BlackRock prepares for the climate-conscious future of capitalism

In his annual letter to clients, Larry Fink, CEO of BlackRock, signalled that he expects the acceleration of sustainable investments to continue into 2021 and remained optimistic over the ability companies and nation states to limit global temperature rises to below 2 degrees Celsius. “I have great optimism about the future of capitalism…not in spite of the energy transition, but because of it” said Mr. Fink. Investments in ESG-integrated options experienced a banner year in 2020, with investors allocating 288 billion USD globally to sustainable assets, representing a 96% increase over 2019. The shift towards a low-carbon economy has prompted the world’s largest asset manager to consolidate its investment strategies and ESG commitments.

 

BlackRock are aiming to build on sustainable action taken in recent years. In 2019, for example, BlackRock directed companies towards reporting in alignment with the Task Force on Climate Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB), leading to a 363% increase in SASB reporting and over 1,700 companies supporting TCFD. TCFD and SASB cover a broader range of factors in determining ESG factors, making it more difficult for companies to engage in greenwashing, the practice of giving a false impression of how sustainably a company operates.

 

Following activist pressure, including the invasion of BlackRock’s office in Paris, the company sought to improve their green credentials. The asset manager succeeded in making 100% of its active and advisory strategies ESG-integrated and introduced 93 new sustainable solutions, representing a capital allocation of 39 billion USD towards green investment strategies. Despite its improvements, hedge fund manager Christopher Hohn admonished BlackRock, claiming that the industry as a whole was taking “insufficient and ineffective action” in tackling climate change and calling on BlackRock to “show leadership”, reflecting the sentiment of many activist investors.

 

Mr. Fink’s 2021 letter to clients signalled a more aggressive approach towards sustainable investment strategies, such as increasing scrutiny in active portfolios and incorporating the impact of climate change in capital market assumptions. Scrutiny over company operations is set to be expanded to 1,000 clients and partners, representing 90% of major global emitters. Among the more ambitious 2021 targets are the publication of a temperature alignment metric for public equity and bond funds. Temperature alignment is a measurement which produces the compatibility of a portfolio or investment with a particular global warming outcome, a constantly evolving area of portfolio construction.

 

A lack of quality data has long been considered the biggest obstacle for investors looking to invest heavily in sustainable options. The sophistication of a temperature alignment metric would allow BlackRock to develop a wider range of climate data and risk management strategies. Through Aladdin Climate, a company software which calculates climate risk in portfolios, the company would be able to tailor climate targets to clients through tracking the trajectory of investments so that they converge towards net-zero carbon emissions. In early 2021, BlackRock took a minority stake in Clarity AI, a sustainability analytics platform, to be used in tandem with Aladdin Climate. Through the use of big data and machine learning, Clarity AI aims to provide insights into climate-related impact across companies and would give BlackRock a unique opportunity to attract eco-conscious investors.

 

A recent report by BlackRock found that 81% of globally representative ESG index funds outperformed more traditional peers in 2020, a trend which looks set to eventually transition to a net-zero carbon economy. By committing to advancing climate-related technology and ensuring that sustainability issues inform and direct investment strategies, BlackRock appears likely to benefit from the green future of capital.

 

By Jack Walsh

Sector Head: Sophia Li

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