BlackRock, the world's largest investment firm, will put sustainability at the center of its investment strategy going forward, according to CEO Larry Fink's annual letter to chief executives.
The letter, first reported by the New York Times, states that BlackRock, which manages almost $7 trillion in assets, will immediately stop investing in companies that "present a high sustainability-related risk," such as coal producers. It will also introduce new products that screen for fossil fuel producers and make sustainability "integral to portfolio construction and risk management."
Climate change, Fink writes, is "almost invariably the top issue that clients around the world raise" when wondering how to make their investments more sustainable. The numbers bear it out: Investors in the U.S. contributed a record $20.6 billion to sustainable funds last year, according to a new report from Morningstar, nearly four times as much as they contributed in 2018. Investors, particularly younger generations that are beginning to accumulate more wealth, are particularly interested in socially-responsible investing, Adam Grealish, director of investing at Betterment, tells CNBC Make It.
Noting that BlackRock is a fiduciary that invests money on behalf of others, Fink writes that climate change is a major economic issue, affecting housing prices, insurance markets, productivity, food costs and more. Being more sustainable, then, isn't just a political choice — it's the smartest business decision, he says.
"Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors," Fink writes. "And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward."
Any executive who does not take climate change seriously, he writes, is harming the long-term prospects of their company. To Fink, that means that company is not a wise investment and does not belong in clients' portfolios.
Still, as Bloomberg noted, BlackRock is one of the largest investors in fossil fuel companies, given how many assets it holds. And although it will stop investing in companies that get more than 25% of sales from coal, BlackRock will continue to invest in many of the biggest coal producers, which have diversified income streams.
The asset manager had come under increasing criticism for being slow to address climate issues. A 2019 analysis of shareholder votes on climate change resolutions showed that BlackRock and Vanguard had the worst voting records in the fund industry.
Fink's letter is an important step forward for the sustainability movement, and could influence other financial firms to follow suit. But it doesn't mean that companies will lose all of their investments overnight if they are not sustainable enough.
About two-thirds of investor money is held in passively managed index funds. BlackRock can't simply divest from companies in the index. Instead, it can tweak its actively managed products. In a letter to clients that echoes Fink's message to CEOs, BlackRock says it will make sustainable funds the "standard building blocks" of clients' portfolios whenever possible, and plans to offer sustainable versions of its target-date funds and build a sustainable index fund.
BlackRock's proposed sustainable target-date fund is particularly exciting because it would mean investors could select a single, low-cost fund for their retirement portfolios without the need to rebalance it themselves. It could also influence other financial firms to create their own sustainable index funds and target-date funds.
These products aren't yet available, but there are plenty of sustainable funds currently offered by financial firms, including a handful of target-date funds.
BlackRock also wants the companies it invests clients' money in to make certain financial disclosures related to sustainability, including disclosing "climate-related risks." If they don't, BlackRock will vote against the management teams in place.
That's no empty threat. The asset manager holds considerable sway in corporate America: BlackRock, State Street Corp. and Vanguard Group hold around a fifth of the S&P 500 via their clients' investments.
In the past, the companies have more or less voted in line with management; now, BlackRock says it will use its voting power to push sustainability measures, which could encourage companies to be more transparent and put some sustainability measures into place.
Still, there is an ongoing existential debate over whether any company is actually sustainable and whether your investment portfolio is the best place to make the biggest difference in the ongoing climate crisis.
"The collective action starts to become powerful," Betterment's Grealish tells CNBC Make It. "If I'm an investor, I may not be tilting the scales on my own, but at the collective level it starts to matter."
That the largest asset manager in the world is putting sustainability at the center of its investment strategy going forward is sure to make waves throughout the financial industry.
The climate crisis is "bigger" than the 2008 financial crisis, Fink said in a separate interview with CNBC's Andrew Ross Sorkin. "It requires more planning. It requires more public-private connections together to solve these problems. And I do believe many of these problems could be solved, but the actions have to begin now."
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