Larry Fink started off 2020 by dropping a big, green bombshell. In his annual letter to corporate executives, the BlackRock CEO wrote that the world’s largest asset manager would push climate change to the center of its investment process. He also issued a warning, telling businesses to prepare for a “fundamental reshaping of finance.”
BlackRock, which manages about $6.5 trillion, has long been a target for environmentalists because of its vast holdings in companies most responsible for global warming. Fink’s call to arms was seen as a major shift for Wall Street, an unmistakable signal that the biggest pool of capital would be aimed squarely at the climate crisis. But there are obstacles — not least of which is the way BlackRock invests the bulk of its assets, that is, in index-linked funds. Fink’s plan has run up against CEOs and investors scrambling just to survive the economic fallout from the pandemic.
In the months since Fink’s announcement, the investing landscape has changed more than anyone could have anticipated, and BlackRock will play a leading role in what comes next. On March 24, the Fed selected the Wall Street giant to run three bond-buying programs, including participating in a $750 billion plan to prop up struggling American companies by buying corporate debt on the central bank’s behalf.
It’s not the first time BlackRock has been asked to help in an emergency. In the aftermath of the 2008 financial crisis, the company played several roles in a controversial government plan to manage toxic assets. This time, BlackRock has been pulled into a partisan debate over whether unprecedented borrowing should be used to invest in sustainable industries.
Not long after the asset manager’s role with the Fed was announced, Republican senators wrote Fed Chairman Jerome Powell and Treasury Secretary Steve Mnuchin seeking guarantees that BlackRock would hew to its fiduciary role and not leave out energy and transportation companies. Democrats soon followed up, urging Powell and Mnuchin to ensure debt purchases aren’t used to bail out fossil fuel companies that were in trouble before the new coronavirus struck.
Fink has told shareholders the pandemic should be used as an “opportunity to accelerate into a more sustainable world.” But when it comes to the company’s work for the Fed, his hands are tied. Although BlackRock scoops up corporate bonds and ETFs on behalf of the government, it must follow Fed guidelines rather than its own. That means buying investment-grade and high-yield debt from companies in need regardless of environmental footprint — thus leaving fossil fuel companies free to participate.
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For Fink, who has privately warned of a coming wave of U.S. bankruptcies, the gravity of BlackRock’s pandemic assignment seems clear. It may mean that the urgency of saving the economy comes at some cost to a more sweeping vision of saving the planet.
BlackRock is one of the biggest holders of shares in U.S. publicly traded companies, counting sovereign wealth funds and state pension plans among its clients. In the past the company has seemed reluctant to vote for corporate climate initiatives or push for sustainable reforms, drawing criticism as it lagged peers in support for environmental proposals.
But in 2020, BlackRock joined Climate Action 100+, a group of 450 investors who manage a combined $40 trillion. Together they seek to convince the world’s biggest greenhouse gas emitters that reform is in their best interest. BlackRock also recently won a contract to develop sustainability strategies for the European Union’s banking system.
Still, those in the environmental community view the company with suspicion. BlackRock holds almost two-thirds of its assets in products linked to indexes, a big part of a passive investing strategy that’s brought down fees for small investors. These indexes — which BlackRock mostly doesn’t control—include fossil fuel giants such as Exxon Mobil, Royal Dutch Shell, and BP, some of the planet’s worst polluters.
Among the changes Fink outlined in his January letter was making sustainability integral to portfolio construction and risk management. He pledged to double sustainable ETF offerings, push index providers to expand their environmental, social and governance benchmarks, and drop thermal coal producers from BlackRock’s approximately $1.8 trillion in active strategies.
With proxy season under way, there’s additional focus on its voting behavior. The company said it’s voted against 25 directors and cast no-confidence votes against two boards in 2020, all on climate-related concerns, and that it’s supported two climate-oriented shareholder proposals. But it’s also courted controversy, given Fink’s pledge, by voting against climate-related resolutions involving Australian oil companies Woodside Petroleum and Santos.
Diana Best, senior finance campaigner at the Sunrise Project, says that even though Fink’s plans are a step forward, BlackRock still warrants scrutiny. One thing she says is needed is more disclosure on how the company is updating its sustainability analysis and the risk factors it’s considering. “The words don’t mean anything until we see concrete action,” she says.
Climate activists say they had hoped the Fed’s massive outlay, and BlackRock’s role in it, could serve as a once-in-a-lifetime opportunity to jump-start American investment in a renewable future. Only three days after the company’s selection, environmental groups including Greenpeace and the Sierra Club urged Powell to weigh climate risk when deciding what sectors of the economy get financial support. But to no avail.
The decade’s top performers also outpaced broader markets over the short term.
Brian Deese, BlackRock’s global head of sustainable investing, declined to comment on the Fed programs. He said investors are watching whether governments will infuse rescue packages with sustainable components.
“There’s obviously a lot of conversation, particularly in [the EU], about ways to use the unprecedented fiscal response,” he said. “Whether global policymakers take this moment to actually try to do recovery in a way that accelerates the trend toward sustainability is going to be one of the key outstanding questions.”
Beyond the bailout, Deese said, the pandemic could turbocharge client interest in the green investing strategies Fink highlighted. Environmentalists agree, saying the coronavirus may make investors reconsider their fossil fuel holdings, which have been negatively affected by the oil price war between Saudi Arabia and Russia, stay-at-home orders, industrial shutdowns, and a cratering travel sector.
One S&P index of energy providers shed more than half its value in the first quarter. By contrast the MSCI Global Environment Index, which focuses on companies contributing to a more sustainable future, was down only 17% over the period. BlackRock said 94% of sustainable indexes it examined outperformed benchmarks in the first quarter COVID-19 sell-off. And even though its own clients withdrew a net $19 billion from long-term investment products in the first quarter, the company’s ESG-focused products generated about $10 billion of inflows.
“We’ve seen firsthand how this turns our world upside down — our economy, our health and our safety,” said Mindy Lubber, CEO of the sustainability nonprofit Ceres. “If we can learn that climate change has the potential to turn our world upside down maybe as badly or worse, our incredibly maniacal short-term thinking might get broadened out.”
But in a worst-case scenario for environmentalists, the pandemic could instead send more investors fleeing for shorter-term safety without concern for climate-forward policies.
Eric Walters, president of SilverCrest Wealth Planning in Colorado, says he sees no sign of investors he works with shunning energy companies as a result of the coronavirus crash. Mitchell Kraus, owner of Capital Intelligence Associates, said that for most of his clients, “their primary concern is their return,” though he adds that many “are thrilled to be out of fossil fuels.”
Some companies that were brimming with plans for green investment are instead focusing on solvency. BlackRock acknowledged this new reality in its first-quarter stewardship report, in which it said corporations will be given some flexibility in reporting on climate risk as they deal with the current crisis. But though the pandemic may induce some short-term thinking, the asset manager contends companies that incorporate sustainability will perform better under future stress.
Lubber says any marginalization of green investing will be temporary. “I haven’t seen any of the companies we work with say this is taking us off-topic on climate,” she says. “There will be a little bit of a dip in energy and focus, but nobody is giving up on it.”
