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Capital markets on the precipice of change. Global flows to move...

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    Capital markets on the precipice of change. Global flows to move into more sustainable related investments...
    BlackRock's climate epiphany

    The world's largest fund manager is putting climate change at the heart of its engagement with the thousands of companies captured in its $US7 trillion in assets under management.
    Jan 14, 2020 — 8.00pm
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    There are few people in global capital markets with the antennae for sensing tipping points in investor sentiment as good as those on the head of BlackRock chief executive Larry Fink.
    After a 40-year career in finance he has lived through the inflation spikes of the 1970s and early 1980s, the 1987 stockmarket crash, the Asian currency crisis of 1997, the dotcom bubble of 1999-2000 and the global financial crisis.

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    But he says in his latest annual letter to global CEOs that none of these events can be compared in scale or impact with the much more structural, long-term crisis caused by climate change.
    Fink says we are on the edge of a fundamental reshaping of finance that will involve "massive capital shifts". He says companies that do not address sustainability will inevitably face a higher cost of capital.
    It should be said that critics have viewed previous Fink letters urging business to embrace purpose and values in order to restore trust in capitalism with some cynicism.


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    This was partly caused by BlackRock's often spiritless approach to voting at company meetings on resolutions deserving a "no" vote. Lack of action on the ground made Fink's commentary sound a little like motherhood.
    Also, Fink's colossal $US26.5 million ($38 million) salary gave some pause when urged to strive for a higher purpose.
    But this year Fink can hardly be accused of being wishy-washy or spouting rhetoric.
    Clarion call

    His letter not only contains a climate change clarion call, it is backed up by a five-point action plan that puts sustainability at the core of the investment and risk platforms used to manage BlackRock's $US7 trillion in assets under management.
    The action plan includes dumping $521 million in thermal coal shares held in BlackRock's $US1.8 trillion in actively managed portfolios, doubling the number of sustainable exchange traded funds and stepping up votes against the management of companies which have not made sufficient progress towards the goals of the Paris Climate Accord.
    Make no mistake, this is a significant development when the world's biggest fund manager is ready to use its voting power, its investment decision-making and its powerful passive product creation machine to reduce carbon emissions.
    BlackRock's action plan is contained in a letter from the company's 19-member global executive committee, which includes Australian head of Asia-Pacific Geraldine Buckingham, who spoke to Chanticleer on Tuesday from her office in Hong Kong.

    Geraldine Buckingham, BlackRock's head of Asia-Pacific and member of its global management committee, says the fund manager is not "joining a revolution". Michael Chiu
    "What we've really tried to do is reflect the fact that the community expectations about sustainability and a deeper understanding of the risks that climate presents in our investment portfolio have increased," she says.
    "We are taking a series of collective steps that we think are significant and really put sustainability at the centre of what BlackRock does.
    "This is not about people's personal or individual views about environment or, you know, what the right policy responses are, this is really about how do we fulfil our role as a fiduciary to help clients understand how to manage the risk in their portfolio.
    "It's become very clear, I think in the last few years, that climate risk represents significant investment risk in portfolios and I think that the regulators as well as managers like BlackRock are saying that this risk in the portfolio is material."

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    Some will argue that the sale of $521 million in shareholdings in thermal coal producers is small beer and will have limited impact.
    But this ignores the power of the BlackRock marketing machine, which plays a powerful role in the flow of money in global capital markets.
    For example, last year BlackRock released a range of sustainable exchange trade funds with a special focus on environment, social and governance issues. These have attracted $US20 billion in flows.
    "We do feel it's important to offer clients a broad range of sustainable options so that they can vote along their own beliefs and values around these issues and or manage the risk in their portfolio given the fact that climate risk has become material to the portfolio," Buckingham says.

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    By emphasising fiduciary duty, Buckingham and Fink have framed their climate change action plan in a manner similar to banking royal commissioner Kenneth Hayne in a speech last year to a climate change roundtable in Sydney.
    Hayne said the director’s duty to act in the best interests of the company meant boards had to "recognise both the nature and extent of climate-related risks and the speed with which change will have to be made; to develop strategic plans in response; and to report to shareholders and the wider market about what they have done, are doing and will do in response".
    Making directors accountable

    Buckingham sums it up this way: "Our primary responsibility is to act as a fiduciary to our clients to help to advise them on their investments and to ensure that we help them reach their long-term financial objectives."
    She says it would be wrong to misinterpret BlackRock's actions. "I think that people expecting BlackRock to necessarily join a revolution misunderstand the fiduciary obligation that we have to clients," she says.
    Blackrock's clients can still choose to buy ETFs with exposure to fossil fuels. But Fink says that if companies do not address a material issue like climate change, BlackRock will make directors accountable.
    "Where we feel companies and boards are not producing effective sustainability
    disclosures or implementing frameworks for managing these issues, we will hold board members accountable," Fink says in his letter to CEOs.
    "Given the groundwork we have already laid engaging on disclosure, and the growing
    investment risks surrounding sustainability, we will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and the business practices and plans underlying them."
    Fink says we are entering an era of "accountable and transparent capitalism" which will be led by the next generation as they take the helm of government and business.

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    "As trillions of dollars shift to Millennials over the next few decades, as they become CEOs and CIOs, as they become the policymakers and heads of state, they will further reshape the world’s approach to sustainability," he says.
    Fink says companies must give shareholders a clear picture of their preparedness for change or lose the support of capital markets during a period of significant capital reallocation.
 
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