Blackrock urges firms to prep for net-zero transition

CLIMATE risk is investment risk, but the climate transition is also a "historic investment opportunity'', said Laurence Fink, chairman and chief executive of BlackRock, the world's largest asset manager.

In his latest annual letter to chief executives, Mr Fink called on companies to have a plan to transition to net-zero emissions.

This will distinguish them and give their stakeholders confidence that they are able to navigate the global transition towards carbon neutrality. "There is no company whose business model won't be profoundly affected by the transition to a net-zero economy,'' he said.

Mr Fink's annual letters have proved influential not just in provoking conversation but in spurring action.

The firm manages over US$7.8 trillion in assets and of late, has been weighing on companies to step up in terms of sustainability disclosures.

In its latest stewardship report for 2021, it signalled its intention to intensify its engagement with companies, for instance.

Among others, it aims to hold directors accountable by voting against their re-election "where it believes companies are not moving with sufficient speed and urgency" on issues such as climate risk.

Said Mr Fink: "Given how central the energy transition will be to every company's growth prospects, we are asking companies to disclose a plan for how their business model will be compatible with a net-zero economy - that is, one where global warming is limited to well below 2 degrees Centigrade, consistent with a global aspiration of net-zero greenhouse gas emissions by 2050.

"We are asking you to disclose how this plan is incorporated into your long-term strategy and reviewed by your board of directors.''

Net-zero emissions means a company or country will emit no more carbon dioxide than it removes from the atmosphere. This is the scientifically established threshold to limit the global rise in temperature to below 2 deg C.

Last year, the EU, China, Japan and South Korea committed to achieve net-zero emissions by 2050. BlackRock itself is carbon neutral in its operations, said Mr Fink.

"There is no company whose business model won't be profoundly affected by the transition to a net-zero economy. . . Companies with a well-articulated long-term strategy and a clear plan to address the transition to net zero will distinguish themselves with their stakeholders. . .

"But companies that are not quickly preparing themselves will see their businesses and valuations suffer. . .''

Mr Fink said the reallocation of capital driven by climate risk is occurring at a pace even faster than he anticipated. He sounded a warning on this capital reallocation in his letter last year.

Between January and November, investors in mutual funds and ETFs invested some US$288 billion globally in sustainable assets, a 96 per cent increase over the whole of 2019.

At end-December, BlackRock managed some US$200 billion of sustainable funds including impact and ESG (environmental, social and governance) thematic funds. There are currently over 200 sustainable funds on its platform; over 100 were launched in 2020. The firm also manages US$616 billion in assets that use ESG screens.

BlackRock reported US$68 billion in net inflows into sustainable strategies last year, representing organic year-on-year growth of 60 per cent.

While BlackRock supports a move towards a global reporting standard, it endorses reporting according to recommendations of the TCFD (Task Force on Climate-related Financal Disclosures) and the SASB (Sustainability Accounting Standards Board).

Mr Fink said BlackRock is taking a number of steps to help investors prepare their portfolios and capture opportunities. These include publishing a temperature alignment metric for public equity and bond funds, where sufficient data is available.

The firm also plans to implement a "heightened scrutiny model'' in its active portfolios as a framework for managing holdings that pose significant climate risk, including flagging a potential exit.

It also aims to launch investment products with explicit temperature alignment goals including products aligned to a net-zero pathway.

He said: "I have great optimism about the future of capitalism and the future health of the economy - not in spite of the energy transition but because of it.''

On the potential impact in Asia, Geraldine Buckingham, BlackRock chair and head of Asia-Pacific, said Asia is a diverse market in varying stages of evolution. "We do think that while some Asian companies and some countries are perhaps just starting this journey, the general direction of travel is critical for all companies to recognise. We think companies are increasingly going to have to navigate this very significant transition if they're going to be successful over the longer term.''