The announcement by BlackRock, the world's biggest fund manager, that it will cut companies generating more than 25% of their revenues from coal production from its US$7.43trn portfolios, is being hailed by some as a watershed moment for the financial sector.
BlackRock says it wants to be a global leader in sustainable investing and increase its sustainable AUM more than tenfold this decade to over US$1trn, in a move that will put pressure on large asset managers to follow suit.
"As an investment industry we need everyone in the industry pushing in the right direction," said Marie Dzanis, head of Northern Trust Asset Management in EMEA.
BlackRock is cutting companies that derive a quarter or more of their revenues from thermal coal from all of its discretionary investment portfolios. It will also double the number of sustainability-focused exchange-traded funds that it offers to 150.
BlackRock’s actively-managed fourth-quarter 2019 AUM of US$1.95trn amounts to 14.5% of its total portfolio. Its US$4.93trn AUM in passive exchange-traded and index funds will not be affected. It also manages US$545bn of cash.
The firm will continue to invest in hydrocarbons, but BlackRock has already offloaded US$500m of shares in companies with coal-heavy revenues. That is roughly 0.007% of its total assets, but about 0.026% of actively managed assets.
Although those numbers appear to be rounding errors, BlackRock’s size and scale make the move meaningful, particularly combined with its plans to promote climate risk disclosure by voting against companies that fail to comply with the Sustainability Accounting Standards Board and the Task Force on Climate-Related Financial Disclosure.
BlackRock’s abrupt change of course follows criticism and intensifying pressure to pull back from thermal coal investments as catastrophic climate events accelerate, including Australia’s devastating bushfires.
Germany struck a €40bn deal to compensate its coal-mining regions for the closure of coal-fired plants by 2030 and banks including BNP Paribas, Credit Agricole and Standard Chartered are pulling back from lending to coal producers.
In December, activist investor Christopher Hohn accused BlackRock of "greenwashing" as his hedge fund TCI started to punish directors of companies that fail to disclose their CO2 emissions. He called BlackRock’s record of voting for climate-relevant resolutions "appalling".
Larry Fink, BlackRock chief executive, said his firm is now formally integrating environmental factors into its risk assessments in the same way it looks at liquidity and credit risk, reinforcing the conclusion that ESG-compliant business can also be profitable, and that the topic has moved into the mainstream for prudent business.
Fink also thinks that the markets are on the verge of a significant reallocation of capital that will shape companies’ ability to attract capital. This is also expected to impact credit spreads in other sectors, such as midstream oil and tobacco.
"Because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself," Fink said.
Other fund managers agree. “It could just be that truly the ESG train has left the station and we're going to see these premiums in asset prices going forward more consistently," said Jason Shoup, head of global credit strategy at Legal & General Investment Management America.
Coal mining may become the first industry to be stranded by climate concerns, but its demise will take a long time to play out and a similar timeline is expected in other sectors, as fossil fuels remain in the mix in the transition to a cleaner future.
Not all are convinced of an immediate pricing correlation. US electricity utilities with more than 30% of revenues derived from coal exposure are not correlated with higher credit spreads, said Andrew DeVries, CreditSights' co-head of US investment grade credit and senior utilities analyst.
Less than 10 US investment grade electricity utilities have more than 30% coal exposure and all of them have plans to add renewables and shut down coal plants to reduce their exposure below that limit, DeVries said.
BlackRock’s extension of ESG considerations across its business is significant as the US continues to lag behind the rest of the world when it comes to climate issues, but coal exposure is a relatively easy place to draw a line.
But questions for BlackRock remain.
"Is it for new investments? Is it forced selling of existing investments? Is it for their passive investments? Their active investments? How are they defining the 25% threshold?" DeVries said.