On January 14th, the world’s largest investor, BlackRock®, sent two historic letters, one addressed to “Clients” (basically the world’s wealthiest individuals and their financial advisors) and the other to “CEO‘s” (the heads of the firms in which the world’s largest investor invests), and they both announced the now inevitable earthquake that’s coming to global capitalism. The letter didn’t say precisely when it will hit, but did say, “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” Here’s more from the two letters:
A Fundamental Reshaping of Finance
As an asset manager, BlackRock® invests on behalf of others, and I am writing to you as an advisor and fiduciary to these clients. (…)
I believe we are on the edge of a fundamental reshaping of finance.
The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.(…)
Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. (…)
In the near future – and sooner than most anticipate – there will be a significant reallocation of capital. (…)
As a fiduciary, our responsibility is to help clients navigate this transition. (…)
Over the next few years, one of the most important questions we will face is the scale and scope of government action on climate change, which will generally define the speed with which we move to a low-carbon economy. (…)
We don’t yet know which predictions about the climate will be most accurate, nor what effects we have failed to consider. But there is no denying the direction we are heading. Every government, company, and shareholder must confront climate change. (…)
Sustainability as BlackRock®’s New Standard for Investing
Since BlackRock®’s founding in 1988, we have worked to anticipate our clients’ needs to help you manage risk and achieve your investment goals. As those needs have evolved, so too has our approach, but it has always been grounded in our fiduciary commitment to you. (…)
The most significant of these factors today relates to climate change, not only in terms of the physical risk associated with rising global temperatures, but also transition risk – namely, how the global transition to a low carbon economy could affect a company’s long term profitability. (…)
As your fiduciary, BlackRock® is committed to helping you navigate this transition and build more resilient portfolios. (…)
These models will use Environmental, Social, and Governance (ESG) optimized index exposures in place of traditional market cap weighted index exposures. (…)
• Reducing ESG Risk in Active Strategies – In heightening our scrutiny on ESG issues.
• Putting ESG Analysis at the Heart of Aladdin – We have developed proprietary measurement tools to deepen our understanding of material ESG risks. For example, our Carbon Beta tool allows us to stress test issuers and portfolios for different carbon pricing scenarios. (…)
• Doubling Our Offerings of ESG ETF‘s. (…)
• Working with Index Providers to Expand and Improve the Universe of Sustainable Indexes. (…)
• Expanding Sustainable Active Investment Strategies. (…)
Our role as a fiduciary is the foundation of BlackRock®’s culture. (…)
We invest on your behalf, not our own. (…)
While the low carbon transition is well underway, the technological and economic realities mean that the transition will take decades. Global economic development, particularly in emerging markets, will continue to rely on hydrocarbons for a number of years. As a result, the portfolios we manage will continue to hold exposures to the hydrocarbon economy as the transition advances.
A successful low carbon transition will require a coordinated, international response from governments aligned with the goals of the Paris Agreement, including the adoption of carbon pricing globally, which we continue to endorse. (…)
The steps we are taking today will help strengthen our ability to serve you as a fiduciary. Sustainability is becoming increasingly material to investment outcomes. (…)
Basically, the world’s largest investor, BlackRock® (manager of about $ 7 trillion in funds), is predicting that as the 90%+ consensus of climate scientists increasingly impacts the relative prices of renewable as compared to non renewable energy sources, the “ESG” premium on the renewable (such as solar, wind, etc.) will inevitably cause the non renewable (coal, oil, and gas) energy-sources to need to become ever cheaper in order to remain competitive – and this will drive down the values of stocks in the non renewable category, and drive up the values of stocks in the renewable category.
These two letters are saying that this will be evident “In the near future – and sooner than most anticipate,” but “the technological and economic realities mean that the transition will take decades.” There is an obvious tension between those two assertions. The “In the near future – and sooner than most anticipate,” is addressed to “CEO‘s,” but the “the technological and economic realities mean that the transition will take decades” is addressed to “Clients” – BlackRock®’s customers, mainly the world’s billionaires and centi-millionaires, but also the investment-managers for large organizations. The “Clients” naturally have a preference for low perceived risk in their investments; and BlackRock® is, in that letter, providing its clients the sense that there will be no earthquake to their investments. If one happens, BlackRock will be able to say to its clients, “We told you that this is coming, but it came faster than we and our competitors expected,” and they’ll be right about that. As regards the letter to “CEO‘s,” it’s telling them to transition as fast as is reasonably possible out of fossil fuel investments and into renewable fuel ones, in order to become less vulnerable to the shock, when it does hit. This makes good sense: keeping the clients comfortable, while telling the CEO‘s: “Make major moves on this ASAP!”
Investigative historian Eric Zuesse is the author, most recently, of They’re Not Even Close: The Democratic vs. Republican Economic Records, 1910-2010, and of CHRIST’S VENTRILOQUISTS: The Event that Created Christianity.