BlackRock, the world’s largest money manager, just announced that it would exit investments with “high sustainability” risks. Initially, we interpreted that as meaning a plan for the eventual divestiture from coal mines and related fossil burning infrastructure. Larry Fink, the CEO of BlackRock said in his annual letter that the world of finance was on the cusp of a fundamental change.
But Mr Fink’s epiphany could mean more to energy companies in general than to coal miners that only comprise a small percentage of the market capitalization of the energy industry. As a firm BlackRock creates low cost equity and fixed income funds for investors. These funds own virtually every asset class imaginable and they do so in size. However, if BlackRock’s investment committee elects to eliminate energy stocks from its various portfolios, it is likely that the resulting selling pressure would depress prices, thereby making financing more expensive for those firms. On the other hand, when BlackRock creates environmentally friendly funds for investors, these attract investment funds and should elevate prices of the companies selected.
BlackRock may have been slow to notice the trend but once it is on board the pressure will be on for the other large fund managers to follow suit. In the past, it was easier to dismiss environmental risk as an investment criterion that concerned only a minority of investors. This can no longer be said with BlackRock on board embracing even a modicum of environmental awareness in its future portfolio construction. The issue of the environment in portfolios has now clearly gone mainstream.
Few details have emerged on how BlackRock actually intends to implement its new policy, But as the old saying goes, it would be irresponsible not to speculate. First we doubt we’ll see a wholesale disinvestment of an entire fossil fuel sector like oil and gas stocks. These still comprise too large a piece of overall global equity assets to simply disinvest from.
Second, the avoidance of a market sector like oil and gas E&P for example is a mixed blessing. In bad times for the group when energy prices are low, portfolios with no or minimal exposure to the sector will outperform their more diversified peers. But the reverse is also true if energy prices solidify. Then energy avoiding portfolios are likely to underperform their financial peers thus causing investors to go elsewhere. We take no official view on inflation but if we do see a resurgence then energy light portfolios might be less desirable if the broad commodity complex plays its traditional role as inflation hedge. Related: Bearish Sentiment Returns To Oil Markets
BlackRock, as a marketer of index funds, must own all large, representative firms in a particular industry as its managers develop portfolios for the public. BlackRock, as a large and significant shareowner can also exert its corporate clout in a more direct fashion. They can vote their shares opposing managements embracing environmental risks while discouraging other activities. More important, BlackRock might soon decide to offer investors equity funds that target higher environmental standards, providing a big financial boost to those firms.
Will this announcement be another instance of CEO greenwashing, a mere statement of asset financing policy soon forgotten? In the fixed income realm we see proposals for “green bonds” to finance sustainable, green investments? Or is this the beginning of a major change? Our bet is that BlackRock’s investment actions will be initially incremental, baby steps. However, at $7 trillion in assets, BlackRock is so large that even small steps make a big impact.
Investor pressure on fossil fuel producers as well as users has been increasing dramatically of late. The headlines and pictures from Australia alone have been simply brutal. Investing at some level cannot be entirely divorced from politics. The BlackRock CEO’s letter is more evidence that investment policies do change, maybe sooner than later. And that is not good news for fossil fuel industry.
By Leonard Hyman and William Tilles for Oilprice.com
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