February 26, 2020
Merewyn Groom

Climate tipping point in business?

In his annual letter, BlackRock Chair and CEO Larry Fink shot climate change to the top of the investment risk calculation

Larry Fink has declared that business as usual is over. His January letter to CEOs states “climate risk is investment risk” shaking the ideas of some of the world’s biggest corporates. 

That climate change will have drastic economic effects isn’t news to anyone who has been following the science, but to see this kind of message from the controller of the world’s largest investment fund could prove to be a turning point in a market which has been ignoring this reality.

Climate risk is investment risk

Each year, Fink writes a letter to CEOs of the world’s companies. This year his letter is titled A Fundamental Reshaping of Finance. It states “Climate change has become a defining factor in companies’ long-term prospect”. Further he explains that climate change is the top issue that clients around the world raise with BlackRock, seeking to understand both the physical risks associated with climate change and the ways that policy responses will impact prices, costs, and demand across the entire economy.

The companion letter to BlackRock’s own customers is titled Sustainability as BlackRock’s New Standard for Investing. Describing how the company’s approach has always evolved to respond to client needs, the letter highlights climate change as the most significant factor affecting investment risk today.

Climate change is the top issue that clients around the world raise with BlackRock

Under the new approach from BlackRock, profits are no longer enough, firms must have a purpose, and each company must communicate how it “serves its full set of stakeholders, such as the diversity of its workforce, the sustainability of its supply chain, or how well it protects its customers’ data.”

The implication of this is that BlackRock will consider pulling his investments from companies which are not doing enough to address their carbon emissions. This is the fundamental reshaping of capital the title refers to, and if BlackRock are making moves in this direction then odds are that other players will follow suit.

We are going to see an overabundance of capital available to mitigate

Fink appears optimistic that the private sector can help to tackle the climate change emergency. Speaking in Davos, Switzerland after the letter was issued, CNBC reports him as saying “This is the beauty of capital markets. When more people believe in something, we bring the problem forward,” and that “Through that reallocation of capital, we are going to see an overabundance of capital available to mitigate”.

Those who have been advocating for government action will be hoping this is the trigger which ultimately enables political action to address carbon emissions.