More than three years ago, BlackRock, the world’s largest fund manager, published a paper promising to take more account of climate risks when investing in companies.
“Investors can no longer ignore climate change,” the 16-page report observed. “Some may question the science behind it, but all are faced with a swelling tide of climate-related regulations and technological disruption.”
Last week, under pressure to practice more vigorously what it preached, the fund manager’s chief executive announced a series of measures designed to show it was following through on its commitment.
Larry Fink said BlackRock would increase the number of sustainable funds it offers, divest its active funds of some holdings in coal-related businesses, and be more transparent about how it raised climate matters with companies it holds and voted in their general meetings.
Now it’s easy to scoff at the likely impact of these pledges. Not just the fuzzy ones to make more noise in company meetings. Take the vow on divestment for example.
The first tranche of sales last week amounted to just $500m in value. Given the $7tn the firm has under management, that’s hardly like amputating a limb, more a very light trim of the toenails. Anyway it only applies to the $2tn-odd BlackRock has under active mandates. As for the $5tn of passive money, that stays as it was before.
But is it really the job of intermediaries to drive environmental change through asset allocation? Groups like the activists Extinction Rebellion call regularly for rapid fossil-fuel divestment as if that were both deliverable and the answer.
Indeed, they flamed BlackRock last week for the inadequacy of its conversion, claiming the fund manager remained “waist deep” in these investments. Withdraw funds, claims Bill McKibben, leader of the campaign group, 350.org, and “fossil fuel companies would almost literally run out of gas”.
Yet that is to misunderstand the role of finance in climate transition. Fund managers aren’t there to drag their investment clients out of profitable investments into ones where returns are more meagre. That would be quixotic and almost certainly unsuccessful. For as climate-concerned investors dumped fossil-fuel stocks, thus driving down their value, their socially neutral peers would simply take advantage of the mispricing that came about, meaning the net effect was blunted.
In the case of climate change, it could even be detrimental. Put Royal Dutch Shell out of business by dumping its shares, and state-run national oil companies in Asia or South America might pick up the slack, pumping out more polluting output.
Fund managers exist to channel capital to profitable activities. Which touches on a big difference between the task before us and the dawn of the fossil fuel era that led to global warming, namely the many frictional costs in bringing decarbonisation about.
There is no easy way to substitute the fossil fuels that we rely on. Take renewables for instance. While their cost may be falling, and they clearly have a part to play in the transition, they are not a panacea. They require huge amounts of land, costly transfers of energy over long distances, cause their own environmental problems, and depend on sun and wind that deliver their blessings independent of human need.
Nor do they deliver certain systemic decarbonisation. Despite pumping nearly $600bn into renewables, and raising power costs by 50 per cent, Germany’s carbon emissions have been almost flat since 2009 — principally because it has closed nuclear stations and relies on coal for baseload.
Some decarbonising measures are clearly unfinanceable by private capital, such as retrofitting Britain’s 27m homes with energy saving materials to reduce their carbon footprint. Setting aside the impact on poorer citizens, the energy savings would take decades to recoup.
Governments may like the idea of subcontracting decarbonisation to financial markets. But in practice, it is the politicians who must take the lead. They alone can mandate the necessary regulatory changes, encourage new technologies, and establish the fiscal framework from which a new energy system can emerge.
It is only when this happens that fund managers can then play their part, vetting companies’ disclosed plans for cutting carbon dioxide emissions and steering capital away from those that fail to live within officially mandated emissions targets, thus helping their clients to avoid hidden climate liabilities. But government policy must be credible and consistent. That means the true costs must be set against benefits, and the public — gilets jaunes and all — somehow brought on side.
Decarbonisation cannot ultimately be palmed off to well-meaning investors, or altruistic businessmen. Disinvestment will not save the planet. Only a proper thought through policy can bring emissions down.
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January 19, 2020 at 12:01PM
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Don’t expect the earth from fund managers on climate change - Financial Times
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