Tuesday, January 28, 2020

Strategic CSR - BlackRock

The article in the url below comments on Larry Fink's recent annual letter to CEOs that has received so much media attention. As CEO of BlackRock, "the world's largest asset manager with nearly $7 trillion in investments," Fink's opinions clearly matter, and he has increasingly embraced more of a stakeholder perspective to firm management (e.g., see Strategic CSR – BlackRock):

"Laurence D. Fink, the founder and chief executive of BlackRock, announced Tuesday that his firm would make investment decisions with environmental sustainability as a core goal. … this move will fundamentally shift its investing policy — and could reshape how corporate America does business and put pressure on other large money managers to follow suit."

So, the key question is, Will this announcement indeed "reshape how corporate America does business"? On the one hand, saying publicly that climate change represents a risk to companies and, therefore, a risk to the shareholders of those companies is hardly demonstrating great insight. In fact, you could argue that the biggest aspect of this story is that it is, in fact, a story when, to anyone paying the slightest bit of attention, this has been obvious for many years (decades?). On the other hand, however, it still matters when the CEO of one of the world's largest investment groups alters their position in a direction that advances the debate. Specifically in this year's letter, Fink focuses on sustainability and commits to ensure BlackRock's investments from now on will favor those firms that are more sustainable:

"[Fink] said BlackRock would begin to exit certain investments that 'present a high sustainability-related risk,' such as those in coal producers. His intent is to encourage every company, not just energy firms, to rethink their carbon footprints."

In addition to demanding greater transparency on climate issues/performance and divesting from firms that earn a significant percentage of profits in coal-related industries, Fink pledged to introduce new funds that closely adhere to this positive sustainable vision:

"[BlackRock], he wrote, would also introduce new funds that shun fossil fuel-oriented stocks, move more aggressively to vote against management teams that are not making progress on sustainability, and press companies to disclose plans 'for operating under a scenario where the Paris Agreement's goal of limiting global warming to less than two degrees is fully realized.'"

One concern is that, at this time, it is not immediately clear how BlackRock is going to determine which firms are considered 'sustainable' and which firms are not. Perhaps more critical, however, is that although this statement sounds progressive, implementing the vision across its stable of investments is going to be difficult given BlackRock's business model. As the article in the second url below notes:

"In a stroke, Larry Fink became one of the most powerful champions of green investing in global finance. But behind his new sustainable-investing push at BlackRock Inc. lies an uncomfortable truth: going green won't be easy or quick. Today BlackRock funds hold a 6.7% stake in Exxon Mobil Corp., for instance, as well as 6.9% in Chevron Corp. and 6% in Glencore Plc. And, in all likelihood, they'll keep holding them, for the same reason that BlackRock is so big and successful: two thirds of its roughly $7 trillion in assets are squirreled away in funds that passively track market indexes, rather than actually pick stocks or bonds."

So, in short, there are at least two reasons to be skeptical as to whether BlackRock's announcement will have much of an impact. The primary reason, as noted above, is that much of the firm's $7trn in investments is locked-up in passive index funds (at least $2trn) that, by definition, permit zero control over the allocation of capital (so, no real incentive for firms to change?). Moreover, the concentrated ownership the passive model promotes also tends to disincentivize competition (see here). Second, related to the measurement issue, is how BlackRock is going to decide which management policies/practices to support and which to vote against. In other words, how is it going to decide what constitutes 'sustainable' behavior? Already, some analysts are predicting that the firm will not even be able to meet its commitment about coal producers, let alone its more aggressive targets. Either way, while this announcement may be good business and excellent PR, it seems that it will do little to shift the needle on climate change, when what we need is dramatic action, and quickly. As the first article quietly buries further down the article:

"Because of its sheer size, BlackRock will remain one of the world's largest investors in fossil-fuel companies."

For now, therefore, I am filing BlackRock's announcement under the category of greenwash and will watch to be (hopefully) proven wrong. As the article in the third url below suggests, the firm's past record does not provide much reason for hope. For example, "the pledged coal divestments … are less than 0.1% of BlackRock's assets." More damning:

"In 2019 [BlackRock] opposed 93% of shareholder resolutions in America urging companies to become greener, compared with an industry average of 56%, according to Morningstar, a research firm. It only recently joined Climate Action 100+, a coalition of asset managers that presses big polluters to clean up."

Take care

David

David Chandler

Strategic Corporate Social Responsibility: Sustainable Value Creation (5e)

Instructor Teaching and Student Study Site: https://study.sagepub.com/chandler5e

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The library of CSR Newsletters are archived at: https://strategiccsr-sage.blogspot.com/