Asset AllocationJanuary 15, 2020

BlackRock Makes Sustainability the Focus of its Investment Strategy

CEO Larry Fink says investment risk and climate risk are one and the same.

Reported by Michael Katz

In a tectonic shift for the world’s largest asset manager, BlackRock is making sustainability the central focus of its investment strategy for the $6.3 trillion it manages for clients.

In his annual letter to CEOs, and another to clients, BlackRock CEO and founder Larry Fink announced several initiatives that make sustainability “integral to portfolio construction and risk management.”

Fink said the firm would exit investments that present a high sustainability-related risk, such as thermal coal producers, and will launch new investment products that screen fossil fuels. He also said the company will bolster its commitment to sustainability and transparency in its investment stewardship activities.

“Climate change has become a defining factor in companies’ long-term prospects … awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance,” Fink wrote.

He said evidence on climate risk is compelling investors to reassess core assumptions about modern finance. Research from a multiplicity of organizations is improving the understanding of how climate risk will impact both the physical world and the financial world, Fink said.

“Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk,” he said, adding that climate change is almost always the top issue that clients around the world raise with the firm.

“Sustainability- and climate-integrated portfolios can provide better risk-adjusted returns to investors,” he said. “And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”

Blackrock will begin changes this year, offering sustainable versions of its flagship model portfolios, including its Target Allocation range of models. The models will use ESG-optimized index exposures instead of traditional market cap-weighted index exposures. Fink said that eventually he expects the sustainability-focused models to become the flagships themselves.

The company also plans to launch this year sustainable versions of its asset allocation iShares, which Fink said will “provide investors with a simple, transparent way to access a sustainable portfolio at good value in a single ETF.”

Blackrock also is developing a sustainable LifePath target date strategy, which Fink said will “provide investors with an all-in-one, low-fee, sustainable retirement solution.” It is also working to expand its sustainable cash offerings.

During the next few years, the asset manager expects to double its offerings of ESG ETFs to 150, including sustainable versions of flagship index products.

BlackRock was a founding member of the Task Force on Climate-related Financial Disclosures (TCFD), and is a signatory to the UN’s Principles for Responsible Investment. It also signed the Vatican’s 2019 statement advocating carbon pricing regimes, which the firm believes are essential to fighting climate change. It also helped establish the Climate Finance Partnership, a public-private initiative to improve financing mechanisms for infrastructure investment.

“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital,” said Fink. “Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”