Can cutting investment force firms to go green?

Giant fund managers have a vital role to play in the shift to net-zero carbon, but they may not be equipped to make the rapid changes now required, says Ben Chapman

BlackRock is selling off investments in coal power generation (Getty)

The decision by BlackRock, a giant fund manager with $7 trillion under its control, to start using its considerable clout to tackle climate change should be welcomed. But its newfound commitment to the environment has some major limitations.

First, the commitment applies only to the $1.8 trillion of funds BlackRock “actively” manages, buying and selling investments in order to generate the best returns.

That leaves $5 trillion of funds that are “passively” managed, which will stay where they are for now. These typically just track an index like the S&P 500 or the FTSE 100, both of which count fossil fuel firms among their biggest constituents.

Second, BlackRock hasn’t actually done anything yet, beyond sending some letters outlining its plans to make sustainability its “new standard for investing”. Although BlackRock says it will immediately start selling investments in coal power generation, this is hardly a trailblazing decision.

BlackRock’s chief executive, Larry Fink, has made previous statements about the importance of sustainability but has failed to deliver much in the way of measurable change.

As the world’s biggest asset manager, BlackRock has become something of a target for climate campaigners seeking to apply pressure on companies to change their ways.

It has had many chances in the past few years to vote in favour of shareholder resolutions to require the companies it invests in to take action on climate change. In many cases it has not taken the opportunity.

Last year it supported just 5 of 41 resolutions classified as “climate critical”, according to non-profit group Majority Action.

Proof of the seriousness of BlackRock’s pledge will come when a new round of shareholder votes happens this year. Will BlackRock hold boards to account? There are some signs that it may not.

While Fink has claimed that sustainability is BlackRock’s new raison d’etre, the truth is that investor returns remain the overriding aim and that is not about to change.

It is not selling off coal power investments because they bellow out CO2 but because they are soon likely to become worthless. It has merely responded to broader economic and policy changes rather than shaping them.

BlackRock has been slow to realise the dwindling prospects for oil and gas firms in a world where unprecedented swathes of Australia are engulfed by bushfires and temperature records are smashed on a regular basis.

The firm’s failure until now to fully grasp recent shifts has cost investors in its funds tens of billions of dollars in lost returns over the past decade, according to the Institute for Energy Economics and Financial Analysis (IEEFA).

BlackRock’s bets on oil and gas companies like Shell and ExxonMobil have underperformed the wider market to the tune of $90bn as the risks of climate change have become clearer, IEEFA found.

In his latest announcement, Mr Fink appears to have now recognised what is happening: “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

BlackRock, and other huge fund managers, have a crucial role to play in reallocating that capital. They will now have to demonstrate that they realise just how significant and how rapid the shift needs to be.