When the world's largest asset management firm, BlackRock, announced sweeping changes to its investment and engagement tactic in January 2020, even cynics felt a warm glimmer of hope.
BlackRock has joined Climate Action 100+ to place pressure on global companies who have the poorest record in terms of pollution. Corporate engagement and climate change will soon go hand in hand.
In the U.K., the term ESG is becoming prevalent; Environmental Social Governance. Over the years, you may have been familiar with the terms ‘green’, ‘environmental’ or even ‘socially responsible’ investing.
With more readily available data for individuals to instantly access, investors face a range of options. Carry on investing globally, whether carbon-friendly or not; or consider the ESG filters, to weed out the companies which harm the environment and encourage the companies who aim to do good.
True, the role that you as an individual play, may have a modest effect, but if the asset managers who control over £70 trillion begin to support a low-carbon and climate-resilient approach, things may improve.
The Inflection Point
It feels as if the world is at an inflection point, conflicted with a dilemma.
Either faced with stepping up to the challenges of global warming and other non-sustainable pressures on the Earth’s resources today, or simply let the next generations reap the havoc in the years to come. Melting ice caps; sea water level rises; deforestation and a decline in biodiversity; desertification and the potential social and migratory upheaval that will accompany it, all of which have grave consequences.
Consciences have been piqued by the likes of David Attenborough in his Planet Earth II series, along with his Glastonbury appearance in 2019. Greta Thunberg has also challenged the political leaders, as well as the older generations to take responsibility for the predicament we now find ourselves in.
The internal challenge that many people experience is whether on their own, they make any sort of impact big enough to matter, or if anything they do is simply a drop in the ocean.
Looking at the data on CO2 emissions, China, the USA and India account for nearly half of all global emissions, whilst the U.K. represents a meagre 1% of emissions out of the E.U.'s 10% contribution.
BlackRock has muscle and influence. This is what they have decided to do.
- Ensure board members support climate-informed corporate governance: The firm would be increasingly disposed to use voting powers to push for corporate action on sustainability issues.
- Require disclosure of climate-related risks and opportunities: Companies are obligated to disclose climate-related risks in line with the recommendations if they have not already done so. This must include their plan for aligning their operations with the temperature objectives of the Paris Agreement.
- Push companies to set science-based emissions reduction targets: The request for companies to divulge their plans for adhering to the Paris goals.
- Revisit product offerings and underlying investments: BlackRock announced several product-related advances, including making sustainability integral to portfolio construction and risk management. Also, relinquishing investments that present a high sustainability-related risk, such as thermal coal producers. Additionally, launching new investment products that screen fossil fuels and strengthening their commitment to sustainability and transparency in their investment stewardship activities.
What Happens Next?
Not all good intentions end well. So what might happen next?
Will other large asset management firms follow in BlackRock's footsteps?
BlackRock is one of the ‘Big Three’ asset management firms, alongside State Street and Vanguard. These firms own approximately 15% of assets under management.
Like BlackRock, Vanguard and State Street have been adding increased ESG investment products to their portfolio. Their record, however, isn’t perfect and indeed, they most certainly still have some way to go.
Will Vanguard and State Street feel compelled to stay shoulder to shoulder with BlackRock by announcing their bold steps to assimilate sustainability into their company strategies? Will they also join Climate Action 100+? If not, will activists focus their attention on them instead, now that BlackRock has demonstrated its commitment to implementing more ethical actions concerning climate change?
Will companies provide more meaningful climate-related financial disclosures, causing a cascade of effects in the market?
The demand for TCFD disclosures (Taskforce on Climate-Related Financial Disclosures) from an investor with BlackRock's weight could provide companies with the necessary push they require, assuming BlackRock keeps the pressure on.
Will companies counter BlackRock's demands and provide constructive disclosures on climate-related risks? If so, will investors use this new data to enhance their understanding of climate risks, and how will they reallocate their capital following this? According to BlackRock "In the near future—and sooner than most anticipate—there will be a significant reallocation of capital."
Will collective investor engagement gain momentum and drive wider changes in company behaviour?
Launched in December 2017, Climate Action 100+ is a five-year initiative to guarantee that the world's largest corporate greenhouse gas emitters take necessary action to positively affect climate change. A vast majority of these target companies are not yet addressing climate change as a strategic business risk.
BlackRock stated in bold type: "climate risk is investment risk."
Will governments respond to investor concerns with more ambitious climate-related measures?
Governments must lead the way to a rational and reasonable low-carbon transition. Will fossil fuel subsidies end?
The Human Conflict
In our heart-of-hearts, many people accept that they are conflicted in their attempts to manage their carbon footprint. You may diligently recycle paper, glass, and plastics regularly, wheeling out the green bin every Sunday night, yet simultaneously, we will jump straight into a petrol or diesel car and head off to Heathrow for a holiday in the Far East.
Greta Thunberg found herself embroiled in controversy around the issue of climate change, and it is this topic that has catapulted her to the forefront of this issue globally. It was revealed by the media that although she had taken a moral stand to sail, instead of flying commercially, from Europe to attend the U.N. climate change conference, in a zero-carbon yacht, the yacht’s owners were forced to fly crew to the U.S. to return the yacht.
If reflecting on a personal level, there are certainly an abundance of things that we can do to improve the sustainability of our lifestyles, including how we invest our money. Today, $1 out of every $4 under professional management in the U.S. (circa $12 trillion), incorporates some form of sustainable/socially responsible investment methodology.
For many, being able to make a difference, whilst not jeopardising the returns and risk control of a sensibly structured portfolio, may well be something worth contemplating.
This can be achieved by utilising systematic low-cost funds, when available, that invest more in companies with high sustainability metrics, and invest less money in those companies doing a bad job.
This is a relatively novel world, where data and metrics are evolving, new products are consistently being brought to market and, today, undoubtedly, no perfect solution exists, regrettably. All choices inevitably require trade-offs. Investors can bravely take a primitive, yet meaningful, step towards a more ecological and balanced environment.
This is undeniably a journey that is best navigated by adhering to guidance as much as possible and moving at a prudent pace. This requires an extremely considered and long-term strategy, that has to be implemented using sustainable-focused funds, and only when they are robust enough to earn a place in a portfolio. In essence, it is one step in the right direction at a time.
If you would like more information about this topic, please contact Capital today.
 B.P. (2019) Statistical Review of World Energy. https://www.bp.com/