Blackrock And Greta Thunberg Team Up, Well Sort Of

Blackrock’s announcement about how its future investment policies will reflect climate-related risks, and Greta Thunberg’s address at the World Economic Forum in Davos were major headlines during the first month of 2020.

The messages from both Blackrock and Thunberg agree in respect to the inadequate global response to greenhouse gas emissions. In other words, at a broad level, the messages reinforce each other; but only up to a point.

Thunberg very clearly tells us that we need to move to zero greenhouse gas emissions at once! In her words, “immediately and completely divest from fossil fuels… We want this done now.”

In contrast, Blackrock’s CEO Larry Fink stated: “Despite recent rapid advances in technology, the science does not yet exist to replace many of today’s essential uses of hydrocarbons.” For this reason, Blackrock, one of the largest, if not the largest money manager in the world will continue its major role as an investor in fossil fuel firms.

Blackrock has been very clear to say that its efforts on climate change are less about saving the planet and more about maximizing returns for investors. In this respect, its main reason for reducing the weights it assigns to fossil fuel firms stems mostly from its conviction that these firms will earn inferior returns in the future.

Investors, take note: From a behavioral finance perspective, Blackrock views financial markets as less than perfectly efficient when it comes to climate risk, meaning that there is potential for positive alpha being generated by smart money.

One place where the messages from Blackrock and Greta Thunberg align involves the social pressure which activist groups sharing Thunberg’s outlook will have on the greenhouse gas emission policies of firms in which Blackrock invests. Specifically, Blackrock will seek to reduce portfolio weights in firms that it expects to be adversely impacted by climate change activists.

Greta Thunberg’s generation is beginning to rally around her, now that she has emerged as a modern climate change analogue of Joan of Arc. Going forward, the voices of young activists will become louder and more influential, especially as those activists achieve greater power.

Blackrock’s efforts will exert pressure on firms to focus more intently on climate risk, and to make the effort to disclose those risks.

What the media reports in January 2020 largely failed to tell us is that a movement is already underway to induce much greater disclosure of climate risks by companies. This movement is known by its initials TCFD, which stands for “Task Force on Climate-Related Financial Disclosures.” TCFD has been spearheaded by Michael Bloomberg, who is seeking to become the Democratic party nominee for U.S. President, and Mark Carney, who is about to step down as Governor of the Bank of England.

In June 2019, the TCFD released a report which made the following four points about areas that are ripe for improvement:

1. Since 2016, firms’ disclosures of climate-related financial information appear to have increased; however those increases are still insufficient for investors.

2. The most important area which users of climate-related financial disclosures have identified involves companies providing greater clarity about the potential financial impact of climate-related issues on their businesses.  

3. A majority, specifically sixty percent, of companies surveyed by TCFD, which view climate-related risk as material and say that they use scenario analysis to assess the resilience of their strategies, do not actually disclose information about the resilience of those strategies.

4. Most companies will need to make significant changes to their organizational structures in order to address climate-related issues. At the moment, responsibility is mostly concentrated in those parts of the organization with mandates to deal with sustainability and corporate responsibility. However, as climate risks increase, which they most certainly will, those engaged in finance, risk management, and executive management will need to assume greater leadership.

There is good reason to believe that Blackrock’s new policies and the activities of those inspired by Greta Thunberg will impact both what companies do, and disclose, about dealing with the risks of climate change. Exactly how impactful is another issue, and one which remains to be seen. But at least the direction is right.