The six key points of BlackRock's letter to the world's most powerful companies
Larry Fink, CEO of BlackRock, warns that his asset management company (the world’s largest) will take action against investee companies that do not consider sustainability. “We will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress,” he warns in his annual letter to the CEOs of the world’s leading companies.
On August 19, 2019, the Business Roundtable, which brings together the largest US companies, issued an unprecedented statement defending the social function of companies, moreover declaring that this function should be treated on a par with the defense of the interests of the companies’ shareholders.
This Tuesday, January 14, it was Larry Fink, CEO and founder of BlackRock, who, in his annual letter, took a tough stance in support of a greater social commitment from companies in the face of the climate emergency.
But what lies behind this “warning letter”?
1.- The financial impact of climate change is a reality
“The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” says Fink in his letter, recognizing that it “has become a defining factor in companies’ long-term prospects.” In his view, all governments, companies and shareholders must take climate change into account.
“Research from a wide range of organizations — including the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and many others, including new studies from McKinsey on the socioeconomic implications of physical climate risk — is deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth,” he says.
The scientific studies are conclusive, and warn of the acceleration of the consequences of climate change and rising temperatures. According to the UNEP Emissions Gap Report 2019, even if all the national plans provided for under the Paris Agreement were implemented, we would still be on course for a 3.2°C temperature rise by 2050. To meet the targets (limiting the temperature rise to no more than 1.5°C by 2050), emissions must drop by around 7.6% per year from 2020 to 2030.
2.- The financial impact of climate change is upon us
The timeline has shortened. At least in terms of the financial impact of climate change, which is already underway. “In the short term, some of the work to mitigate climate risk could create more economic activity.” Larry Fink gives some examples of this: “municipal infrastructure – from roads to sewers to transit,” built in the context of climatic conditions that no longer apply, given the new climate reality (and its most disastrous consequences).
These issues are also leading to a thorough review of risk and asset valuation. “And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future — and sooner than most anticipate — there will be a significant reallocation of capital,” Larry Fink anticipates in his letter.
3.- Sustainability is profitable
It is no longer a question of ecology, image or even the more traditional concept of CSR. BlackRock, which manages assets of around $7 trillion, is clear about this. “Our investment conviction is that sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” the company says. This statement stands up. It’s a business opportunity.
The United Nations estimates that it will be necessary to mobilize between $5 and $7 trillion annually if we are to meet the Sustainable Development Goals. In addition to sectors directly related to renewable energies, others such as mobility and health — based on circular economy models — are already moving toward a necessary transition and, in many cases, reinvention. So what is on the table today (for any board of directors with a degree of strategic vision) is how to address this transition, which is going to cut across the different sectors and their value chains, and which must be carried out in an orderly manner.
The financial sector is also clear about this: “Sustainability is the biggest business opportunity for the banks over the next 10 years,” said Group Executive Chairman of BBVA, Carlos Torres Vila recently. In this scenario, and particularly for this industry, sustainability is profitable and ensures that investors are interested in it.
4.- Sustainability is not just about climate change
In Larry Fink’s view, we must go beyond climate. Sustainability must cover questions around how each company serves all of its stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data. The CEO of BlackRock is committed to the adoption of a sense of corporate purpose, which is crucial for a company to achieve profits while taking the needs of all stakeholders into account.
“At BBVA, we have taken a comprehensive approach to sustainability challenges by including not only climate change, but also other environmental and social challenges in our strategy,” explained Carlos Torres Vila at the Climate Summit held in December in Madrid. Moreover, this transition, which will take decades, must be just and equitable.
5.- A fundamental reshaping of finance is approaching
“What will happen to the 30-year mortgage — a key building block of finance — if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas?”, asks Larry Fink, who is determined to increase the pressure on management teams at the same pace as the rise in the planet’s temperature.
While the BlackRock founder says in this letter that “we are on the edge of a fundamental reshaping of finance,” Carlos Torres Vila — from that very financial industry — characterized climate change as “probably the greatest business disruption humankind has ever faced.”
6.- Strategic shift in portfolios
According to Larry Fink, companies, investors and governments need to prepare for a drastic reallocation of capital, in a movement that should channel capital flows toward a low-carbon economy.
Climate risk is an investment risk, and sustainability will be a key consideration in choosing certain investments. BlackRock itself will veto investments in any mining company that continues to extract coal for burning in thermal power plants.
In the same vein and in the financial industry, “only seven banks have annualized sustainable finance targets greater than the amount of finance they provide for fossil fuel-related transactions each year,” reveals a recent report by the World Resources Institute, which analyzed data from 50 of the world’s largest financial institutions. One of those banks is BBVA, which has committed to mobilize €12,500 million a year to be devoted to sustainable targets, compared with €3,400 million devoted to financing for projects based on fossil fuels.
BlackRock is a founding member of the Task Force on Climate-related Financial Disclosures (TCFD), and has just joined Climate Action 100+, an initiative to limit greenhouse gas emissions that has been signed up to by 370 investors. TCFD is urging the top 100 greenhouse gas emitters to reduce their environmental impact.
In the financial sector, the sustainable reference framework is based on, among other factors, the Principles for Responsible Banking, which, under the auspices of the United Nations, have been signed by BBVA as well as other founding banks. It is all about aligning the entities’ strategy with sustainable development, as embodied in the UN SDGs and also in the Paris Agreement.
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