Climate is changing. Investing needs to, too, says BlackRock

NEW YORK - A changing climate means dramatic risks for the world -- and for investments too, the chief of the world's largest investment manager said Tuesday.

To prepare for and protect against those risks, BlackRock CEO Laurence Fink said in his influential annual letter to CEOs that his firm, which manages roughly $7 trillion for investors, will make a series of moves putting climate change and sustainability at the centre of its investing approach.

Among them, BlackRock will cut out investments in some coal producers from some of its portfolios, sharply increase the number of sustainability-focused funds that it offers, and vote against companies at shareholder meetings when they're too slow in disclosing and mitigating their impact on the environment.

"Climate change has become a defining factor in companies' long-term prospects," Fink wrote in his letter, adding that he believes "we are on the edge of a fundamental reshaping of finance" because of it.

Fink predicted that the changes in how capital is deployed will come "more quickly than we see changes to the climate itself," and "sooner than most anticipate."

In fact, the shift is already underway.

Investors poured a net $20.6 billion into sustainable funds across the industry last year, nearly quadruple the record set a year earlier, according to Morningstar. Investors, particularly younger ones, increasingly say they want their money invested with an eye toward sustainability. The total dollars are still small relative to the entire industry -- investors plugged a total of $413.9 billion into all taxable bond funds last year, while yanking $41.3 billion out of all U.S. stock funds -- but the trend is clear and accelerating.

Fearful of losing out on those dollars -- and the fees that they produce -- investment companies are rushing to meet the surging demand.

BlackRock and other huge asset managers are generally behind smaller competitors when it comes to sustainability, said Danielle Fugere, president of shareholder-advocacy group As You Sow. BlackRock, State Street, Vanguard and others have been criticized for not doing more about the environment. Besides protests outside its Manhattan headquarters, BlackRock has also heard criticism from members of Congress who believe it could better address climate change.

Because of its size and reach, any shift in focus by BlackRock could alter the industry. It is a major shareholder in thousands of companies through its popular exchange-traded funds that track various indexes, as well as its funds run by stock-picking managers. But Fugere said Tuesday's announcement is only a first step.

"The words are significant, and the words show leadership," Fugere said. "But that's not enough. We have to see on the ground action, and we need to see it quickly. There is no time. Australia is burning up. California is burning up."

The wildfires in parts of Australia and California and other recent disasters have shown big institutional investors that climate change is just as much a threat to their returns in the near term as over the coming decades.

"The physical risks have become so immediately clear and stark," said Amy Borrus, deputy director of the Council for Institutional Investors, whose members include pension funds, endowments and other U.S.-based asset owners investing more than $4 trillion.

"Many institutional investors will welcome these steps by BlackRock," she said. "More and more public funds are coming around to the view that sound environmental, social and governance practices are not just about making the world better but about fundamentally creating and preserving shareholder value."

This approach to investing comes after a yearslong evolution for the industry, which began with simple funds that bluntly excluded stocks deemed as harmful, such as gun makers or tobacco stocks.

Now, fund managers say they they look at environmental, social and governance issues broadly as part of their analysis of any investment. It's known as "ESG" investing, and proponents say it aids investors' returns, not just their consciences, because it helps them avoid risky stocks and big potential losses. Companies with poor records on environmental issues are more likely to face big fines, for example.

For all the noise made by Fink's announcement, the reaction in the stock market was muted on Tuesday. Energy stocks in the S&P 500 were down, but not as much as some other corners of the market. Coal stocks were mixed.

In his letter, Fink said companies and investors have a role to play in the transition to a low-carbon world, but governments will ultimately need to lead the way.

Some movement has begun. The European Union on Tuesday unveiled a plan to dedicate a quarter of its budget to tackling climate change and to help shift 1 trillion euros ($1.1 trillion) in investment towards making the economy more environmentally friendly over the next 10 years. The Europe Investment Plan will be funded by the EU budget and the private sector. It aims to deliver on European Commission president Ursula von der Leyen's Green Deal to make the bloc the world's first carbon-neutral continent by 2050.

"It will be interesting to see whether BlackRock's high profile move will have any impact on policy," Borrus said. "Government can do much more in the long run on climate change than investment flows."

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AP Reporter Samuel Petrequin contributed to this report from Brussels.