Top Asset Management Firm’s Game-Changing Assessment: “Climate Risk is Investment Risk”

BlackRock is the world’s leading asset management firm and provider of investment management, risk management, and advisory services. Its total worldwide portfolio is nearly $7 trillion as of this past September.

This week, BlackRock chairman and CEO Larry Fink sent a letter to CEOs discussing their future valuations around climate change. The company has “made sustainability their standard,” triggering a potential watershed moment for investors in clean energy, particularly because BlackRock’s decision was completely voluntary and based on free-market principles.

“(Climate) awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” he wrote, claiming that “climate risk is investment risk.”

These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future—and sooner than most anticipate—there will be a significant reallocation of capital.”

Addressing climate change obviously presents many challenges, but it has also proven to offer economic opportunities. For instance, renewable energy is creating jobs at a rate 12 times faster than the rest of the economy.

Politicians should take note, as well, because such tangible results resonate with conservative voters. In fact, their opinions have already shifted, with CRES Forum polling showing 81 percent of voters overall support government action to accelerate the development and use of clean energy in the United States, including more than two-thirds of Republican voters. BlackRock’s admonishments will likely further move public opinion and the private sector, particularly as citizens see more and more clean energy job creation and local economic growth in their communities.

As Mr. Fink put it, “Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital.”

BlackRock’s initiatives to place sustainability at the center of its investment approach include making sustainability integral to portfolio construction and risk management; exiting investments that present a high sustainability-related risk, such as thermal coal producers; launching new investment products that screen fossil fuels; and strengthening its commitment to sustainability and transparency in its investment stewardship activities.

Mr. Fink said studies from the UN’s Intergovernmental Panel on Climate Change, the BlackRock Investment Institute, and McKinsey, among others, are deepening our understanding of how climate risk will impact both our physical world and the global system that finances economic growth. CRES commends BlackRock’s bold move.

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