BlackRock cannot navigate the next critical decade of decarbonization by changing course as political winds shift. BlackRock needs to forge a new path that follows the science and the will of the majority of its investors.
In 1988 — coincidentally the year BlackRock was founded — Jim Hansen testified in front of the U.S. Congress about the dire consequences of global warming. It is now the end of 2022 and the impacts of the escalating climate crisis are felt even more direly. Society’s continued dependence on fossil fuels has led to a planetary temperature increase of 1.1°C, a level of global warming that is already causing heat waves, drought, floods, storms, fires, and other extreme weather events that are devastating communities around the world.
This has not stopped Larry Fink from asserting “I actually believe we’re going to need hydrocarbons for 70 years”. This statement is totally out of step with scientific reality. It contradicts authorities in the field, such as the International Energy Agency (IEA), which says in no uncertain terms that a 1.5°C-aligned pathway requires no new investments in fossil fuels. While Fink’s outlook on carbon capture and storage technology is optimistic at best, experts have established that CCS must be reserved for specific sectors that are hard to decarbonize and should not be used as a justification for fossil fuel expansion. Fink’s stance also goes against the express wishes of the majority of BlackRock’s largest clients, two thirds of which “have committed to support the energy transition through investments in their portfolios”.
Larry Fink has pledged to “help [clients] navigate the transition” by “providing the data, tools, strategies, and insights”, and promised that BlackRock would focus on leading the transformation to a decarbonized economy. But this leadership approach seems to have taken a backseat at the company this year. BlackRock is undermining its promises by vacillating on climate risk management and by failing to enact appropriate financial stewardship to mitigate those risks.
BlackRock has previously, and to great effect, promoted rising above the political fray and avoiding the pitfalls of shortsighted trends. However, it has ended 2022 deeply, troublingly right in the middle of both. The asset manager is no longer circumnavigating the political quagmire, but is instead playing — and getting stuck — in the muck. This begs the question: has BlackRock lost its edge?
THE LANDSCAPE
RUSSIA’S INVASION OF UKRAINE, EUROPEAN ENERGY CRISIS & RENEWABLE ENERGY
Russia’s invasion of Ukraine has ignited a fossil fuel crisis in Europe, the reverberations of which are felt across the globe.
What has become clear is that recent profits from oil and gas were driven by the war in Ukraine, not by savvy management and skillful governance. It would be a grave mistake to take them as an indication that the market is going to continue to prosper. The Institute for Energy Economics and Financial Analysis’ (IEEFA) latest study on energy markets finds that sustainable economics are proving their financial reliability, whereas the fossil fuel industry faces long-term headwinds, rendering it an “unsound investment.”
Tom Sanzillo, IEEFA director of financial analysis and co-author of the report, clarified: “For investors seeking a steady, stable investment, fossil fuels are unreliable. Today and going forward, fossil fuel companies offer volatility, spurious innovations and political calamity.”
Instead of plunging the continent ever more deeply into reliance on coal, oil, and gas, the EU now has the opportunity to replace fossil fuels with cheaper, readily available, less conflict-prone renewable energy sources. The benefits of an accelerated energy transition are manifold. Leaving volatile, dirty fossil fuels behind would allow leaders to permanently bring down the cost of living for citizens while lowering emissions and achieving greater energy security at the same time.
Political leaders are at the precipice of a potential energy revolution, and not just in Europe. While Republicans in the U.S. are scrambling to enforce continued funding of the fossil fuel sector, the landmark IRA legislation has opened up a new horizon in clean energy projects, fostering both new technologies and domestic manufacturing opportunities.
Capturing the opportunities offered by the energy transition is in the clear interest of investors. As is responding to the financial risks associated with the fossil fuel sector when coal, oil, and gas assets lose value and drag down portfolio performance. Giving in to desperate clinging to outdated, polluting business models will eventually drive us off the proverbial cliff, tanking the economy on the way.
RIGHT-WING REACTIONARIES AND ‘ANTI-ESG’ FERVOR
Contrary to Republican claims, ESG (short for Environmental, Social, and Governance) does not constitute a political or value-driven approach to investing.
As Wachtell, Lipton, Rosen & Katz asserted in a recent legal memo, “These attacks and attempts to besmirch the ESG rubric misunderstand that the concept of ESG is as simple as it is uncontroversial: ESG is merely a collection of the risks and issues that all companies must carefully consider and balance, taking into account their own specific circumstances, in seeking to achieve sustainable, long-term value. The politicization of ESG does not alter or undermine the ability of boards and companies to consider stakeholder and ESG risks and issues.”
The wave of Republican-sponsored anti-ESG bills leave business leaders and state representatives in affected states, such as Texas or Utah, fearful of the economic disadvantage the GOP’s laws would cause. Despite the Right’s frenzied crusade against ESG, it remains a framework of which most Americans still have not heard. Yet, red state legislation targeting ESG is already costing taxpayers dearly, with pensioners on track to see their retirement funds sacrificed for political theater orchestrated by fossil fuel interests. Interestingly, when surveyed Republican voters are even more likely to oppose government curbs on ESG investing than Democrats.
One of the primary aims of these bills is to punish banks and asset managers that are responding to the systemic risk posed by climate change — something well within the boundary of their fiduciary duty. Forcing investors to ignore risk is a ridiculous mandate that causes losses for both clients and taxpayers. It is clear that this is not based on economic best practices, but is rather a political ploy to delay the inevitable: the obsolescence of industries that are unable to adapt to the transition.
BlackRock has been a particular focus of this right-wing campaign aimed at preventing financial institutions from pursuing any type of climate measure. However, the bark is worse than the actual bite. The AUM that red states are threatening to pull — or have pulled — from BlackRock is but a figurative drop in the bucket. The amount of assets BlackRock manages for climate-concerned clients outweighs the amount of AUM anti-ESG red states have withdrawn by a factor of almost 1,000 — $4.2 billion versus over $3.3 trillion.
THE CHALLENGES EMERGING IN 2022
BLACKROCK DOUBLING BACK AND LOSING ITS EDGE
Larry Fink has recently joked that if BlackRock is being criticized by the Left as well as the Right, he must be doing something right. This is a false dichotomy. Managing the systemic risk of the climate crisis is not a political matter, it is a fiduciary duty. Additionally, attempting to appease the anti-ESG Right has not led to any less criticism for BlackRock. Far from finding balance by playing all sides, BlackRock has instead alienated clients across the political and regional spectrum. Now more than ever, BlackRock should remain steadfast in its position on climate and even more assertive in its commitment to serve clients’ navigation to the forefront of the energy transition.
BlackRock has made a demonstrated and compelling case to its clients and CEOs that climate risk will be one of the most significant financial risks facing the economy and that every client and business will be impacted. Therefore, understanding climate risk, and also protecting clients by working to mitigate that risk, should be the top priority of the asset manager. However, BlackRock continues to fall short of fully adopting measures that actually minimize systemic climate risk. Instead, the firm is opting for piecemeal practices — such as its position on thermal coal — that do relatively little to limit exposure and virtually nothing to drive down global emissions.
Furthermore, with the recent U.S. political backlash, BlackRock has slowed its climate efforts from a trickle to a dribble, at times appearing to downplay its climate commitments altogether in order to appeal to a politically-motivated minority client base. This is a dangerous and losing approach for the company and for clients. The right-wing attacks are not rooted in fact. BlackRock’s value as a political punching bag for fossil fuel-funded Republicans far outweighs any placating by the asset manager. Meanwhile, it stands to lose the clients who are looking to BlackRock to fulfill its promises to lead the transition.
CLIMATE-CONCERNED CLIENTS SOUND THE ALARM
In October of this year, the UK government asked more than 30 financial institutions to explain their climate commitments and positions on fossil fuel funding. This survey was the result of a lawsuit the government faced over its lack of a cohesive net zero plan. In order to fulfill the climate commitment it made to its citizens, the government depends on its financial service providers, among them BlackRock, to be transparent about concrete plans to reduce emissions. In response, BlackRock stated that it does not support the International Energy Agency (IEA)’s net zero scenario, which calls for no new investments in fossil fuels.
In 2022, BlackRock was perceived as rolling back on its institutional-level commitments, a trend that has raised concerns about the firm’s trustworthiness among clients. The implication for climate-concerned asset owners is that their business is not a priority, despite the fact that they have publicly voiced their concerns with the direction BlackRock is taking. Clients are no longer just asking about how BlackRock is advising and managing their own funds, they are keen to work with asset managers that have a very clearly defined set of commitments across the whole of their business. One such example is New York City Comptroller Brad Lander who oversees the city’s pension funds, $43 billion of which BlackRock currently manages.
In September, Lander addressed BlackRock in an open letter, stating that his office was currently reevaluating its client relationship, urging the asset manager to honor its climate commitments: “The three NYC Funds cannot reach our net zero goals without the active support of all of our asset managers, starting with BlackRock, as our largest manager. Our net zero plan puts forward ambitious actions for us to take as investors to reach science-based emission reduction targets, and we need BlackRock to do the same. […] That’s why we will be prudently reassessing our business relationships with all of our asset managers, including BlackRock, through the lens of our climate responsibilities.”
EXPECTATIONS MOVING INTO 2023
APPLYING A UNIVERSAL OWNERSHIP APPROACH TO VOTING
BlackRock’s clients are universal owners of the economy, and as such are exposed to wider market risks caused by the climate crisis. It therefore follows that BlackRock, as a steward of its clients’ assets, should be protecting those clients — including through voting and engagement — by identifying, minimizing, and mitigating systemic risks.
The vast majority of BlackRock’s client base understand the very real financial risk and cost of the climate crisis. While some small number of clients may prefer votes that are inconsistent with achieving rapid decarbonization in line with scientific targets, BlackRock has now committed to giving such clients that opportunity. For the remaining voting bloc, BlackRock must represent the best interests of its total client base and the global economy by voting in ways that are consistent with a 1.5°C pathway.
BlackRock’s focus on individual corporate governance on a case-by-case basis does not adequately address nor minimize the systemic risks facing its clients. Unless BlackRock uses all of the engagement tools at its disposal to actively drive down emissions across the heavy polluting sectors, clients will continue to face long-term systemic risks.
AN URGENT COAL PHASE-OUT
Coal, as one of the most polluting energy sources along with gas and oil, is a central driver of the systemic risk of the climate crisis. An abundance of analysis demonstrates that coal is also one of the most vulnerable sectors to obsolescence as a result of decarbonization initiatives, government regulation, and financial incentives.
In 2020, BlackRock released a thermal coal exclusion policy, which the asset manager refers to as an ‘investment decision’.
In providing further rationale for its ‘investment decision’, BlackRock defined and acted — at least in part — upon stranded asset risk: “Our active portfolio managers concluded that the long-term economic or investment rationale no longer justified continued investment in companies with significant exposure to thermal coal.”
By outlining its recognition of stranded asset risk and its responsibility as a fiduciary to respond accordingly, BlackRock set an important precedent for what are consequent next steps. The policy, however, is flawed: it does not cover passive funds, it only uses revenue percentage thresholds rather than absolute production, and it does not exclude companies developing new coal projects.
In 2022, two years after the adoption of its coal policy, BlackRock is still a major investor in many companies that have coal expansion plans and lack coal exit dates, such as Glencore and Mitsubishi. The asset manager still votes in support of the management of these companies. For example, BlackRock voted in favor of Glencore’s climate plan despite the company still being involved in 10 new thermal coal mines projects. It also voted against the two climate resolutions filed at Mitsubishi’s AGM.
Any coal expansion projects are inconsistent with a 1.5°C target, as confirmed in the IEA Net Zero Emissions scenario. A full coal phase-out by 2030 in OECD and European countries and by 2040 globally at the latest has been emphasized as necessary by the UN’s High Level Expert Group on net zero commitments. BlackRock has not committed to restrict financing in accordance with this standard.
INDIGENOUS RIGHTS FRONT AND CENTER
In its 2021 Sustainability Disclosure report, BlackRock notably recognized the interconnectedness of climate change, ecosystem protection, and Indigenous rights. The report specifically acknowledged the risks that land conflicts and rights violations that arise from the development and extraction of carbon-heavy industries have to company operations. Furthermore, BlackRock committed to examining whether companies obtain Free Prior and Informed Consent from impacted communities and provide access to remedy when rights are violated.
The fact that BlackRock has identified certain risks associated with Indigenous rights violations and demanded disclosure is a positive step. However, the asset manager still falls short of adopting a comprehensive Indigenous rights policy that can be applied across its entire portfolio and that communicates transparent expectations, timelines, and consequences for corporate inaction on these issues. This policy needs to honor — inter alia — the right to self determination, the right to plentiful clean drinking water and breathable air, and the right to access and manage traditional lands and territories.
Not only will a comprehensive policy result in concrete improvements for communities and ecosystems, but it also fulfills BlackRock’s fiduciary obligation. Time and again, failure to respect Indigenous rights has exposed companies and their investors to legal, political, reputational, and operational risks. These risks can take the form of project delays and even cancellations, resulting in significant financial loss. In short, it is both a moral and economic imperative to center Indigenous rights.
CONCLUSION
BlackRock cannot navigate the next critical decade of decarbonization by changing course as political winds shift. BlackRock needs to forge a new path that follows the science and the will of the majority of its investors.
According to Larry Fink’s own assertions: “Stakeholder capitalism is not about politics. It is not a social or ideological agenda. It is not ‘woke.’ It is capitalism, driven by mutually beneficial relationships between you and the employees, customers, suppliers, and communities your company relies on to prosper.”
BlackRock must apply this mutually beneficial framework to address the climate crisis. Skillful management and clear-eyed stewardship is the work of an asset manager, the expectation of clients, and what is required to meet the existential threat of our time.
