything it invests in, or about half of BlackRock’s AUM. It is highly unlikely it could absorb all the fossil fuel assets. Additionally, BlackRock and other asset managers also hold a lot of debt via bond funds. Private equity purchases equity, so it would not buy up the debt if BlackRock were to offload it.