Announced changes will have profound impact on global financial markets - first target: thermal coal divestment

January 15, 2020 (IEEFA) – The world’s largest fund manager announced overnight it is cutting companies that derive a quarter or more of their profits from thermal coal from its actively managed portfolios, in response to climate change.

In his annual letter to CEOs, BlackRock Chairman and CEO Larry Fink announced a globally significant policy that strongly flags this US$7 trillion investor powerhouse is finally starting to align its portfolios with the Paris Agreement.

Fink’s letter starts with an emphatic statement: “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.”

When BlackRock announced last week it was signing up for Climate Action 100+, an investor initiative to ensure the world’s largest corporate emitters take necessary action on climate change, the global financial response suggested this was probably no more than greenwash, given BlackRock’s long history of voting against climate action in shareholder resolutions.

Fink’s CEO letter, however, starts with a clear reference to BlackRock’s ‘fiduciary duty’ to its investors. BlackRock’s own analysis shows global financial markets will be materially impacted by climate change, reflected in the Bank of England’s analysis of $20 trillion at risk. BlackRock concludes this stranded asset risk is not yet priced into the market, so as a fiduciary, BlackRock really has no choice but to act.

BlackRock has announced it will divest all of its thermal coal exposure due to its exceptionally high carbon intensity, regulatory risks and the loss of economic viability. While this divestment across BlackRock’s US$1.8 trillion of active funds is couched in climate terms, the rising technology-driven economic viability risk makes this a clearly sensible financial decision, irrespective of the moral responsibility that Fink has long argued for, but done little about.

BlackRock has defined its thermal coal divestment criteria as covering both debt and equity exposures. Any coal mining firm generating more than 25% of revenue from thermal coal will be divested from active mandates by mid-2020. This means firms like China Shenhua, China National Coal Group, Coal India Ltd, Adani Enterprises, Peabody Energy, Arch Coal, Inc., Contura Energy, CONSOL Coal Resources LP, PT Bumi Resources, Whitehaven Coal, New Hope Corp., Yancoal Australia and more, are all up for immediate review and likely divestment. With no absolute cap, Glencore would survive this first cut, but not the second.

BlackRock will then closely scrutinize high risk sectors heavily reliant on thermal coal as an input. That will likely see divestment of a much wider range of firms, like KEPCO, TEPCO, Duke Energy, RWE, Southern Co., NTPC, and Adani Power, and will also include Chinese power utility majors such as China Huaneng Group Co, China Datang Corp, China Huadian Corp, State Power Investment Corp and China Energy Group.

Service and infrastructure providers to thermal coal, like Aurizon, will likely go in the third round of review.

The Norwegian sovereign wealth fund has been divesting an ever-wider range of emissions-intensive firms who have failed to accept the science of climate change and who have refused to actively and fundamentally transition their business to deal with this clear financial risk. Firms like Nextera Energy of the US, ENGIE of France and ENEL of Italy have shown how this can be achieved, both rapidly and to the benefit of shareholders, in direct contrast to the increasingly evident underperformance of laggards.

While BlackRock has made important first steps in endorsing the Task Force on Climate-related Financial Disclosures (TCFD), the Sustainability Accounting Standards Board (SASB) and Climate Action 100+, a major area still largely ignored with respect to the climate’s financial risks is in the majority of BlackRock’s passively managed indexed funds. IEEFA notes BlackRock is the world’s leading index manager, ahead of State Street and Vanguard, with the three effectively controlling and running a rapidly growing and all-too-powerful global financial oligopoly. All three should be regulated as Global Systemically Important Financial Institutions.

With regard to the passive index funds it manages, BlackRock has committed to stepping up efforts in offering lower emissions index-linked alternatives. Clearly, this is pedestrian and insufficient. IEEFA would strongly endorse a move by BlackRock to offer a low emissions index default offering for all investors, both new and existing. An ‘opt-in’ alternative could then be offered, allowing investors to actively choose a high emissions intensive exposure to fossil fuels and the complementary stranded asset risks, rather than Fink’s current suggestion of an ‘opt-out’ option.

It is also crucial that Blackrock show leadership in fixed income and real asset portfolios as well as equity investment products. The vast majority of new high carbon risk power and energy infrastructure is predominately funded by debt. This debt often sits in unlisted state-owned-enterprises (SOEs) outside of the U.S. Until the credit rating agencies address more appropriate rating methodologies, it falls to the asset managers to reprice these ballooning carbon risks for fixed income investors, especially in emerging markets where governance risks still run too high.

Climate policy-aligned shareholder voting, public transparency, and time limited engagement with companies is another crucial area of reform for BlackRock. IEEFA’s August 2019 report: BlackRock’s fossil fuel investments wipe US$90 billion in massive investor value destruction, highlighted the importance of BlackRock leading on shareholder engagement.

Global capital flight pressures are building, rapidly.

To date, 116 globally significant banks and insurers have announced their exit from coal, with new announcements accelerating to weekly during 2019. And 2020 has begun with Dutch insurance major Aegon announcing a significant tightening of its coal divestment policy. Global managers with over US$11 trillion of assets under management have made similar fossil fuel divestment commitments.

IEEFA’s analysis – Over 100 Global Financial Institutions Are Exiting Coal, With More to Come – shows that once a financial institution accepts its fiduciary duty to act on the climate’s clear financial risk, the initial announcement is almost always just the first step. A firm committing to align with the Paris Agreement is committing to deep decarbonisation, and anything other than a superficial greenwash highlights the profound stranded asset risks.

Our recent analysis of Indian thermal power assets shows that even in a country with exceptionally high energy demand growth expectations, and a commitment to using domestic coal for many years to come, there has still been a quick accumulation of more than US$60 billion of non-performing assets. Bank write-downs over recent months highlight the loss of 60-80% or more of their total exposure.

Without a full alignment with the Paris Agreement by global capital markets, coupled with the follow-through of divesting the laggards and businesses unable or unwilling to rapidly decarbonise away from coal and other dirty fossil fuels, the future is very uncertain and increasingly dire, as people around the world experiencing climate change first hand know all too well.

Authors

Tim Buckley (tbuckley@ieefa.org), Director of Energy Finance Studies, IEEFA

Tom Sanzillo (tsanzillo@ieefa.org), Director of Finance, IEEFA

Melissa Brown (mbrown@ieefa.org) is IEEFA’s Director, Energy Finance Studies, Asia

Media contact: Kate Finlayson (kfinlayson@ieefa.org) +61 418 254 237

About IEEFA

The Institute for Energy Economics and Financial Analysis (IEEFA) conducts research and analyses on financial and economic issues related to energy and the environment. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.