BlackRock to vote against corporates with limited net-zero planning

CEO of $8.7trn asset manager has written to clients and company management on path to net zero

A year on from committing to a “new standard” in sustainability, BlackRock CEO Larry Fink has said the group will use its might as the world’s largest asset manager to steer the companies it invests in on the path to net zero.  

In his annual letter to CEOs, Fink noted “a tectonic shift” in global momentum towards net zero with companies, governments and investors centred on building an economy that emits no more carbon than it removes from the atmosphere by 2050.

See last year’s letter summary: – BlackRock commits to “new standard”

The letter said not long after the $8.7trn asset manager’s commitments to sustainability were reported in January 2020, the Covid-19 pandemic hit and while it was initially thought to be something that would hold back focus and investment into ESG matters, the opposite happened.

Fink wrote: “Despite the darkness of the past 12 months, there have been signs of hope, including companies that have worked to serve their stakeholders with courage and conviction. We saw businesses rapidly innovate to keep food and goods flowing during lockdowns.

“Companies have stepped up to support non-profits serving those in need. In one of the great triumphs of modern science, multiple vaccines were developed in record time. Many companies also responded to calls for racial equity, although much work remains to deliver on these commitments.

He added the pandemic has been a “stark reminder of our fragility” and “strikingly, amid all of the disruption of 2020, businesses moved forcefully to confront climate risk”.

Fink pointed out this climate transition presents a “historic investment opportunity” and the reallocation of capital to securities addressing these risks has “accelerated even faster” then he anticipated.

Momentum will continue to build, he said, as better technology and data has allowed asset managers to offer a broader range of investment solutions, but also regulatory and policy response to Covid-19 has leaned towards supporting the path to net zero leading to “dramatic implications for the global economy”.

“There is no company whose business model won’t be profoundly affected by the transition to a net zero economy,” Fink wrote.

“As the transition accelerates, companies with a well-articulated long-term strategy, and a clear plan to address the transition to net zero, will distinguish themselves with their stakeholders – with customers, policymakers, employees and shareholders – by inspiring confidence that they can navigate this global transformation. But companies that are not quickly preparing themselves will see their businesses and valuations suffer, as these same stakeholders lose confidence that those companies can adapt their business models to the dramatic changes that are coming.”

See also: _ BlackRock updates on engagement progress since January ESG pledge

Action steps

As a result, in a separate letter written to BlackRock clients, Fink said the group has committed to a series of actions to help prepare portfolios for a net zero world with a particular focus on three areas: transparency, investment management and investment stewardship.

The client letter said: “The new understanding of sustainable investing and the global momentum towards net zero means that there will be dramatic reshaping of the economy over the next few decades. This transformation has profound implications for you, our clients, and we are committed to being your partner of choice in providing the data, tools, strategies and insights to help you navigate the transition.”

In summary, BlackRock will:

  • Implement a “heightened-scrutiny model” in active portfolios as a framework for managing securities that pose significant climate risk.
  • Launch investment products with explicit temperature alignment goals, including products aligned to a net zero pathway.
  • Votes on shareholder proposals will play an increasingly important role in our stewardship efforts around sustainability.
  • Announce an interim target on the proportion of our assets that will be aligned to net zero by 2030.
  • Publish a temperature alignment metric for our public equity and bond funds.

In terms of investment management, Fink said BlackRock will be seeking to identify specific ways in which climate insights can help drive financial returns.

“Sustainability issues are no longer something that can be addressed after strategic investment decisions have been made – rather, we believe they are indispensable to making investment decisions, which is why we are incorporating them into our portfolio design process” he wrote.

As part of the heightened scrutiny framework for the firm’s active investment process, the investment team will be establishing a “focus universe” of holdings that present a particularly significant climate-related risk, due to:

  • High carbon intensity today.
  • Insufficient preparation for the net-zero transition.
  • Low reception to our investment stewardship engagement.

Where the group does not see progress in this area, and in particular finds a lack of alignment combined with a lack of engagement, BlackRock will vote against management for its index portfolio-held shares, but also flag these holdings for potential exit in the group’s discretionary active portfolios because “we believe they would present a risk to our clients’ returns”.

“Conversely, companies that distinguish themselves in terms of their emissions trajectory, transition preparedness and governance will often represent an opportunity for our clients,” the letter added.

In order to meet its net-zero disclosure goals, BlackRock has publicly reported its weighted-average carbon intensity in line with the Task Force on Climate-related Financial Disclosures (TCFD) recommendations, for more than $2trn in iShares ETFs and BlackRock mutual funds.

However, the letter said today’s carbon intensity metrics do not provide the whole picture as to how portfolios are positioned to adapt to the global transition towards net zero and as a result, BlackRock will publish portfolios’ ‘temperature alignment’ help investors understand the decarbonisation pathway of an investment.

The group is also developing a climate version of the Aladdin risk management technology it uses, which will include wide range of climate data, risk measurement and implementation capabilities.

‘Talent strategy’

Returning to Fink’s letter to CEOs, he discusses the “sustainability premium” where companies with better ESG profiles are performing better than their peers and added there has never been a more important time for companies to respond to the needs of all their stakeholders.

“We are at a moment of tremendous economic pain. We are also at a historic crossroads on the path to racial justice – one that cannot be solved without leadership from companies. A company that does not seek to benefit from the full spectrum of human talent is weaker for it – less likely to hire the best talent, less likely to reflect the needs of its customers and the communities where it operates, and less likely to outperform.”

He added BlackRock expects companies in all countries to have a “talent strategy” that reflects long-term plans to improve diversity, equity, and inclusion, while emphasising it holds its own to this same standard.

He ends the letter on an optimistic note as he looks a recovery from the Covid-19 disruption, but also improved attitudes at corporate management level.

“I have seen how many companies are taking these challenges seriously – how they are embracing the demands of greater transparency, greater accountability to stakeholders, and better preparation for climate change. I am encouraged by what I have seen from businesses. And now, business leaders and boards will need to show great courage and commitment to their stakeholders. We need to move even faster – to create more jobs, more prosperity, and more inclusivity. I have great confidence in the ability of businesses to help move us out of this crisis and build a more inclusive capitalism,” he said.

Reaction

It has been highlighted by commentators that Fink’s letters does not mention the company’s fossil fuel investments, with Reclaim Finance research indicating the group has some $85bn holdings in coal. Campaigners warn BlackRock’s continued support for the most polluting fossil fuels undermines its claim to climate leadership.

Lara Cuvelier, sustainable investments campaigner at Reclaim Finance, commented: “Larry Fink’s new net-zero commitment could be a positive step if it were paired with concrete and immediate action to stop investing in new fossil fuels. But a year after its first, extremely weak coal commitment, BlackRock has yet to announce a more ambitious policy.

“Rather, BlackRock’s $24bn investments in coal expansion are a perfect illustration of how investors can hide behind ESG credentials and net-zero commitments. Whilst new commitments on voting are welcome, there is no time left to engage with companies that are still actively building new coal projects, with climate scientists stating since 2015 that new coal is incompatible with the Paris objectives.”

Meanwhile, Global Canopy executive director Niki Mardas said BlackRock has not addressed the role it plays in the tropical deforestation and the biodiversity crisis.

Niki Mardas, Executive Director of Global Canopy, said: “There is no solution to climate change without a solution to deforestation. Yet a great majority of the world’s largest financial institutions are looking the other way on this vital issue. Some are making big announcements on climate change, while failing even to have a deforestation policy in place.

“It is great to see BlackRock’s support for net-zero targets, but we cannot solve the climate crisis without also tackling deforestation, and BlackRock still fails to address this issue in its portfolios. BlackRock wields huge influence in the market and if it were to set out a clear and ambitious policy on deforestation, it would send a clear message that this is an issue that must be addressed.” 

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Natalie Kenway

Natalie is global head of ESG insight for ESG Clarity and has been an investment journalist for 16 years. She won Editor of the Year at the Aviva Investors Sustainability Media Awards 2021, and was Winner...