There is a growing understanding that BlackRock’s increased offerings of environmental, social, and governance (ESG) investment funds, along with its increased willingness to throw its weight around in the corporate boardroom, are an impediment to the world’s ability to deal with climate change. A recent op-ed by Tariq Fancy, BlackRock’s former chief investment officer for sustainable investing, helps explain why.
Mr Fancy believes, as do I, that we need to reduce greenhouse gas emissions sooner rather than later. To that end, Mr Fancy was greatly disappointed to find that while his work enhanced the company’s profitability, it had no impact on mitigating climate change. Moreover, he realized that it was highly unlikely that creating ESG funds was going to have any real-world impact on reducing carbon emissions.
Given this insight, Mr Fancy came to the realization that only governments can have a real impact on climate change. Moreover, he concluded that a focus on ESG investing harmed mitigation efforts 'by creating a societal placebo that delayed overdue government reforms.' That is, this focus has reduced our sense of urgency to advocate for strong governmental actions that will have a real impact on mitigating climate change. Mr Fancy refers to this as a 'deadly distraction,' and I agree.
In terms of strong governmental actions, a number of leading business groups would like to see governments focus on 'putting a price on carbon and accelerating the development of carbon capture and other technologies'; 'US and European automakers want subsidies to expand charging infrastructure'; and the AFL-CIO would like to see import taxes placed on goods from high-emissions countries. In contrast to investors simply being satisfied with how their financial advisers have incorporated ESG assets into their portfolios, the quick implementation of such proposals will be what determines whether climate change is significantly mitigated.
Besides the harm caused by focusing too much on ESG investing and reporting, we need to add the unintended consequences of BlackRock and other shareholder activists pressuring energy companies to reduce their exposure to fossil fuels. The economic argument is that energy companies need to reduce their exposure to fossil fuels or they will be stuck with billions of dollars of stranded assets.
An example of such unintended consequences is BP’s decision to sell off its entire Alaska oil operations to a private investor, resulting in the company having a much smaller carbon footprint. Moreover, BP was divesting itself of a type of oil that created a higher than average level of emissions when extracted. So, by all appearances, the activists, including BlackRock, got what they wanted from their interference in BP’s corporate governance—but there was one problem: the activists did not consider how concerned the new owner was going to be about carbon emissions. The new buyer, a privately owned company, has allegedly allowed these assets to generate a significantly higher level of emissions than what occurred during BP’s ownership.
BlackRock’s climate-change activism not only has unintended consequences; it is also another deadly distraction because BlackRock is able to influence only those companies in which it holds large amounts of shareholder voting authority. It uses this voting power to engage with and pressure energy companies on various issues. However, it holds no such influence with the national oil companies that own the vast majority of the world’s oil and gas reserves. In sum, while this activism may generate good publicity and entice millennials to give BlackRock their business, it misleads investors into believing that BlackRock has significant influence in the fight against climate change when, in reality, it has very little.
I believe that, instead of being part of the problem, BlackRock can be part of the solution by attempting to add 'financial innovation' as a tool in the battle against climate change. Such financial innovation should be targeted to creating new private equity funds that help provide the billions of dollars of funding that will be needed by new and growing carbon-cutting companies. BlackRock can market these funds to the millions of retail investors who currently invest in its products.
Of course, this is easier said than done. Besides the issue of how to market to retail investors billions of dollars of private equity funds composed of relatively illiquid assets, regulatory hurdles must be overcome. For example, BlackRock will have to work with the SEC to expand the definition of 'accredited investor' so that more retail investors will have the opportunity to invest in these funds. Nevertheless, BlackRock has a huge amount of financial and legal resources to draw from, giving it a realistic chance of making a real impact in the fight against climate change.
This post was originally published on RealClearMarkets.
Bernard Sharfman is a Senior Corporate Governance Fellow at RealClearFoundation.