BlackRock’s CEO said that the group would focus on sustainability, exiting any investments it saw as having high sustainability-related risk.
The company, which has shareholdings in groups including Hilton, Park Hotels & Resorts and Red Lion Hotels, said that it expected to see “more patient capital” in the future.
In his annual letter to fellow leading CEOs, Laurence Fink wrote: “Awareness is rapidly changing, and I believe we are on the edge of a fundamental reshaping of finance. The evidence on climate risk is compelling investors to reassess core assumptions about modern finance.
“From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.
“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”
BlackRock has announced a number of initiatives to place sustainability at the centre of its investment approach, including: making sustainability integral to portfolio construction and risk management; exiting investments that presented a high sustainability-related risk, such as thermal coal producers; launching new investment products that screened fossil fuels; and strengthening its commitment to sustainability and transparency in its investment stewardship activities.
Fink said: “While government must lead the way in this [energy] transition, companies and investors also have a meaningful role to play.
“Over time, companies and countries that do not respond to stakeholders and address sustainability risks will encounter growing skepticism from the markets, and in turn, a higher cost of capital. Companies and countries that champion transparency and demonstrate their responsiveness to stakeholders, by contrast, will attract investment more effectively, including higher-quality, more patient capital.”
The letter was not the first time Fink has raised the issue of sustainability with his fellow CEOs. In 2018 he said that companies must make positive contributions to society, but faced criticism when, despite launching sustainable products, it continued to invest in fossil fuels and was absent from the Climate Action 100+ initiative, a network of over 340 investors with $32 trillion in assets under management. It has now joined.
"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, steering committee chair at Climate Action 100+. "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."
Signatories commit to engage with companies to get them to take action to reduce greenhouse gas emissions across the value chain, implementing a strong governance framework, and reporting in line with the recommendations of the Task Force on Climate-related Financial Disclosures.
ESG investment - environment and social governance investment - money market funds saw their assets under management grow 15% to $52bn during the first half of 2019, according to research from Fitch Ratings.
In December the ratings agency said that global banks were increasingly embedding ESG factors into their risk-management frameworks. More than half the 182 banks that took part in Fitch's ESG survey said they incorporated ESG considerations “always” or “most of the time” into most of their risk-management processes.
The exception was asset pricing, where only 39% of banks considered ESG “always” or “most of the time”. However, this proportion was, Fitch said, likely to increase if governments introduced financial or regulatory incentives to channel funds into more environmentally-sound investments.
Xenia zu Hohenlohe, managing partner, Considerate Group, told us: “It makes good business sense to act now – according to the latest research released by the Arabesque University of Oxford for the UN Global Compact, good ESG performance results in 90% lower cost of capital, 88% better operational performance and 7% higher return of equity.”
Rosa Brand, principal, real estate, KKR, added: “Sustainability is a major topic for us, as it should be for everyone. We’re trying to be ahead of the pack; we have an elaborate ESG policy and every time that we look at an asset we look at how we can apply it so that the asset complies, but also so that we are thinking ahead.
“We’re on the value-add opportunistic side, so what we try to do is buy an asset which isn’t suitable for a core investor yet and we look to develop it. Given the way the trends are going, from a business perspective it would be careless for us to fail to take that into account, you may have to pay more but this is the way that you get a good ROI.”
This year’s IHIF will see the launch of a Sustainability Council to identify the key areas in which the hospitality real estate sector needs to address sustainability concerns and to provide guidelines on how investors, developers, operators and all key stakeholders can commit to more sustainable practices.
Insight: Fink’s letter was described by those riding the Trump train as an attack on the president, but it was largely being seen as more of a circumventing of political power. As AC/DC said, money talks, and if it’s good enough for AC/DC then it should be good enough for the rest of us.
With Fink there to make other CEOs feel bad - and feel like they may make less money - it matters a little less what politicians say. If there’s no money to pay the miners to dig the coal out of the ground it’s likely to stay in the ground, no matter how much government may act to subsidise. Fink will stick with some fossil fuels, but lean on them to think more closely about being more renewable.
The money motivation has shown itself to be true in the hotel sector, which is not one that BlackRock is having qualms about. As we heard from KKR, there’s money to be made and, while sustainability isn’t yet featuring in valuations to the extent of the office sector, it is starting to make itself felt.
While the bushfires in Australia are acting as a reminder that all is not well, there are still some moves left in this most important of games, but cash, whether being invested by business or withheld by the consumer, cannot do it all.
The technology is out there to pull back the warming of the planet, even to allow us to continue our frenzied growth of travel, but for it it work it must be deployed en masse. Only government can push this kind of shift. So once people have voted with their wallets, they’ll have to do the old type of balloting too.