BlackRock’s Larry Fink may believe that greater demand for sustainable investing leaves Wall Street “on the edge of a fundamental reshaping of finance,” but advocates say it’s a hollow prediction absent bigger moves by the world’s largest fund firm to unwind its fossil-fuel exposure.
Other observers noted a “materially different” annual letter to chief executives Tuesday from Fink, the chairman and CEO, compared to his stance only one year earlier. Sooner rather than later, Fink said, sustainable investments that take into account climate change will deliver better returns.
“Larry Fink has always had a large megaphone and his pronouncements on climate have been important, [but] we need to see action from BlackRock — from supporting climate-related shareholder proposals, to offering fossil-free options in 401(k) funds, to ensuring wide access to, and promotion of, passive funds that tilt away from fossil fuel-based energy,” said Danielle Fugere, president and chief counsel of As You Sow, a nonprofit shareholder advocacy firm focused on environmental issues and social corporate responsibility.
Fink’s latest rhetoric dials up earlier climate commentary from the weighty Wall Street influencer and accompanies a BlackRock move to leave coal behind. BlackRock BLK, -0.92% pledged just last week to join other notable investing firms, including pension giant CalPERS and HSBC Global Asset Management, in pressuring oil giants and other big industrial and consumer firms to be more mindful of their impact, although only through voluntary commitments.
“In the near future — and sooner than most anticipate — there will be a significant reallocation of capital” driven by climate factors, said Fink, the founder of the firm that now manages some $6.8 trillion in assets. He delivered the comments against a backdrop of climate change-aggravated bushfires ravaging Australia and as the world’s financial power brokers hold their 50th annual World Economic Forum at Davos next week.
Fink’s pledges — including a “commitment to accountability,” proxy pressure on boards and actions to avoid thermal fossil fuels — “have teeth” compared to a high-level commentary on sustainability only a year earlier, said Leslie Crutchfield, executive director at Georgetown University’s Business for Impact center. “Yes, more-progressive advocates for [environmental, social and governance] investing will say BlackRock is late to the parade, but this [year’s letter] is not lip service.”
Of the nearly $7 trillion managed by BlackRock across mutual funds, exchange-traded funds, index-tracking funds and elsewhere, some $87 billion can still be linked to fossil fuels through late last year, according to data from Influence Map and ProxyInsight, first reported in an analysis from the Guardian.
BlackRock isn’t alone, of course. The other two largest fund firms, Vanguard, with roughly $161 billion in fossil-fuel exposure, and State Street STT, -0.67% , at $38 billion, are under the watch of environmental investing groups, too.
Eight of the 10 biggest U.S. funds claiming a “sustainable” focus remain invested to varying degrees in oil-and-gas companies, according to a Wall Street Journal review of the funds’ public disclosures. Exiting the stocks of gun makers, for instance, has been a fairly simple move; splitting with oil hasn’t. That’s in large part because the volatility of energy shares can bring big potential stock-performance upside, particularly when the economy is expanding.
BlackRock’s robust lineup of iShares ETFs, for instance, can include ESG pledges in fund prospectuses, yet keep oil stocks in the mix. The iShares ESG MSCI USA ESGU, -0.11% counts Chevron Corp. CVX, -0.31% and Exxon Mobil Corp. XOM, -0.86% among its holdings. Chevron stock is up 3% over the past year, though down to start 2020; Exxon has lost about 1.1% over the past year, down nearly 4% in the early days of 2020.
“Let’s see if their ESG funds are actually fossil free, including no coal-fired utilities, and if BlackRock votes their shares in support of Paris compliance and net-zero shareholder resolutions,” said Andrew Behar, a senior executive and strategist, also with As You Sow. “We are hopeful that BlackRock takes action and that this drives competitors like Vanguard, State Street and TIAA to follow. We will hold Mr. Fink to his words to reshape finance to deal with climate change.”
Pressure may only pick up as investors increasingly put money behind their social-investing convictions. Investments in funds focused on socially responsible investing grew to $17.67 billion as of November, a jump from $2.83 billion in 2015, according to Morningstar, which last year updated the screen it uses to rank funds’ sustainability rating. ESG covers everything from a company’s carbon footprint to board diversity.
Leading fund firms, including BlackRock, aren’t yet using their full heft to influence the companies they invest in at shareholder proxy time, at least not on par with individual investor demands for environmental and socially minded behavior.
Jackie Cook, director of sustainability stewardship research for Morningstar, said in a recent commentary that 14 fund groups expanded their support for ESG-related shareholder resolutions in 2019 by more than 20 percentage points over their respective previous four-year averages, most notably, American Century, Eaton Vance and Fidelity’s index funds, managed by Geode. Five of the 10 largest fund families, however, supported fewer than 12% of sustainability resolutions voted in 2019: Vanguard, BlackRock, American Funds, T. Rowe and Dimensional Funds.
“By our estimates, an additional 15 sustainability-related shareholder resolutions would have achieved majority support in 2019 had BlackRock voted in support, more than double the number of resolutions that did so,” Cook told MarketWatch.
Advocates will be watching to see if Fink’s pledge to hold companies accountable will materialize.
The fund firms have also said they regularly engage with companies on shareholders’ behalf and that proxy voting isn’t the only way to exact change. For instance, BlackRock, Vanguard and State Street are supporters of the Task Force on Climate-related Financial Disclosures, a voluntary scheme chaired by presidential candidate Michael Bloomberg to improve information.
Plus, the recognition that Fink can bring is key to moving all of Wall Street ahead on climate change, some advocates believe. Fink’s assertion that sustainable funds are the building blocks for all portfolios implies a potential “step change in the mainstreaming of sustainable investing and large movement in capital allocations,” said Mindy Lubber president at Ceres, another long-established nonprofit behind the investor push for climate change.
Georgetown’s Crutchfield said BlackRock does have profits in mind as Fink makes this pledge. Post-recession, investment firms can no longer aim to “profit and placate,” she says, by treating climate change simply as a gesture of goodwill, nor can fund giants ignore the transfer of $24 trillion in wealth from baby boomers to sustainability-minded younger generations, nor shrug off demands of their own employees to be an ESG-sensitive business.
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