BlackRock, the world’s largest asset manager, will make climate change central to its investment decisions.
The founder and CEO Laurence Fink, who oversees the administration of approximately $ 7 billion in funds, said in his influential annual letter to CEOs on Tuesday that he believes we are “on the verge of fundamental finance reform” due to a planet in heating.
Climate change has become the main problem posed by customers, Fink said, and will affect everything from municipal bonds to long-term home mortgages.
The New York firm is taking immediate action, abandoning investments in coal used to generate energy, and will begin asking customers to reveal their climate-related risks.
“Because capital markets drive future risk, we will see changes in capital allocation faster than we see changes in the climate itself,” Fink wrote in the letter. “In the near future, and sooner than most expect, there will be a significant reallocation of capital.”
That change is already underway.
Investors invested $ 20.6 billion in sustainable funds last year, almost quadrupling the record they had set a year earlier, according to Morningstar. The industry has expanded in recent years, after starting with simple funds that unreservedly excluded stocks considered harmful, such as weapons manufacturers or tobacco stocks.
Investors, especially younger ones, say more and more that they want their money to be invested with a view to sustainability. Fearful of losing those dollars, and the rates they produce, investment companies rush to meet the growing demand.
Fund managers increasingly say they consider environmental, social and governance issues in their broad investment strategy. It is known as “ESG” that invests in the industry, and it means that fund managers measure a company’s performance in the environment and other sustainability issues along with its financial results when choosing what shares to own.
ESG funds say that this approach can help investors’ returns, rather than just their consciences, because it can help avoid risky companies and the big losses they may face in the future. Companies with bad records about the environment are more likely to face large fines, for example.
The European Union plans to dedicate a quarter of its budget to addressing climate change and has established a scheme to invest 1 billion euros ($ 1.1 billion) in investments to make the economy more environmentally friendly in the next 10 years.
The Investment Plan in Europe, which will be released on Tuesday, will be financed by the EU budget and the private sector. Its objective is to comply with the green agreement of the president of the European Commission, Ursula von der Leyen, to make the block the first carbon-neutral continent in the world by 2050.
The BlackRock change is substantial. The firm has long been a target of environmental activists who have organized protests outside their headquarters in Midtown Manhattan. It has been persecuted by some members of Congress who believe that BlackRock could better address climate change with its great economic weight.
Due to its size and scope, any BlackRock change of focus has the potential for much broader ramifications. The company has operations in dozens of countries and is often called the largest shadow bank in the world.
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter increasing market skepticism and, in turn, a higher cost of capital,” Fink wrote. “Companies and countries that defend transparency and demonstrate their capacity to respond to interested parties, on the contrary, will attract investments more effectively, including higher quality and more patient capital.”