Will BlackRock’s climate move cause a domino effect?

This isn’t the first time that BlackRock CEO Larry Fink’s annual letters to CEOs and clients addressed climate risk and the need for urgent action from the public and private sector. But it is the first time we’ve seen a commitment and a plan for making climate change and sustainability central to the way that BlackRock manages risk, designs products and portfolios, and engages with companies to improve disclosure and accelerate progress towards the goals of the Paris Agreement.

This week’s news is encouraging, but it’s also just the beginning of a critical next chapter. Real results for investors, the economy and the planet hinge on how ambitiously and transparently BlackRock uses its capital and influence to accelerate climate progress and policy – and whether other leading asset managers do the same.

The urgent need for investor leadership

To solve the climate crisis – including making the capital intensive clean energy transition – investors can, should and must play a leading role.

However, until this week the four largest and most influential U.S. asset managers – BlackRock, Vanguard, State Street and Fidelity – have stayed mostly on the sidelines, or worse. Saying the right things about climate risk and the urgent need for public and private sector leadership is not the same as using a firm’s capital, company engagement and proxy voting to accelerate progress.

Tom Murray, VP EDF+Business

In fact, according to InfluenceMap, the vast majority of investors globally are misaligned with the goals of the Paris Agreement in “significant portions of their portfolio holdings.” Further, the asset management sector is “as a whole not demonstrating the kind of leadership… that the recent escalation in the urgency of climate change would apparently warrant.”

This week’s announcement from BlackRock, however, could catalyze a historic shift in leadership on Wall Street – and beyond. Especially given the emphasis on reporting risk and performance through the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD), both by the end of the year.

Climate change goes mainstream on Wall Street

“Climate change is almost invariably the top issue that clients around the world raise with BlackRock,” noted Fink in his letter. “Investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.”

Given that BlackRock manages nearly $7 trillion in investments, and that firm’s commitment was preceded by recent acts of leadership from Goldman Sachs and Credit Suisse (both of which announced plans to stop financing new coal-fired power plants), I’d say it’s fair to say that climate change has emerged as a top priority for asset owners and asset managers. And, the bar has officially been raised.

What leadership looks like

Climate leadership in the finance sector requires aligning investment strategies and portfolios with what the science says is necessary to avoid the worst impacts of climate change. It also entails developing and expanding financial products and services that accelerate the shift to low and zero carbon solutions across the economy.

Further, it requires using key tools like engagement and shareholder proxy voting to transparently and constructively challenge management teams to plan for and operate under a scenario where the Paris Agreement’s goal of limiting global warming to less than two degrees is fully realized.

The pressure is on for Vanguard, State Street, Fidelity and others to follow the leaders, including Legal & General and UBS who are well ahead of the pack. Acting now is the best way to manage risk, serve their clients, and change the course of the climate crisis.

What’s missing: climate policy

Fink’s letter acknowledged that governments must lead the way in transitioning to a low-carbon world, and that companies and investors have “have a responsibility to play a constructive role in the low-carbon transition.”

Indeed they do – but as climate change continues to pose unprecedented risks to our economy and businesses across the globe, a “constructive role” is not ambitious enough.

Goldman Sachs CEO David Solomon recently wrote in the Financial Times, “To give us the best chance of combating climate change, governments must put a price on the cost of carbon, whether through a cap and trade system, a carbon tax or other means. The resulting incentives will channel capital to low carbon solutions and drive innovation. Combining public policy, technology and capital is a must, not a choice.”

Political influence is a company’s most powerful tool for fighting climate change. That’s why the real leaders will emerge – in the finance sector and elsewhere – by advocating for climate policy, aligning with their trade associations on climate, and allocating political spending to advance climate action, not obstruct it.

Climate policy is the key to unlocking the investment and innovation needed to transition the global economy and avert the worst impacts of climate change. Whether BlackRock and other large asset managers champion a science based policy agenda will say everything about the credibility of their climate commitments.

Follow Tom on Twitter: @tpmurray