Long Term Matters: BlackRock – time to pull your finger out!
Donald Trump is not the only US leader to ignore the climate emergency. BlackRock’s 2019 letter to companies, timed to coincide with Davos, is not quite the State of Union address but it was equally silent on the crisis.
That did not stop the media from gushing about the ‘Fink effect’, and how unusually decent he is. That may be so, but it is totally irrelevant given the disconnect between acknowledgement and action. The world’s largest asset manager has unrivalled influence with investee companies, and had assets under management of $5.98trn (€5.3trn) as of the end of 2018. In addition, BlackRock’s risk platform Aladdin influences the management of around $20trn, or 10% of the world’s financial assets.
Systemically important asset managers, a description mega managers seek to avoid, have taken a disappointing approach to stewardship. In an op-ed focused on the company’s actions on pay, New York Times columnist Gretchen Morgenson wrote that “BlackRock wields its big stick like a wet noodle”.
It really is irrelevant that Fink is a decent CEO or even a life-long Democrat who regularly attends the World Economic Forum.
Public hand wringing about populism is pointless> What matters is the gap between walk and talk: few independent commentators doubt that levels of inequality last seen in the early 1930s are the main cause of the populist backlash.
The same knowing-doing gap is clear with the climate crisis. To his credit, Fink has answered critics directly. The firm’s case rests on four points, all of which have superficial plausibility but none of which stand up to detailed scrutiny.
● Private engagement by a firm as big and informed as BlackRock is more impactful than voting, especially given the increase in ESG staff. But given the number of investee companies, BlackRock would need several hundred, if not a few thousand, ESG staff to carry out stewardship properly. Traditional investment professionals, recruited and nurtured to be stock pickers, cannot be magically re-purposed to engage on systemic risks. Furthermore, other top 10 managers are able to vote against management – it is not an either/or choice.
● There is not yet clear evidence that stronger action on ESG issues – including climate change – is warranted. This confuses backward-looking research on share price movements with a forward-looking systemic risk assessment informed by science and increasing financial evidence of value destruction from ignoring the low carbon transition (for instance, European energy utilities). However brilliant BlackRock’s quants are, they will not see in their charts what has not yet happened.
● The focus on climate is something that US concepts of fiduciary duty make illegal and EU ‘values’ cannot drive US voting. Fink is either getting bad advice about the current application of fiduciary duty in the US or he is using fiduciary duty as an excuse for placing the short-term interests of companies and investors above beneficiaries. The fiduciary duty of loyalty does not need a blinkered focus on short-term portfolio returns, without consideration and management of beneficiaries’ related long-term and systemic risk exposures. And while the Republican elite has largely been captured by climate denialists, most Americans accept anthropogenic climate change and want action. That is US values are not monolithic. So US asset managers need to choose – do they want to be science-led and international or sing to the tune of extreme ideologues?
● BlackRock is taking part in all the collaborative initiatives that matter. The implication, given that BlackRock is not yet a signatory, is that ClimateAction100+, representing more than $32trn in AUM or about a quarter to a third of most FTSE and Dow Jones listed companies does not matter.
Currently this debate has been happening in circles that are too small to worry mega managers but that is changing. When Preventable Surprises launched its #Missing60 campaign in 2016 – highlighting how some fund managers were willing to ask European oil majors to disclose climate risks but were happy to support US counterparts that did not – we were ahead of the curve.
Now, 12 campaigning groups have signed a public letter challenging BlackRock. Perhaps even more significantly in terms of the public, 2019 will be remembered as the year that BlackRock was targeted by Yes Men (advertising activists who came to fame over the Bhopal disaster). They circulated a carefully written missive purportedly from BlackRock, which tricked leading journalists. The contrast between what Fink should have said, but actually did, was embarrassing.
So is America devoid of leadership on the climate front? Fortunately not. The Green New Deal is a bold and systemic response. A decade ago, Democrats tried to pass a more Republican friendly cap-and-trade plan, but it ran into a “wall of intransigence and fossil-fuel-industry-funded denialism” in the words of the Washington Post.
Will the politics of the Green New Deal – first neutralise corporate capture, then address the decarbonisation challenge – work? Some right-wing commentators seem to think so, arguing that Republicans need to “find a better idea or lose”.
So BlackRock and its peers have a choice. They can be like polemicists who argue that climate change is similar to poverty – a serious problem but one that should not involve any action that might disrupt an allegedly working system. But that incrementalism is the new climate denialism.
Who can change things? Senior executives could, but are unlikely to rock the boat. Personal career risk is more important than the climate emergency. Asset owner clients who consider themselves climate aware, but who say little about how their investment supply chain operates are powerful enablers of incrementalism. And so too are committed campaigners who ignore the mega managers to focus on smaller investor targets who can be pushed to divest from fossil fuel stocks.
As the FT noted in a December 2018 editorial: “The depressing reality about climate change is that we could solve the problem, at manageable cost, but are failing to do so. This failure is due to a mixture of blindness and self-deception. The blindness comes from those, such as US president Donald Trump, who deny the reality of climate change. The self-deception comes from those who accept the reality, but only pretend to solve it.”
C’mon BlackRock! Time to get your finger out!
Raj Thamotheram is founder and chair of Preventable Surprises