How BlackRock’s Climate Pledge Could Change Everything

Any chartered financial analyst worth their salt knows for a fact that the right information can make the difference between a good investment strategy and a great one. Hence the vital importance of staying up on current events, including the latest financial and business trends. Because in today’s world, everything is moving at a faster pace than it ever has before.

The news that has been on everyone’s lips of late is evidence of this: BlackRock, the world’s largest private equity firm, let it be known in mid-January through a missive penned by CEO Larry Fink that environmental and climate risks would be key considerations in all its investment decisions going forward. And when BlackRock speaks, you can be assured that the CEOs of the concerned companies are listening, and listening closely…

“Awareness [of climate issues] is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” wrote Fink in a letter to the chief executives of companies in which BlackRock invests the nearly US$7.5 trillion it manages around the planet. Given BlackRock’s clout in the financial and investment arena, it is safe to assume that we can expect to see radical changes in the months and years ahead. Like what, you may ask?

More transparency 

Over and above the actual issue of climate change, the broader concept of corporate social responsibility (CSR) is taking centre stage thanks to Fink and BlackRock. And CSR and transparency go hand in hand: “Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders […] will attract investment more effectively, including higher-quality, more patient capital,” said Fink in his January letter. BlackRock has also committed to disclosing its voting record during annual shareholders and investors meetings on a quarterly rather than yearly basis, as well as the topics discussed with the boards of the companies in which the firm invests. Yet another step in the right direction!

Less passive, more proactive

Furthermore, BlackRock has vowed to put an end to empty promises when it comes to CSR for the companies in which it invests its millions and billions. The firm will work toward doubling the number of CSR-oriented exchange-traded funds (ETFs) in its portfolio to 150. In other words, sustainable development and CSR from here on in will constitute the backdrop against which BlackRock will conduct its operations. How’s that for a paradigm shift?

Paying the piper

BlackRock’s sustainability focus will nevertheless come at a cost to investors. Management fees for CSR-type funds are generally higher than those for so-called conventional funds. This is the cost of the extra investigations and audits required to ensure investments comply with stringent CSR principles. As the number of green funds BlackRock contributes to increases over time, these costs may eventually come down to a more competitive level, but this is not currently the case.

It remains to be seen whether the two other members of the “Big Three,” namely Vanguard and State Street, will bow to the enormous pressure created by BlackRock’s bold move forward. In any event, wherever money is invested in CSR, everyone comes out a winner.