The Promise and Challenges of BlackRock’s Climate Commitment

Asset management giant BlackRock made waves in the financial press this week, announcing through its annual letter to CEOs that the company would put sustainability front and center in its investment strategy. As the world’s largest investor, with over $7 trillion in assets under management, BlackRock is a prime mover in global finance. This makes all the more significant BlackRock CEO Larry Fink’s declaration that climate change would drive a “fundamental reshaping of finance.”

BlackRock’s announcement is the latest sign of a profound shift underway in the financial sector, moving it from passive bystander to active contributor in the fight against climate change. This week’s news from BlackRock adds to a growing chorus of serious climate action commitments throughout the financial investment chain.

Last fall, 16 pension funds and insurers representing $4 trillion under management formed the Net Zero Asset Owners Alliance and 33 banks with $13 trillion under management formed the Collective Commitment to Climate Action. Both groups have resolved to align their financing and investment portfolios going forward to a vision of limiting global warming to well below 2°C.

BlackRock has outlined concrete steps to start aligning its decisioning-making with a low-carbon future, including strengthening its environmental and social governance (ESG)-aligned passive fund products and committing to wield shareholder engagement to steer companies towards sustainable business practices. These moves show an important path forward for large investors to move the needle of the real economy towards a cleaner future.

And while some have said that they would like to see more from BlackRock, the scope of its announcement highlights a common set of challenges that financial institutions face when trying to align their investments and decisions with the pace of decarbonization needed to preserve a healthy world for future generations.

More Passive Products & Increased Engagement

One important aspect of this move by BlackRock is its focus on passive funds. A significant portion of BlackRock’s assets under management are allocated to investment vehicles like exchange-traded funds (ETFs) that track an established index or portfolio.

For context, over $6 trillion sits in these passive funds worldwide, with more and more money shifting into passive funds each year. BlackRock’s commitment to double its offerings of sustainable ETFs over the coming years—particularly if matched by similar efforts from its competitors—could increasingly help to align those trillions of dollars with climate-friendly investments.

Some activists have argued that BlackRock should go further and divest from unsustainable companies and sectors. Yet the rise of passive index-tracking funds—and BlackRock’s titanic size—means that BlackRock is inevitably a universal investor in an economy that is currently on track to a 4°C future. Even if it did want to reallocate capital solely to <2°C compliant investments, it simply wouldn’t find enough investment opportunities to put its $7 trillion in assets.

Yet this challenge also presents an opportunity for BlackRock—one that it indicates it will increasingly seize. BlackRock is a significant shareholder in nearly every major public company, giving it the ability to influence corporate decision-making on climate change through shareholder resolutions, board votes, and other shareholder actions.

BlackRock’s intent to engage companies in reducing their climate risk exposure and transforming their energy use could dramatically expand the impact of large asset managers in promoting corporate climate action and, ultimately, enable a transformation within individual companies and whole sectors.

Four Challenges for Transforming Finance

While BlackRock’s statements are encouraging, they’re just the beginning of the work that must be done. The road to making commitments to align finance with the Paris Agreement within the confines of competition and real-world constraints will be a challenging, yet vital, one. We see four key challenges facing all financial institutions that seek to support decarbonization of the economy.

First, there is no standard definition of climate alignment, or the role to which investment decisions are aligned with the goals of the Paris Agreement.

Second, inadequate data makes progress difficult to measure and track in some industries. This is particularly true for heavy industries, such as steel production or methane leakage from gas extraction and transport, and this is work that Rocky Mountain Institute (RMI) is addressing through our Industry Program.

Third, competition between financial institutions presents considerable risk to those that move out ahead of competitors. Thus, there is a need to better define and establish expectations of all financial institutions in supporting decarbonization, as well as mobilize a broad set of the financial sector to take action to mitigate this first mover challenge.

And finally, as our economy is not yet aligned with the rapid decarbonization required under the Paris Agreement, the active role that financial institutions can—and must—play to support decarbonization must be clarified across key emitting sectors.

Through our Global Climate Finance Program, RMI is working actively with some of the world’s largest financial institutions to overcome these barriers and clear the way for a climate-aligned financial sector. RMI was integrally involved in the design and launch of the world’s first climate alignment agreement among financial institutions—the Poseidon Principles for the shipping sector—and is laying the groundwork for similar climate alignment agreements in other sectors.

In the coming months, we will also publish a series of guides to climate alignment that can serve as road maps for banks, asset managers, asset owners, and financial regulators seeking to advance this promising but complex agenda.