Larry's Letter: our in-depth analysis - BlackRock's Big Problem


  • Larry’s Letter: our in-depth analysis

    This year's letters from BlackRock CEO Larry Fink represent an important positional change by the world’s largest asset manager. It also expands on some of the commitments Fink made in his previous letter and subsequent policies rolled out by the company throughout 2020. However the details for implementation, real-world impact, and commitments leave much to be desired.

    Quote: This year’s letters represent an important positional change by the world’s largest asset manager. However the details for implementation, real-world impact, and commitments leave much to be desired.

    German translation available here

    On January 26, Larry Fink released his annual letter to CEOs alongside a letter to clients signed by BlackRock’s Global Executive Team. Similar to last year, both letters are dedicated to BlackRock’s plans to address the urgent, systemic climate crisis and its plan for operating within our changing world. In this year’s letter, BlackRock recognizes its extensive power and the need for leadership.

    This year’s letters represent an important positional change by the world’s largest asset manager. It also expands on some of the commitments Fink made in his previous letter and subsequent policies rolled out by the company throughout 2020. As with Fink’s previous letters, the stance and changes discussed in this year’s would be game-changing for the financial sector and how it sees climate change. However the details for implementation, real-world impact, and commitments leave much to be desired. While the commitments contained in the letter could have important and needed climate impacts if implemented with stronger, more ambitious, and decisive action, they contain glaring gaps that must be addressed.

    The science has made it abundantly clear that limiting warming to 1.5 degrees C means radically reducing overall emissions over the next decade, in addition to achieving net zero by 2050. In most of the core new policies outlined in these letters, BlackRock has not indicated or provided a clear pathway for how it can sufficiently meet both short and longer term emission reduction goals. Furthermore, the letters fail to adequately address the human rights, Indigenous rights, and traditional landowner rights threatened by extractive fossil fuel industries and companies tied with deforestation.

    Below, we break down the details of BlackRock’s new rhetoric and commitments: the good, the bad, the missing, and the necessary next steps.

    Our core recommendations for BlackRock, which we expand on later in this analysis, are:

    • Net zero must be carefully defined, with an emphasis on decarbonization and climate justice. It must be accompanied by short and medium term benchmarks.
    • Introducing a net zero 2050 commitment without detailing the impact on issues of deforestation, human rights, Indigenous rights, and traditional land owner rights is a significant blind spot, especially since many net zero commitments hinge on flimsy or false solutions involving land use.
    • BlackRock has dispensed with  the false argument that asset managers have no power and simply act on the behest of their clients. The next step is to shift thinking from a sole focus on the risks climate change poses to investments, to a more holistic understanding of, and accountability on, how its investments may be causing and accelerating climate change. To embrace this challenge, BlackRock must add a lot of detail to the plan outlined in the 2021 CEO and client letters.


    Net Zero by 2050

    Summary of commitments:

    BlackRock will:

    • Support the goal of net zero greenhouse gas emissions by 2050 or sooner.
    • Publish a temperature alignment metric for its public equity and bond funds.
    • Incorporate climate considerations into its capital markets assumptions (i.e. its expectations of long-term risks and returns).
    • Implement a “heightened-scrutiny model” in its active portfolios as a framework for managing holdings that pose significant climate risk. This includes flagging active holdings for potential exit, and the letter explicitly calls out companies which represent “high carbon intensity today.”
    • Launch new investment products with explicit temperature alignment goals, including products aligned to a net zero pathway.
    • Announce an interim target by the end of the year on the proportion of its assets under management that will be aligned to net zero by 2030.

    What we like:

    • With $8.68T AUM as of December 2020, BlackRock’s achievement of net zero by 2050 portfolio – if done well – will have significant positive impacts for our climate. BlackRock appears to recognize that long-term planning with short-term ambitious benchmarks is necessary to deal with climate.
    • BlackRock is incorporating sustainability issues directly into the portfolio design process, rather than addressing them after strategic investment decisions have already been made. This is an important expansion and refinement of last year’s announcement to put climate at the center of investment decisions.
    • BlackRock is framing the need to transition to a net zero economy as an investment opportunity. It is recognizing that the companies that do not adjust adequately pose a risk to investors and should be treated as such. It is also recognizing that companies that move adequately to reduce their carbon emissions present attractive investment opportunities that can and should be “captured” for clients. BlackRock is acknowledging that sustainability screens make more money and that there is an opportunity to profit off of sustainability.
      • BlackRock has significant power and influence in the marketplace and has indicated a clear bright line that it sees the markets headed in a decisively sustainable direction and will take action to further that reality.
      • BlackRock has steering power in the finance and business worlds and can be, and in this case is, using it for good.
      • BlackRock acknowledges the need to consider stakeholders, not just shareholders, in the transition to a net zero economy: That means a successful transition – one that is just, equitable, and protects people’s livelihoods – will require both technological innovation and planning over decades.”
      • BlackRock acknowledges that “today’s economy remains heavily reliant on fossil fuels.”
    • Blackrock’s Aladdin Climate, an investment management and operations platform, now incorporates climate risk so that institutional investors and wealth managers may integrate questions about the risks of the climate crisis into their portfolios.
    • BlackRock will create new net zero investment products that will help clients and the asset manager achieve sustainability goals.

    What we have questions about:

    • How is “net zero” defined? We expand upon the challenges of net zero in the last section of this analysis.
    • What metrics, criteria and timelines will BlackRock be using to identify which clients are meeting its targets by 2050 at the latest?
      • What are the pathways for moving BlackRock’s full portfolio to net zero?
      • How will BlackRock be marketing, engaging, and encouraging clients to adopt this plan?
      • Beyond creating new products and engaging companies listed within broad-market indices to adopt net zero transition plans, how will BlackRock make sure its index (aka ”passive”) portfolio meets both interim and 2050 targets?
      • Does BlackRock plan to engage with index providers on existing broad-market indices that do not meet 2050 net zero targets and/or are overweight in heavy emitters and sectors vulnerable to physical and transitional climate risk?
    • The 2030 interim target is essential not only for the climate but for meeting the scale and ambition of the 2050 target. Delaying action will make it difficult to achieve the emission reductions we need. What modeling will BlackRock use to set its 2030 interim target, and will it align with emission reduction targets outlined by the world’s scientific community?
      • The Science Based Targets Initiative provides a roadmap for how much and how quickly companies need to reduce their GHG emissions to prevent the worst effects of climate change.
    • Will BlackRock accept net zero plans that include reliance on untested carbon sequestration or offsets?
    • Will BlackRock engage with and advocate for net zero by 2050 targets with its peers, including other big asset managers that are lagging on climate commitments?
    • Will Aladdin Climate be integrated into Aladdin’s core function, or will it be applied at the discretion and request of clients, users, and portfolio managers?

    What’s problematic or missing:

    • Net zero must be clearly and carefully defined with short and medium interim benchmarks that reduce overall emissions in alignment with what the science says is necessary, and without harmful offsets and false solutions.
      • Net zero does not necessarily mean zero emissions. In fact, it likely does not. (See our section below on the perils and pitfalls of net zero for additional details.)
    • Introducing a net zero 2050 commitment without detailing the impact on issues of deforestation, human rights, indigenous rights, and traditional landowner rights is a significant blind spot. Many net zero commitments hinge on flimsy or false solutions involving land use, and deforestation is the second largest contributor to the climate crisis after fossil fuels. (See our section below on the perils and pitfalls of net zero for additional details.)
      • BlackRock should adopt a policy to respect the rights and self-determination of Indigenous peoples, as well as respect the statutory and customary land rights of traditional, Afro-descendent, and local communities to own, manage, and access their traditional lands and natural resources.
    • BlackRock must commit to not creating any new funds that do not align with net zero and interim goals.
    • If BlackRock aims to shift its entire portfolio to net zero by 2050 with strong interim targets, every new product offered by BlackRock should be in alignment with that goal.
    • New “low-carbon” or transition funds are contradictory and potentially counterproductive if they continue to include sectors and companies that have failed to produce adequate net zero transition plans.
    • BlackRock should ensure net zero data is central to Aladdin’s services and make it a core function, not an optional function, for BlackRock and other managers licensing the software.


    Accountability for portfolio companies’ net zero plans

    Summary of commitments

    BlackRock will:

    • Ask companies to disclose a plan for compatibility with a net zero economy that limits global warming to well below 2ºC by 2050.
      • BlackRock wants companies to disclose these plans quickly, rather than waiting for regulatory action that forces them to do so.
      • If BlackRock does not see progress with these companies, it may vote against management and potentially remove those holdings from its active funds.
    • Subject its active investment portfolios to greater scrutiny and create a “focus universe” of companies that pose “particularly significant climate-related risk” based on: carbon intensity today, lack of adequate net zero transition plans, unresponsiveness to engagement.
      • BlackRock will also expand its “focus universe” to over 1,000 carbon-intensive companies that represent >90% of the global Scope 1 and 2 emissions of the companies it invests in.
    • Support shareholder proposals to address material climate risks where it agrees with the intent of the proposal and believes that management is lagging.
      • BlackRock may also support a resolution to accelerate progress, even if management is taking action.

    What we like:

    • As we noted in our December analysis of BlackRock’s 2021 Stewardship Report, BlackRock is finally acknowledging that voting against management and supporting shareholder proposals often leads to positive changes at companies. BlackRock is now expanding its criteria for using its voting power to address climate-related risks and will increasingly vote against management at high-risk companies that don’t show signs of progress.
    • In addition to using its shareholder voting power more forcefully and effectively, BlackRock is publicly saying that there could be capital shifts as a result of an inadequate or insufficient net zero plan.
      • BlackRock may divest its active investment portfolios from high climate-risk companies that do not demonstrate sufficient progress or have high carbon intensity today.
      • Exiting these holdings is essential for cleaning up BlackRock’s portfolios, strengthening its hand at engagement with other firms, and making clear it will hold companies to their word — and its own.

    What we have questions about:

    • What were the 440 companies in the high-risk “focus universe” in 2020, and what are the 1,000+ companies in that group in 2021? If BlackRock will not name the specific companies, will it provide a breakdown of the industries included and short term priorities?
    • Does BlackRock plan to screen companies’ Scope 3 emissions (in addition to Scope 1 and 2,) and how will that factor into its “focus universe” for heightened scrutiny? Will BlackRock demand Scope 3 emissions disclosures from financial firms and other industries whose emissions profile is overwhelmingly in Scope 3?
    • Does the “focus universe” of 1,000+ high-risk companies cut across BlackRock’s holdings in actively-managed portfolios and passively-managed index funds? BlackRock says it will consider divesting companies on this list in its active funds, but what actions will it take with those companies in its passive funds if progress through engagement fails beyond voting off directors?
    • How is BlackRock defining net zero for each type of company it invests in? What does an adequate net zero plan from a fossil fuel company look like? From a financial institution? What about from an agribusiness company? We expand upon the challenges of net zero in the last section of this analysis.
    • On what timeline will BlackRock take action against “bad actors,” companies that have consistently failed to limit emissions and instead continue to expand fossil fuels and/or deforestation-linked operations?
    • Will BlackRock demand companies end lobbying and/or participation in trade associations that obstruct climate solutions as part of the net zero plans?
    • In addition to publicly-traded companies, BlackRock wants large private companies and issuers of public debt to disclose how they are addressing climate-related risks. What will BlackRock do to help make this happen?
      • Is BlackRock joining broader, collective engagement efforts to support this position?
      • What regions, industries, or sectors will be the priority?

    What’s problematic or missing:

    • BlackRock is vague on the timeline for action from companies.
      • The timeline for action cannot reset back to zero. There must be immediate action (voting off directors and removing from active funds) for companies that have shown historic inaction or continue to take anti-climate positions.
      • 2021 action from these sectors is needed to show that 2030 and 2050 commitments mean something.
      • 2021 votes will be an immediate litmus test of the seriousness of this commitment.
    • BlackRock needs to be transparent and specific in its criteria for adequate and sufficient net zero plans. (See more below on the perils and pitfalls of net zero.)
      • The plans that BlackRock requires from companies should focus on zeroing out their climate impact in line with a 1.5 degree pathway.
      • Companies must explain how they plan to reduce their Scope 1, 2, and 3 emissions.
      • Net zero plans must have clear interim targets by 2030 at the latest and clear consequences for inaction.
      • Net zero plans must demonstrate a reduction in emissions that is consistent with what the science says is necessary.
      • Plans cannot leave the door open for carbon offsets or false solutions.
      • Any company engaging in development of new fossil fuel reserves, not exiting coal on the timeline of Global Coal Exit List, not exiting tar sands, and/or having a no-deforestation commitment cannot have acceptable net zero plans.
    • Fossil fuel expansion is incompatible with a 1.5 degree warming scenario. BlackRock must immediately exclude from its actively managed funds any company that is still engaging in expansion and exploration of fossil fuel extraction and infrastructure.
      • This should be backed by a transparent, expanded exclusion policy.
      • This should apply across heavy-emitting and/or “pure play” fossil fuel sectors, not just on a company-by-company basis.
    • “Well-below 2 degrees” is not clearly defined or measurable. Instead this should be a clear commitment to 1.5 degrees C.
    • Often land rights violations are the first signs of impending forest destruction and subsequent carbon emissions resulting from deforestation and land conversion inherent to the business models of industrial agricultural companies and consumer goods companies’ supply chains. BlackRock should require companies to conduct due diligence on human rights, land rights, and deforestation risks. This should explicitly include requiring companies to ensure that international standards of Free Prior Informed Consent are respected and followed.


    BlackRock Internal Corporate and Policy Commitments

    Summary of commitments

    BlackRock will:

    • Increase basic transparency on its own emissions: disclose Scope 1, 2, and 3 emissions for corporate operations, including “financed emissions” meaning the aggregate emissions attributable to its investment portfolios.
    • Continue to advocate for public policies “that help make the financial system more resilient, sustainable, and equitable, including advancing the goal of net zero.” This will include support for the establishment of a global market for carbon offsets and carbon pricing regimes.

    What we like:

    • Disclosing financed emissions is a necessary (though insufficient) step for financial firms.
    • BlackRock’s acknowledgement that financial regulation is necessary to enable a net zero emissions future.
    • BlackRock acknowledges that it has a responsibility to leverage its policy influence to support pro-climate public policy.
    • BlackRock recognizes that policies like carbon pricing can lead to disparate impacts on vulnerable communities.

    What we have questions about:

    • Will BlackRock’s support policies that will help make the financial system more resilient, sustainable, and equitable, and will it support climate and justice oriented regulations, like those outlined by Stop The Money Pipeline?
      • Will BlackRock support comprehensive legislation across the world that mandates companies commit to net zero by 2050 with short term targets?
      • Will BlackRock change course from its history of opposing financial regulation?
      • Will BlackRock also instruct the myriad trade associations to which it belongs to support this financial regulation?
      • When BlackRock’s investments are tied to environmental destruction, loss of livelihoods, and rights violations, what mechanisms does BlackRock have in place to receive, review, and remedy grievances linked to its investments?
        • BlackRock said in its January 2021 Investment Stewardship Proxy Voting Guidelines, “As a long-term investor, we believe that in order to deliver value for shareholders, companies should also consider their stakeholders,” including the communities in which companies operate. 
    • Will BlackRock end its direct and indirect lobbying that obstruct climate solutions?

    What’s problematic or missing:

    • Pledging to support offsets runs counter to BlackRock’s recognition that certain policies can have disparate impacts on vulnerable communities;  the global carbon offset market has often allowed polluters to continue to pollute while ignoring impacts on local communities. (More on this the net zero pitfalls section below.)
    • The focus on carbon pricing as a policy centerpiece ignores the fact that market-based mechanisms leave too much to chance, have led us into the current climate crisis, and don’t meet the urgency of the crisis. They can be part of a comprehensive climate change package, but the failure of existing carbon pricing schemes to produce significant decarbonization, or address the greenhouse gas impacts of forest-risk commodities, demonstrates that they are wholly inadequate and too-often lead to unjust impacts on low-income communities and Black, Indigenous, and people of color communities. More on this from Friends of the Earth here.


    What didn’t get enough attention in the letter

    Racial justice

    Larry Fink says: “Questions of racial justice, economic inequality or community engagement are often classed as an ‘S’ issue in E.S.G. conversations . . . But it is misguided to draw such stark lines between these categories. For example, climate change is already having a disproportionate impact on low-income communities around the world — is that an E or an S issue?”

    What matters is less the category we place these questions in but the information we have to understand them and how they interact with each other–and how that understanding determines how we act. Improved data and disclosures will help us better understand the deep interdependence between environmental and social issues. BlackRock has a lot of room for improvement here. The December 2020 report Equity in the Boardroom by Majority Action and the Service Employees International Union showed that BlackRock and Vanguard continued proxy voting practices that shielded boards from accountability and reinforced a status quo that perpetuates the harms of systemic racism. The report concludes that large asset managers must use their power and responsibility to promote racial justice by:

    • Holding boards accountable to the corporate governance best practice of diversifying boards to ensure that the perspectives of Black and brown communities are represented at the highest level of corporate decision-making.
    • Holding companies accountable to improving disclosure of corporate policy influence that directly and indirectly impacts Black and brown communities.
    • Supporting resolutions that seek to improve oversight of risks driven by systemic racism.


    The perils and pitfalls of net zero

    “Net zero” is a broad, vague, and fraught term, with many devils in the details. Companies’ emissions reductions should be judged more important than their overall net zero targets.

    There are two categories of net zero pitfalls: First, the use of investment in renewables and other “green” industries to “zero out” continued expansion of carbon-intensive activity, like fossil fuel exploration, extraction, or infrastructure. Second, the reliance on unproven carbon capture and/or problematic offset schemes.


    Continued expansion of carbon-intensive activities

    It is crucial to understand that limiting global warming to 1.5°C requires that a rapid, managed phaseout of existing fossil fuel production and use must begin now. Potential emissions from coal, oil, and gas already in production would push us far beyond 1.5°C, and likely even 2°C, so any expansion of fossil fuel exploration or extraction, or expansion of infrastructure that drives continued and expanded extraction, is incompatible with that goal. Many of the companies BlackRock invests in are still actively engaged in fossil fuel expansion, new infrastructure, and exploration, when that is clearly not consistent with keeping warming below 1.5 degrees C. For example, Oil Change International’s analysis of Big Oil climate plans shows that not a single Big Oil firm with a net zero plan has committed to halt expansion of fossil fuel production.

    Any company that meets any of the following should not be considered to have an adequate net zero plan:

    • Developing new fossil fuel reserves or infrastructure
    • Is not exiting coal on the timeline of the Global Coal Exit List
    • Is not excluding tar sands, Arctic oil, or Amazon oil
    • Does not have a no-deforestation commitment

    An assessment of an adequate net zero plan should also include a CAPEX assessment to make sure that companies are not spending too much on carbon reserves they can’t burn (see these two reports from Carbon Tracker for more information.)


    Carbon capture and offsets

    Often, companies’ net-zero plans include use of carbon dioxide removal to offset some emissions, either by using market-based offsets, 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 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 under 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 require companies to disclose the following:

    • What percentage or volume of a company’s target is expected to be achieved by carbon dioxide removal, purchase of carbon offsets, and other indirect emissions reductions approaches, rather than direct emissions reduction.
    • On what basis any remaining emissions are judged unavoidable.
    • What technological and market approaches are being pursued in order to reduce the unavoidable emissions.
    • Whether any indirect emissions reductions relied on, or invested in, are included in the host countries’ climate targets in order to ensure it is not double-counted.
    • Where market mechanisms like offsets or technologies like carbon dioxide removal are to be used and how the companies will ensure carbon integrity and prevent negative social and environmental impacts.


    In 2018, the BlackRock’s Big Problem campaign and global network grew out of a recognition that BlackRock, the world’s largest asset manager and largest investor in coal, oil, gas, and deforestation commodities, was failing to recognize the size, scale, and scope of its climate problem — and the responsibility it has to act on it. Larry Fink did not mention climate change once in his 2019 letter to CEOs.

    While the 2021 letters indicate further progression and several steps in the right direction for the financial giant, without strong policies and clarification, BlackRock still falls short of the visionary financial leadership that is needed to meet the scale and urgency of the climate crisis.

    We will be closely monitoring how BlackRock further clarifies these policies throughout the year.