PARIS, France, Jan 22 – Investment behemoth BlackRock’s decision to divest holdings in companies reliant on coal may encourage more climate-friendly finance but raises questions over how investors prioritise the future of the planet, analysts and industry insiders said Wednesday.
Last week’s announcement from the world’s biggest private investment fund that it would remove its stakes in companies that generate more than a quarter of sales from thermal coal by mid-2020 was greeted by fund managers as a positive first step.
It also attracted a slew of glowing headlines suggesting that BlackRock was prioritising the climate in its investment strategy or even ditching fossil fuels altogether.
But the same managers and industry watchdogs told AFP that it remained far from clear how BlackRock aims to implement its plan to make “sustainability” its new standard for investing.
As the devastating impacts and mounting financial burden of climate change become clearer, more investors and businesses are seeking to reduce the risk that they will be left holding the bag when countries move against certain fossil fuels.
Among the hydrocarbons that power the world economy, coal is by far the worst for the environment.
The UN Intergovernmental Panel on Climate Change (IPCC) says that for a better-than-even chance of reaching the safer Paris climate deal cap of 1.5 degree Celsius of warming, coal use must fall two thirds by 2030 and hit virtually zero by mid-century.
BlackRock’s decision is “immediate bad news for the coal industry,” said Anders Schelde, chief investment officer of the Danish MP Pension fund.
“BlackRock’s position and scale means that its highlighting of climate change as the issue of our time is an important milestone in the investment market and so is much welcomed,” Charles Kirwan-Taylor, executive chairman of the Atlas Infrastructure investment fund, told AFP.
“But it’s only a start.”
Thomas O’Neill, co-founder of industry monitor InfluenceMap, which tracks investments in fossil fuels and renewables, said by his analysis BlackRock’s move would cut its holdings in coal by more than half.
But O’Neill added a caveat.
BlackRock is using the same threshold for divesting as Norway’s government pension fund did in 2015: firms that generate more than 25 percent of their sales from thermal coal.
While that decision did result a short-term drop, over the longer term the Norwegian fund’s investment in thermal coal increased by 12 percent, according to InfluenceMap.
This was because as it dropped stakes in so-called coal “pure-plays” in Indonesia and the United States, it increased its holdings in companies whose coal income didn’t exceed the divestment sales threshold.
In particular, the fund nearly doubled its stake in Anglo-Swiss giant Glencore, one of the biggest miners in the world.
“Essentially there was very little effect on the capital available for coal,” O’Neill told AFP.
When asked about its holdings in Glencore, a BlackRock spokeswoman referred AFP to CEO Larry Fink’s letter to investors last week.
It said BlackRock would “closely scrutinise” businesses reliant on thermal coal but that don’t exceed the 25 percent revenue threshold, suggesting it may drop more holdings in future.
It is long overdue that BlackRock re-evaluate its fossil fuel holdings if it wants to maximise returns for investors, according to one analysis.
Last year the Institute for Energy Economics and Financial Analysis (IEEFA) calculated BlackRock had lost its clients around $90 billion over the last decade by putting their money into fossil fuel firms that underperformed compared to green energy firms that enjoyed stellar growth.
BlackRock oversees $7 trillion in investors’ money and it has a fiduciary duty to them — that is a legal obligation to act in their best interest.
Tim Buckley, director of energy finance studies at IEEFA, said BlackRock’s strategy shift could be a significant marker for the global investment community in confronting climate risks.
“Once a financial institution accepts its fiduciary duty to act on the climate’s clear financial risk, the initial announcement is almost always just the first step,” he said.
“A firm committing to align with the Paris Agreement is committing to deep decarbonisation, and anything other than a superficial greenwash highlights the profound stranded asset risks.”
Off the hook?
Stranded assets are those that prematurely lose their value, with coal-fired energy plants facing a clear threat from tighter regulation as nations try to meet their commitments to lower the production of gases that cause global warming.
But with the IPCC saying that for the best and safest chance of capping global warming at 1.5C, oil and gas consumption would need to decline 37 percent and 25 percent respectively by 2030, these industries are also at risk.
However, BlackRock said in its note to clients that “global economic development… will continue to rely on hydrocarbons for a number of years”.
In the eyes of one fund manager, who didn’t want to be named, this amounts to “BlackRock letting itself off the hook pretty substantially, both in terms of action and timing”.
BlackRock currently manages $50 billion in “solutions that support the transition to a low carbon economy”, according to Fink’s letter.
He announced a number of sustainable investment priorities, including “making sustainability integral to portfolio construction and risk management (and) launching new investment products that screen fossil fuels”, as well as calling for clearer climate risk disclosures from companies.