Money giant BlackRock's uncomfortable truth: Going green won't be easy

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Only last year, Fink became a designated villain of climate change, dogged by protesters pressing BlackRock to divest from fossil fuel companies and others that contribute to climate change. Tuesday’s announcement promptly drew praise from his former critics — and raised the prospect that other money managers would soon follow suit.

Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.

Larry Fink

While the move will draw more attention to environmental sustainability, the hard reality of passive investing may mean it’s as much about making a statement as taking immediate action.

“One of BlackRock’s many challenges is their heavy reliance on traditional indexes and how they address that in light of their new climate policy,” said Timothy Smith, director of environment, social and governance shareowner engagement at Boston Trust Walden, which manages $US10 billion.

The biggest investors could once send a strong message to companies, forcing executives to sit up and listen: change your ways or we’ll sell our shares. Such pressure helped in divestment campaigns from apartheid-era South Africa to American college campuses where students object to how endowment money is allocated.

Selling isn’t an option

But in a period where index-tracking funds are rapidly accumulating assets, selling isn’t an option. That leaves companies such as BlackRock and rival Vanguard Group at the mercy of benchmark compilers including MSCI  and London Stock Exchange Group’s FTSE Russell unit.

As part of BlackRock’s plan, revealed by Fink in a letter on Tuesday, it pledged to pressure index providers to expand their sustainable benchmarks. The changes also include doubling offerings of sustainable exchange-traded funds (ETFs) to 150, and exiting thermal coal producers for its approximately $US1.8 trillion in active strategies.

One of BlackRock’s many challenges is their heavy reliance on traditional indexes and how they address that in light of their new climate policy.

Boston Trust Walden’s Timothy Smith

“Climate change has become a defining factor in companies’ long-term prospects,” Fink wrote in his annual letter to corporate executives. “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

Earlier in January, BlackRock joined Climate Action 100+, a group of more than 370 investment managers with a combined $US41 trillion in assets that pressures greenhouse gas emitters to reform.

Fink is tackling the subject as asset managers come under greater pressure on sustainability, with BlackRock in particular facing increasing scrutiny for its behaviour and voting record around environmental issues.

Groups including Amazon Watch, the Sunrise Project, and coalitions of youth activists and parents have all targeted the asset manager recently, asking for more action around climate change.

Delicate position

BlackRock’s size puts it in a delicate position: operating in more than 30 countries, and as one of the biggest holders of most US publicly traded companies, its clients include large sovereign wealth funds, state pension plans and financial advisers with viewpoints that don’t necessarily align on what to do about climate change and social justice issues.

Smith of Boston Trust Walden said the fund firm could start creating its own indexes, which would give it gauges that meet its new criteria.

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Diana Best, a senior strategist for the Sunrise Project, a non-profit that seeks to rally organisations to advocate for climate change, said that Fink’s letter and BlackRock’s business changes set a good example.

“BlackRock’s new initiatives match the size of the crisis we’re seeing,” Best said in an emailed statement. “Putting climate change at the absolute centre of its business is the way every company should respond to this planetary emergency.”

Bloomberg

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