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BlackRock: Tectonic Shifts Well Under Way

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BlackRock CEO Larry Fink recently talked about the energy transition being a long journey from brown to different shades of green. While he arguably stated the obvious, some have read it as the giant US asset manager moderating its strong position on climate action. But BlackRock is convinced "climate risk will substantially reshape the economy," says Paul Bodnar, its global head of sustainable investing. And while the transition will "of course" take decades to unfold and necessitate "careful public management," the "tectonic shift" in capital markets toward more sustainable companies and assets is already taking place. This is evident, for example, in the oversubscription of green stocks and bonds issuances.

While markets know how to identify and support green companies and technologies, the world is still heavily dependent on fossil fuels for many essential functions. "This is what Larry is talking about with shades of green. The transition is not about waving a magic wand and imagining that everything will suddenly be green," says Bodnar. The key for investors is not necessarily to divest from all carbon-intensive companies, but rather to invest in those that have clear transition plans, he insists.

Confidence in Oil Industry

BlackRock has "a lot of confidence" that oil and gas companies have “the ability to adapt” to the global energy transition, thanks to their strong balance sheets, expertise and talent. "But this world will also have disruptors and challengers, and market forces will play out," Bodnar warns. And while BlackRock is essentially agnostic about adaptation strategies — viewing either renewable diversification or a focus on legacy oil and gas with carbon management as equally coherent — European majors' emphasis on reducing the carbon intensity of their products is noteworthy. “The same thing that is happening in shipping or steelmaking in terms of finding ways to reduce the carbon intensity of products is starting to happen in energy, and that's an interesting development."

Finding a Credible Path

Through the $130 trillion-strong Glasgow Financial Alliance for Net Zero (Gfanz), BlackRock is talking to carbon-intensive industries such as aviation and steelmaking to bring together leading corporates, financial institutions, customers, suppliers and regulators to determine a credible pathway to net zero.

A good example to follow is shipping, Bodnar tells Energy Intelligence. The sector agreed on a carbon-intensity target, which enabled banks to create a quantitative climate standard that other stakeholders could follow. "Every year, the carbon intensity of the banks' shipping portfolios declines and they have to report against it. After the banks did that, the cargo owners, who are the customers of the shipping sector, adopted the very same standard into the Sea Cargo Charter. And now the insurance companies are working on their version."

The Hard Part

Arguably the "hard part" of the energy transition is the fact that carbon-intensive assets such as power plants, cement factories and even passenger cars were designed to have a useful lifetime longer than climate science advises. That also applies to fossil fuel reserves becoming "unburnable" in the most ambitious climate scenarios. "Engineering the early retirement of these assets in a way that does not destroy value for workers, communities, investors or owners is the most difficult part of decarbonization that requires a real partnership between the public and private sector."

One option would be to create a special purpose vehicle — or "bad bank" — to take ownership of these assets and manage their orderly write-off. How to finance that vehicle and whether it results in a better environmental outcome remain open questions, Bodnar notes.

Passive to Active

Another issue for asset managers such as BlackRock is the amount of assets they manage in index strategies — also called passive management — critics argue. At first sight index investing, where a fund tracks a predefined benchmark such as the S&P500 market index, seems to contradict environmental, social and governance (ESG) considerations where investors are supposed to actively select the most sustainable companies.

But index investors can be active shareholders, Bodnar insists. As index funds will hold companies for as long as they are in the benchmark, fund managers are incentivized to engage with companies to ensure that they are appropriately considering ESG risks and opportunities in their business strategy, and are well positioned to succeed through the energy transition. This can include asking companies about their transition plans, voting at shareholder meetings, and promoting corporate governance best practices at industry level.

Plenty of Products

BlackRock also offers "by far the largest suite of new generation climate and ESG products" to its clients, says Bodnar. The firm has well over $200 billion in assets under management across roughly 200 sustainable and low-carbon index funds. In total, BlackRock manages over $400 billion in sustainable strategies. It is also leveraging technology and data to help clients better understand climate risks and their impact on portfolios' investment performance.

BlackRock, for example, recently started publishing the MSCI Implied Temperature Rise for most of its public index mutual funds and exchange traded funds. The metric uses forward-looking projections of companies' future emissions to help investors understand whether their investments are aligned to the Paris Agreement, Bodnar explains. "These are all things that we can do on the passive side."

The World's Top Asset Managers
NameCountryAssets ($ billion)
BlackRockUS$8,677
VanguardUS7,149
FidelityUS3,609
State StreetUS3,467
AllianzGermany2,934
JPMorgan ChaseUS2,716
Capital GroupUS2,384
BNY MellonUS2,211
Goldman SachsUS2,145
AmundiFrance2,126
Legal & GeneralUK1,736
PrudentialUS1,721
UBSSwitzerland1,641
Franklin TempletonUS1,498
Morgan StanleyUS$1,475

Topics:
ESG, Equity and Debt Markets, CO2 Emissions, Corporate Strategy , Leadership Interviews
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