The world’s largest investment manager, BlackRock, has announced it will divest its investments in the thermal coal sector and has issued a major threat to dump company directors who fail to act on the financial risks posed by climate change.

BlackRock manages around USD$7 trillion (A$10.15 trillion) of funds on behalf of investors and has been notoriously cautious in its response to climate change and its reluctance to participate in investor campaigns.

In a letter to clients, BlackRock’s Global Executive Committee, led by company founder and CEO Laurence Fink, explained that the company would be withdrawing its investments in thermal coal producers, including any company that sources more than a quarter of its revenue from thermal coal production.

“Thermal coal is significantly carbon intensive, becoming less and less economically viable, and highly exposed to regulation because of its environmental impacts. With the acceleration of the global energy transition, we do not believe that the long-term economic or investment rationale justifies continued investment in this sector,” the letter says.

“As a result, we are in the process of removing from our discretionary active investment portfolios the public securities (both debt and equity) of companies that generate more than 25% of their revenues from thermal coal production, which we aim to accomplish by the middle of 2020.

“As part of our process of evaluating sectors with high ESG risk, we will also closely scrutinize other businesses that are heavily reliant on thermal coal as an input, in order to understand whether they are effectively transitioning away from this reliance.”

The move will see the investment giant dump around USD$500 million (A$725 million) in thermal coal investments.

In a separate letter to company CEO’s, Fink said that BlackRock views climate change as an investment risk and that companies should expect investors to transform the way they engage with companies and issued a threat to use BlackRock’s substantial shareholdings to dumb directors who fail to respond to the climate threat.

“Climate change has become a defining factor in companies’ long-term prospects,” Fink told company CEOs. “Last September, when millions of people took to the streets to demand action on climate change, many of them emphasized the significant and lasting impact that it will have on economic growth and prosperity – a risk that markets to date have been slower to reflect. But awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance.”

“We believe that when a company is not effectively addressing a material issue, its directors should be held accountable.”

“Given the groundwork we have already laid engaging on disclosure, and the growing investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them,” Fink added.

BlackRock also announced that it would join the Climate Action 100+ initiative, that supports investors to actively engage with the companies they are invested in to assess, disclose and address the risk that climate change and the energy transition poses to the company and the value of investments.

“BlackRock is one of the largest and most influential asset managers in the world and will bring even more heft to investor engagement through Climate Action 100+,” said Emily Chew current Climate Action 100+ Steering Committee Chair and Global Head of ESG Research and Integration at Manulife Investment Management. “We look forward to working with BlackRock to build on the initiative’s success and work to ensure companies take the urgent and necessary action needed in response to the climate crisis.”

The Climate Action 100+ initiative includes the Australian based Investor Group on Climate Change, which supports Australian institutional investors, including superannuation managers, to participate in the initiative. Combined, the investors participating in the Climate Action 100+ initiative now manage more than USD$41 trillion in investments.

“The physical and economic threats of climate change have again been evident in the devastating and unprecedented bushfires raging across Australia,” said Emma Herd, member of the Climate Action 100+ Steering Committee and CEO, Investor Group on Climate Change (IGCC).

“We need deeper and more urgent action from those companies who hold the key to making the zero emissions transition that will de-risk our economies and communities from climate change. This signal from the world’s largest asset manager that they expect companies to be cutting their emissions in line with the Paris Agreement is an important step towards this necessary transition.”

Recent analysis published by the Institute for Energy Economics and Financial Analysis (IEEFA), estimated that BlackRock lost as much as USD$90 billion (A$130.5 billion) in investment value due to poor investments in fossil fuel companies in 2019.

The IEEFA assessment found that investments in just four fossil fuel companies, ExxonMobil, Chevron, Royal Dutch Shell and BP accounted for around three-quarters of the USD$90 billion loss.

“As the world’s largest universal owner, BlackRock wields an enormous amount of influence and shoulders a huge responsibility to the wider community,” IEEFA director of energy finance studies Tim Buckley said at the time.

“It has the power to lead globally to address climate risk, yet to-date it remains a laggard.”

“If the world’s largest investor makes it clear the rules have changed, then other globally significant investors like Fidelity, Vanguard and Japan’s sovereign wealth fund will rapidly replicate and reinforce these moves, reducing stranded asset risks for all,” Buckley added.

Responding to BlackRock’s announcement, IEEFA said that while some will be sceptical of the investor’s track record on climate change, IEEFA was encouraged by specific references from Fink to the fiduciary duty investment managers had to protect their client’s assets from climate related risks.

“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 was that this was probably no more than greenwash, given BlackRock’s long history of voting against climate action in shareholder resolutions,” IEEFA said in a statement.

“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 that this stranded asset risk is not yet priced into the market, so as a fiduciary, BlackRock really has no

choice but to act.”