Erik McGregor
For those following the financial sector’s approach to climate change, Larry Fink’s annual letters in the past few years have served as a barometer for measuring Wall Street’s aptitude for management of climate-related risks. Unfortunately, this year’s letter is cause for concern, with signals throughout that Wall Street’s former climate darling is dragging his feet on climate change.
Historically, to truly understand BlackRock’s approach to climate, the devil has been in the details – proxy voting, public targets and, investment strategies – but now the proof isn’t even in the rhetoric. While Fink asserts that BlackRock views “climate risk as investment risk,” his letter lacks detail on how BlackRock intends to transform those words into practice.
BlackRock is stalling on climate risk. And, in a world where the urgency of the climate crisis grows daily, stagnation is fiduciarily irresponsible. Anyone reading Fink’s letter and holding out hope on climate should have reason for concern.
“Rolling back the importance of climate risk management”
At first blush, anyone can tell that the tone of this year's letter is markedly different from past years. In the past, BlackRock’s commentary on climate risk management was much closer to center stage. This year, it took a backseat to client choice, right-wing pushback, and concerns over market volatility, and shared the stage with a proud proclamation of investment in fossil fuel projects.
While one could argue this is merely a rhetorical strategy to placate vociferous right-wing actors, the content of Fink’s letter indicates that BlackRock’s response to the growing climate crisis is plateauing. Despite recognizing the risks that climate change poses to both society and clients’ portfolios, Fink’s letter does not offer any concrete steps that would see BlackRock make good on its 2020 pledge to “place sustainability at the center of its investment decisions.” As a result, BlackRock is falling behind on responsible management of emerging risks – and Fink, it seems, is no longer trying to hide it.
“Client choice cannot be used as an excuse to abdicate responsibility for risk management”
Client choice was a central theme of Fink’s letter. The letter emphasized BlackRock’s deference to clients’ differences in terms of investment preferences, risk tolerances, and proxy voting inclinations. However, as the majority of BlackRock’s clients still rely on BlackRock for corporate risk assessments, proxy voting, and investment advice – and indeed pay the asset manager for these services – the deference to client choice cannot be a shield for abdicating responsible management of risks.
Last year, BlackRock launched Voting Choice, a service available to certain institutional clients that enables clients to choose guidelines that will direct the proxy voting of their shares. While choice can help democratize proxy voting and allow clients to more directly dictate the voting of their shares, this strategy does not absolve BlackRock of the responsibility to use its proxy voting to mitigate risk.
This is especially important as the overwhelming majority of clients still rely on BlackRock to vote their shares. Fink’s annual letter reported that clients representing over $500 billion participate in the Voting Choice program. While this may sound great, don’t be misled by big numbers: BlackRock still controls voting power over approximately $8 trillion AUM, or 94% of total assets.
To comprehensively address climate risks at portfolio companies, BlackRock must adopt a more comprehensive proxy voting policy for its baseline approach in order to ensure it is acting in the best interest of its clients. As BlackRock’s clients are disproportionately long-term and diversified investors, BlackRock needs to be doing more through proxy voting to mitigate these risks.
For clients that either don't understand or care about the risks of climate change, options are now available to them to opt in to a different strategy. But, for the vast majority of clients that rely on BlackRock to prudently manage their assets for decades to come without concern for political interference, BlackRock has a fiduciary duty to default to an approach of managing and mitigating climate risks to its portfolios.
“Large asset managers do engineer real-world outcomes – and they have a responsibility to engineer ones that help mitigate systematic risks for clients”
In the last year, Fink has been increasingly vocal that governments and technological innovation are primarily responsible for mitigating large-scale instability caused by climate change, and that financial institutions are just to navigate these changes: “It is not the role of an asset manager like BlackRock to engineer a particular outcome in the economy.”
But, the fact is they do engineer real-world outcomes. As some of the largest distributors of capital and the biggest shareholders in the majority of the most polluting companies, the investment and proxy voting decisions of major asset managers, like BlackRock, have a hand in accelerating or slowing down the low-carbon transition and have a substantial impact on corporate behavior.
Fink has talked about how hydrocarbons will be needed for 70 years, a perspective that is fundamentally misaligned with the latest IPCC report which states that “a swift, sharp reduction in fossil fuel use [is needed] if the world is to stay within a relatively safe planetary boundary.” It is an intentional decision and worldview that informs BlackRock’s investment decisions and corporate engagement priorities. And, given BlackRock’s size, these decisions help determine the direction of the market and how companies will or won’t be incentivized to change course.
In other words, BlackRock’s approach is manufacturing outcomes – just ones that locks us into a fossil-fueled future, and increases risk for society and for BlackRock’s clients.
“To be hopeful about the future, we need a future we can retire in”
In his letter, Fink highlights how investors are feeling uncertain: The market is highly volatile, there is high inflation, and the public is losing faith in financial institutions. Despite these challenges, he urges us to have hope in the future and faith in the markets. Unfortunately, he seems to miss entirely some of the underlying concerns that undermine the faith he so wishes to see.
Climate anxiety is rampant. While many are still optimistic that we can still avert the worst impacts of climate change if we act swiftly, that hope is being undermined by continued fossil fuel expansion, projects which Fink himself touts in his letter. For people – especially young people and those starting to save for their retirement – feeling confident about saving for the future requires us to have optimism about the future.
Fink is right – we need to build hope for the future, but that requires moving capital in directions that engender hope for the future. If Fink wants to instill more confidence in the markets, then investments need to work for our future, and not in the best interests of fossil fuels.
In this letter, and a series of recent public disclosures, Fink has reaffirmed his acknowledgement that climate risk is investment risk. But lip service to the management of climate risk is not enough. Not enough to protect clients’ long-term interests, not enough to guard against greenwashing, and not enough to insulate against growing systematic risks.
Whether BlackRock is actually doing its due diligence in managing climate risk will be seen in how BlackRock votes the 94% of assets it still controls, how new funds are marketed, how holdings change, and by whether BlackRock follows its peers in adopting phase-out policies for high polluting companies.
The Sierra Club and our millions of members, supporters, and partners in the US and around the world will be watching closely what Fink and BlackRock do next.